Debt equity ratio shows the relationship between company's debt resources and capital resources. It is calculated for getting idea of solvency of company. If company's overall equity is more than overall debt, it means the position of solvency of company is good because company has internal equity to pay outside equity and external debt need not to worry. I have made an introduction video tutorial for more clearing the concept of debt equity ratio.

Captions or Transcript are given below:

Welcome dear student, we will introduce debt equity ratio. What is this? Actually, this is relationship between debt and equity. Means, total debt is divided by total equity. With this, we see the solvency of company. Suppose total debt is 4 and total equity is 8. It means 1 : 2, we have capital 2 times of our total taken debt. We will include total debt. One is long term debt or debenture. Second is current liabilities which we can calculate from our balance sheet. Second element which we need for calculating debt equity ratio is total equity. It is net worth of business, means in this, we will add equity share capital plus pref. share capital plus reserves. If profit and loss account's balance will show in asset side, it will be loss and it will be deducted. We can a simple example. Suppose we have debenture of Rs. 100,000. Our current liabilities of Rs. 100000 and if we divide it with equity share capital of Rs. 200000 , pref. share capital of Rs. 100,000 and reserves of Rs. 100000

Debt Equity Ratio = 100,000 + 1,00,000 / 200000 +100000 +100000 = 200000/400000 = 2 : 4 = 1 : 2

Related : How to Calculate Accounting Ratios .

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Accounting Education: Debt Equity Ratio
Debt Equity Ratio
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