You can track your debt ratio in QuickBooks. 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). 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.

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

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 do.

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