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

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

Total Assets

The sum of all assets

Total Assets = Current Assets + Other Assets + Net Fixed Assets

Formula 4: Total Assets

Current Liabilities

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

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.

Gross Margin

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

Operating Expenses

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

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.

Return from Accounting Formulas to Accounting Dictionary