The current ratio is a liquidity ratio that measures a firm’s ability to pay off its short-term liabilities with its current assets. The current ratio is important because short-term liabilities are due within a period of twelve months. The current ratio is calculated using two standard figures thatRead more
The current ratio is a liquidity ratio that measures a firm’s ability to pay off its short-term liabilities with its current assets. The current ratio is important because short-term liabilities are due within a period of twelve months.
The current ratio is calculated using two standard figures that are shown in the company’s balance sheet: current assets and current liabilities. The formula for the same goes as:
Current ratio = Current Assets / Current Liabilities
A current ratio of 2:1 is considered ideal. Generally, a ratio between 1.5 to 2 is considered beneficial for the business, which means that the company has more financial resources (Current Assets) to cover its short-term debt (Current Liabilities).
A high current ratio may indicate that the business is having difficulties managing its capital efficiently to generate profits.
On the other hand, a lower current ratio (especially lower than 1) would signify that the company’s current liabilities exceed its current assets and the business may have difficulty covering its short-term debt. Although the definition of a good current ratio may vary in the different industry groups.
Example- Where,
1) CR is 2:1, the company is in a good situation as it has double the Current Assets in order to cover the short-term debt.
2) CR is 0.5:1, the company is not in a good situation as it has only half the Current Assets in order to cover the short-term debt.
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As you know all transactions occurring in a business are recorded in the journal (book of original entry) in chronological order. After recording them in the journal, they are posted to their respective ledger accounts. Here I've explained the steps involved in posting a journal entry to the ledger.Read more
As you know all transactions occurring in a business are recorded in the journal (book of original entry) in chronological order. After recording them in the journal, they are posted to their respective ledger accounts.
Here I’ve explained the steps involved in posting a journal entry to the ledger.
Posting of an account debited in the journal entry:
Step 1: Identify the account which has to be debited in the ledger.
Step 2: Write the date of the transaction under the ‘Date Column’ of the debit side of the ledger account.
Step 3: Write the name of the account which has been credited in the journal entry in the ‘Particulars Column’ on the debit side of the account as “To (name of the account)”.
Step 4: Write the page number of the journal where the entry exists in the ‘Journal Folio (JF) Column’.
Step 5: Enter the amount in the ‘Amount Column’ on the debit side of the ledger account.
Posting of an account credited in the journal entry:
Step 1: Identify the account which has to be credited in the ledger.
Step 2: Write the date of the transaction under the ‘Date Column’ of the credit side of the ledger account.
Step 3: Write the name of the account which has been debited in the journal entry in the ‘Particulars Column’ on the credit side of the account as “By (name of the account)”.
Step 4: Write the page number of the journal where the entry exists in the ‘Journal Folio (JF) Column’.
Step 5: Enter the amount in the ‘Amount Column’ on the credit side of the ledger account.
I’ll explain the process of preparing a ledger A/c with a simple transaction.
On 1st May ABC Ltd. purchased machinery for 5,00,000. In the Journal the following entry will be made.
Let’s assume that this entry appears on page no. 32 of the journal. Now we will open Machinery A/c and Bank A/c in the Ledger.
On the debit side of the Machinery A/c “To Bank A/c” will be written. In the Bank A/c “By Machinery A/c” will be written on the credit side.
An extract of both the accounts are as follows:
Machinery A/c
Bank A/c