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Accounting Formulas for Beginners

There are 11 basic accounting formulas used to produce a balance sheet and income statement. The accounting equation states that assets equal liabilities plus owner's equity. Formulas are provided to calculate current assets, net fixed assets, total assets, current liabilities, shareholder's equity, and total liabilities and equity for the balance sheet. Additional formulas define gross margin, operating expenses, income from operations, and net income for the income statement. Understanding these 11 formulas provides the essential information needed to generate a company's main financial statements.

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Nouman Mujahid
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1K views2 pages

Accounting Formulas for Beginners

There are 11 basic accounting formulas used to produce a balance sheet and income statement. The accounting equation states that assets equal liabilities plus owner's equity. Formulas are provided to calculate current assets, net fixed assets, total assets, current liabilities, shareholder's equity, and total liabilities and equity for the balance sheet. Additional formulas define gross margin, operating expenses, income from operations, and net income for the income statement. Understanding these 11 formulas provides the essential information needed to generate a company's main financial statements.

Uploaded by

Nouman Mujahid
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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What are the 11 Basic Accounting Formulas?

(http://www.entrepreneur-starter-kit.com/accounting-formulas.html )
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.
Formula 1: The Accounting Equation
The accounting equation is a vital formula. For it is the root of accounting.
Worth = Assets Liabilities
The accounting formulas needed to produce the Accounting Balance Sheet (The accounting
Balance Sheet is one of the main financial statements of a business. The other financial
statements are the Income Statement and Cash Flow Statement. The worth of an entity is
reported in the balance sheet. The balance sheet is a rearrangement of the accounting equation.
http://www.entrepreneur-starter-kit.com/accounting-balance-sheet.html ) are:
Formula 2: 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 3: Net Fixed Assets
Net fixed assets are the book value of fixed assets.
Net Fixed Assets = Fixed Assets @ cost Accumulated Depreciation
Formula 4: Total Assets
The sum of all assets
Total Assets = Current Assets + Other Assets + Net Fixed Assets
Formula 5: Current Liabilities
Bills due within 12 months of the Balance Sheet date.
Current Liabilities = Accounts Payable + Accrued Expenses + Current Portion of Debt + Income
Taxes Payable
Formula 6: Shareholders Equity
Shareholders equity is the value of the company to its owners. Also called net worth.
Shareholders Equity = Capital Stock + Retained Earnings

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Formula 7: Total Liabilities & Equity


This is the total obligation plus worth of the entity.
Total Liabilities & Equity = Current Liabilities + Long-Term Debt + Shareholders Equity
The next accounting formulas are needed to produce the Income Statement. Also called the
Profit & Loss Statement.
Formula 8: 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 9: Operating Expenses
The sum of expenses paid for developing and selling the product or service.
Operating Expenses = Sales & Marketing + Research & Development + General &
Administrative
Formula 10: Income From Operations
Net profit from the product or services sold.
Income From Operations = Gross Margin Operating Expenses
Formula 11: Net Income
Net income is all income minus total expenses and costs.
Net Income = Income From Operations + Interest Income Income Taxes
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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