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 – LiabilitiesFormula 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 ExpensesFormula 2: Current Assets
Net Fixed Assets
Net fixed assets are the book value of fixed assets.
Net Fixed Assets = Fixed Assets @ cost – Accumulated DepreciationFormula 3: Net Fixed Assets
Total Assets
The sum of all assets
Total Assets = Current Assets + Other Assets + Net Fixed AssetsFormula 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 PayableFormula 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 EarningsFormula 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’ EquityFormula 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 SoldFormula 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 & AdministrativeFormula 9: Operating Expenses
Income From Operations
Net profit from the product or services sold.
Income From Operations = Gross Margin – Operating ExpensesFormula 10: Income From Operations
Net Income
Net income is all income minus total expenses and costs.
Net Income = Income From Operations + Interest Income – Income TaxesFormula 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
