In this article we will discuss about the classification of ratios in accounting.
The accounting ratios may be classified on the following bases leading to somewhat overlapping categories:
(A) Classification by Statements:
The Traditional classification is based on those statements from which information is obtained for calculating the ratios.
The ratios are classified as follows:
(B) Classification by Users:
This classification is based on the parties who are interested in making the use of ratios.
(C) Classification According to Importance:
This basis of classification of ratios has been recommended by the British Institute of Management.
They are of two types:
(D) Classification by Purpose/Function:
This is a classification based on the purpose for which an analyst computes these ratios. The modem approach of classifying the ratios is according to the purpose or object of analysis. Normally, ratios are used for the purpose of assessing the profitability and sound financial position.
Thus, ratios according to the purpose are more meaningful. There can be several purposes which can be listed. For analysis, it is customary to group the purposes into broad headings.
The following are the broad categories of accounting ratios from functional point of view: