Category: Dictionary

An accounting entry that either increases one’s assets or decreases one’s liabilities, is known as debit. The left side of an account is known as debit side.

Debt to equity ratio is one of the important ratios, indicating the solvency of a firm. This ratio represents the relationship between borrowed funds (Debt) and owners’ capital (Equity) used by a firm. The ratio is used to measure the long term financial position of a business enterprise.

Formula for calculating debt to equity ratio:

The given formula can be used for this purpose:

Ideal ratio:

Experts of finance suggest that a company should neither totally rely on equity nor on debt. But there should be an appropriate amount of balance between these two. It would be better for a company to maintain a balance of 2:1 for this ratio. In other words, a company needs to use as much as double the debt than equity.

Because this ratio is used to check the balance between external (Borrower’s) and  internal (Owner’s) fund, it is also known as ‘external- internal ratio’.

A debtor is person or group of person who has to pay or return benefits or sum of amount to another person or group of persons.

A debtor can be a person, government, agency, or any institution that borrows goods/services or amount from another entity (Creditor).

In above diagram “X” has to pay a sum of amount to “Y”. Therefore” X” is the debtor of “Y” and “Y” is beneficiary.

Depreciation refers to the reduction in value of a tangible asset due to its wear and tear or obsolescence over time. It is non cash expense that reduces the value of a physical asset.

 

Derivative is a financial instrument whose value is derived from an underlying asset. Fluctuation in these underlying assets decides the price of derivative as its price is dependent upon the price of underlying asset.

Often stocks, bonds, commodities, currencies, interest rates and market indexes are considered as underlying assets.

Future, option, forward and swaps are most common type of derivatives.