What are the
11 Basic Accounting Formulas?
There are several accounting formulas used to report the financial health of a person or business. These formulas are used to produce the Balance Sheet and Income Statement. Also known as Profit & Loss Statement.
The accounting equation is a vital formula. For it is the root of accounting.Worth = Assets – Liabilities
Formula 1: Accounting Equation
The accounting formulas needed to produce the Accounting Balance Sheet are:
Current assets are the sum of assets that will convert into cash in less than 12 months. Current Assets = Cash + Accounts Receivable + Inventory + Prepaid Expenses
Formula 2: Current Assets
Net Fixed Assets
Net fixed assets are the book value of fixed assets. Net Fixed Assets = Fixed Assets @ cost – Accumulated Depreciation
Formula 3: Net Fixed Assets
The sum of all assets Total Assets = Current Assets + Other Assets + Net Fixed Assets
Formula 4: Total Assets
Bills due with in 12 months of the Balance Sheet date.Current Liabilities = Accounts Payable + Accrued Expenses + Current Portion of Debt + Income Taxes Payable
Formula 5: Current Liabilities
Shareholder’s equity is the value of the company to its owners. Also called net worth.Shareholder’s Equity = Capital Stock + Retained Earnings
Formula 6: Shareholder’s Equity
Total Liabilities & Equity
This is the total obligation plus worth of the entity.Total Liabilities & Equity = Current Liabilities + Long-Term Debt + Shareholders’ Equity
Formula 7: Total Liabilities & Equity
The next accounting formulas are needed to produce the Income Statement. Also called the Profit & Loss Statement.
The left over amount after cost of goods sold are taken away from net sales. Gross Margin = Net Sales – Cost of Goods Sold
Formula 8: Gross Margin
The sum of expenses paid for developing and selling the product or service. Operating Expenses = Sales & Marketing + Research & Development + General & Administrative
Formula 9: Operating Expenses
Income From Operations
Net profit from the product or services sold. Income From Operations = Gross Margin – Operating Expenses
Formula 10: Income From Operations
Net income is all income minus total expenses and costs. Net Income = Income From Operations + Interest Income – Income Taxes
Formula 11: Net Income
In summary, the above accounting formulas are all a person will need to generate the two main financial statements. However, to fully explore the financial health of person or business knowledge of accounting ratios are required.
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