Accounts and Finance
Step 7 Ratio Analysis

Debt Equity Ratio for Banks

We know that Debt Equity Ratio=



Long Term Loan/ (Capital+Reserves)



Whether Unsecured loan taken from directors, friends. relatives and related companies Debt or Equity ?


Technically they are Debt ie. Loan

However while giving loans some banks consider it part of equity

Hence,Unsecured Loans lead to Lower Debt Equiy Ratio in this case



Following is Balance Sheet of Company

Liability Amount Asset Amount
Capital 10000 Fixed Assets 100000
Reserves 20000 Less  
Secured Loan 80000 Dep 20000
Unsecured Loan 20000 Net Amount 80000
Current Liabilities   Current Assets  
Sundry Creditors 30000 Debtors 60000
Bank OD 10000 Cash and Bank 30000
Total 170000 Total 170000

Calculate Debt Equity Ratio assuming Unsecured Loans as Debt

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Calculate Debt Equity Ratio assuming Unsecured Loans as Equity

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CA Maninder Singh

CA Maninder Singh is a Chartered Accountant for the past 13 years. He also provides Accounts Tax GST Training in Delhi, Kerala and online.