The current ratio is 2:1

The impact of goods purchased on credit will

Current Ratio = $\frac{\text{Current Assets}}{\text{Current Liabilities}}$

Given current ratio = 2:1, which means:

• Current Assets = 2x
• Current Liabilities = x

When goods are purchased on credit:

• Inventory (Current Asset) increases
• Creditors/Accounts Payable (Current Liability) increases

Both increase by the same amount (the purchase value).

Let the purchase value = y

After the transaction:

• New Current Assets = 2x + y
• New Current Liabilities = x + y

New Current Ratio = $\frac{2x + y}{x + y}$

To understand the impact, let's take a numerical example:

Suppose Current Assets = ₹20,000 and Current Liabilities = ₹10,000 (ratio 2:1)

If goods worth ₹5,000 are purchased on credit:

• New Current Assets = ₹20,000 + ₹5,000 = ₹25,000
• New Current Liabilities = ₹10,000 + ₹5,000 = ₹15,000

New Current Ratio = $\frac{25,000}{15,000}$ = 1.67:1

The ratio has decreased from 2:1 to 1.67:1.

When the current ratio is greater than 1 and equal amounts are added to both numerator and denominator, the resulting fraction becomes smaller (moves closer to 1). This is a mathematical property where adding the same value to both parts of a ratio greater than 1 always reduces the ratio.