 Debt Ratio in QuickBooks 2013 - dummies

The debt ratio is one of the leverage ratios you can use in QuickBooks 2013. 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.

 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 are more problematic. Lower debt, therefore, is probably better.