Debt Ratio in QuickBooks 2012

The debt ratio is one of the leverage ratios you can use in QuickBooks 2012. The debt ratio simply shows the firm’s debt as a percentage of its capital structure. The term capital structure refers to the total liabilities and owner’s equity amount. For example, in the case of the balance sheet shown, the capital structure totals $320,000.

Not coincidentally, the total liability and owner’s equity amount, $320,000, equals the total assets amount, $320,000.

A Simple Balance Sheet
Assets
Cash $25,000
Inventory 25,000
Current assets $50,000
Fixed assets (net) 270,000
Total assets $320,000
Liabilities
Accounts payable $20,000
Loan payable 100,000
Owner’s equity
S. Nelson, capital 200,000
Total liabilities and owner’s equity $320,000

This makes sense if you think about it a bit. A firm funds its assets with its capital. Therefore, the total assets always equal the total capital structure.

The formula for calculating the debt ratio is a simple one:

total debt/total assets

Using numbers from the simple balance sheet shown, for example, the debt ratio can be calculated as follows:

$120,000/$320,000

This formula returns the debt ratio of 0.375. This indicates that 37.5 percent of the firm’s capital comes from debt.

No guideline exists for debt ratio. Appropriate debt ratios vary by industry and by the size of the firm in an industry. In general, small firms that use QuickBooks probably want to show lower debt ratios than larger firms.

Small firm see their operating income fluctuate more wildly than large firms. Because of that fluctuation, carrying and servicing such debt is more problematic. Lower debt, therefore, is probably better.

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