Key Financial Ratios like Current Ratio, Quick Ratio, etc. in Tally Prime

In this article, we will learn how to calculate key financial ratios like the Current Ratio, Quick Ratio, and others using Tally Prime. These ratios help assess the financial health and performance of a business. We will explain the steps involved in generating and analyzing these ratios with a real-world example.

Step 1: Opening Tally Prime

First, open the Tally Prime software. After launching the application, you will be presented with the main screen, where you can manage your company’s financial data.

Step 2: Select Company

If you have already created a company in Tally Prime, select the company from the list of available companies. If you have not created a company, you will need to create one by entering the necessary details like the company name, address, financial year, etc.

Step 3: Create Ledgers

Before you can calculate financial ratios, ensure that you have created all necessary ledgers in Tally Prime. Some of the key ledgers include:

• Assets (e.g., Cash, Inventory, Accounts Receivable)
• Liabilities (e.g., Accounts Payable, Loans)
• Owner’s Equity (e.g., Capital)
• Revenue (e.g., Sales)
• Expenses (e.g., Rent, Salaries)

For example, create the following ledgers:

• Cash (under Current Assets)
• Inventory (under Current Assets)
• Accounts Receivable (under Current Assets)
• Accounts Payable (under Current Liabilities)
• Loan Payable (under Liabilities)

Step 4: Enter Transactions

Next, record the financial transactions in Tally Prime. Here are a few sample transactions:

• Received a cash payment of ₹50,000 from a customer (Cash increases, Accounts Receivable decreases)
• Purchased inventory worth ₹30,000 on credit (Inventory increases, Accounts Payable increases)
• Paid ₹10,000 towards accounts payable (Cash decreases, Accounts Payable decreases)
• Received a loan of ₹20,000 (Loan Payable increases)

Step 5: Display Financial Ratios

Once the transactions are entered, you can calculate the key financial ratios in Tally Prime. Here are the steps to display financial ratios:

1. Press Alt + F1 to go to the “Company Info” screen.
2. Select “Display” from the menu.
3. Choose “Ratio Analysis” under the “Statutory Reports” section.
4. Select the date range for which you want to calculate the ratios (e.g., 01st January 2024 to 31st December 2024).
5. Click on “Show” to generate the financial ratios.

The screen will display key financial ratios like:

• Current Ratio
• Quick Ratio
• Debt-Equity Ratio
• Return on Assets (ROA)

Step 6: Understanding the Key Financial Ratios

Let’s break down some key financial ratios with the example data. Below are the formulas and calculations for some common ratios:

1. Current Ratio

The Current Ratio measures the company’s ability to pay its short-term liabilities with its short-term assets. It is calculated as:

Current Ratio = Current Assets / Current Liabilities

Example: If the current assets are ₹80,000 (Cash ₹50,000, Inventory ₹30,000) and current liabilities are ₹40,000 (Accounts Payable ₹30,000, Short-term Loans ₹10,000), then:

Current Ratio = ₹80,000 / ₹40,000 = 2:1

A Current Ratio of 2:1 means that the company has twice as many assets as liabilities, indicating good liquidity.

2. Quick Ratio (Acid Test Ratio)

The Quick Ratio is a more stringent test of liquidity, as it excludes inventory from current assets. It is calculated as:

Quick Ratio = (Current Assets - Inventory) / Current Liabilities

Example: If the current assets are ₹80,000, inventory is ₹30,000, and current liabilities are ₹40,000, then:

Quick Ratio = (₹80,000 - ₹30,000) / ₹40,000 = ₹50,000 / ₹40,000 = 1.25:1

A Quick Ratio of 1.25:1 indicates that the company can cover its liabilities with its liquid assets (excluding inventory).

3. Debt-Equity Ratio

The Debt-Equity Ratio measures the financial leverage of the company and shows the proportion of debt used to finance the business. It is calculated as:

Debt-Equity Ratio = Total Debt / Shareholder’s Equity

Example: If the total debt is ₹50,000 (Loan Payable ₹20,000 and Accounts Payable ₹30,000) and the equity is ₹70,000 (Owner’s Capital), then:

Debt-Equity Ratio = ₹50,000 / ₹70,000 = 0.71:1

A Debt-Equity Ratio of 0.71:1 means the company is using 71% of debt compared to its equity, which is considered a moderate level of financial risk.

4. Return on Assets (ROA)

The Return on Assets measures how efficiently the company is using its assets to generate profits. It is calculated as:

ROA = Net Income / Total Assets

Example: If the net income is ₹20,000 and total assets are ₹150,000, then:

ROA = ₹20,000 / ₹150,000 = 13.33%

A ROA of 13.33% means the company is generating a return of ₹13.33 for every ₹100 invested in assets.

Step 7: Reviewing the Financial Ratios

Once the ratios are displayed in Tally Prime, you can review the results to analyze the company’s financial health. These ratios provide insights into liquidity, financial leverage, and operational efficiency. Here’s how to interpret the results:

• If the Current Ratio is above 1, the company has enough assets to cover its short-term liabilities.
• If the Quick Ratio is above 1, the company has sufficient liquid assets to cover its immediate liabilities without relying on inventory.
• A Debt-Equity Ratio below 1 indicates that the company has more equity than debt, which is generally considered financially stable.
• A higher ROA indicates better utilization of assets to generate profits.

Step 8: Closing the Financial Ratio Reports

After reviewing the financial ratios, you can print or export the reports in various formats (PDF, Excel, etc.) for further analysis or record-keeping. You can also save the reports for future reference or use them for decision-making purposes.

Conclusion

Calculating and analyzing key financial ratios in Tally Prime is an essential task for assessing a company’s financial health. By following the steps outlined above, you can easily generate and interpret ratios like the Current Ratio, Quick Ratio, Debt-Equity Ratio, and Return on Assets. These ratios provide valuable insights into a company's liquidity, profitability, and financial stability, helping you make informed business decisions.