What Are The Top Most Basic Business Accounting Formulas?

I hope you didn’t forget your high school days and of course mathematics. What was a day it was? Unbelievable, when you had to remember dozens of important accounting formulas to pass the final exam?

And now, you might surprise yourself by using some of these accounting formulas in real life to run your own small business.

In today’s competitive business world, not everyone has the ability to run an enterprise. Likewise, not all business owners need an accounting expert because most of them are genius in finance calculations. But in some cases, some can use accounting software to do a lot of hard work.

Math can be used to solve every finance problem, from how much time should be saved for a new home, to how long will it take to repay the loan, everything that we can afford.

Likewise, managing your own business finance and revenues is a big deal and it can be a full-time job for you. So, it includes keeping track of accounts receivable, accounts payable, inventory and much other financial accounting in your business.

A Complete Business Finance Solution

As the business owner, you are in control of the business’s accounting needs, so you need a strong understanding of the financial statements of your business as well as it’s business terms with a brief definition.

And if you are new entrepreneurs who would prefer to monitor your company’s cash flow with your own eyes. Then there are financial accounting formulas that you should be familiar with. If you do not prepare your financial calculation correctly, then they won’t reflect a true picture of your business financial status. So let’s have a look a

Lists Of Basic Accounting Formulas

Accounting is the language of any business. Thus, every entrepreneur, students, manager, and the executive needs to understand at least the basic accounting formulas.

Therefore, we have listed various finance accounting formulas that can be used in every single day in your business life. Read it out, whip out your pencil, and prepare a budget like a genius and handle your own company without hiring any financial experts.

  1. Basic Accounting Formula
  2. Simple Interest
  3. Compound Interest
  4. Cash Flow
  5. Rule Of 72
  6. Credit Card Equation
  7. Break-Even Point
  8. Gross Profit
  9. Net Income
  10. Cash Ratio
  11. Profit Margin
  12. Debt To Equity Ratio(D/E)
  13. Cost Of Goods Sold
  14. Contribution margin
  15. Total assets
  16. Leverage ratio
  17. Double entry accounting
  18. Average Inventory
  19. Trade Discount
  20. Revenue

accounting formulas

The Basic Accounting Formula

Also, know as the balance sheet equation, this equation explains how the balance sheet balances show. Accounting equation formula is

Assets = (Liabilities + Equity)

Equity = (Assets – Liabilities)

Liabilities = (Assets – Equity)

Liabilities and owner’s equity are two basic types of claims on the assets of an entity. The accounting sheet is one of the main financial statements and on the other hand income statements and cash flow statements are also very important.

Simple Interest

Simple interest is interest that earned from the principle. This calculation can be done very fast to provide an idea of how much interest will accrue over time. Simple interest formula is

Simple interest = principal * interest rate * numbers of periods

Compound Interest

Compound interest is the interest that is earned on the principal. It is a great thing when you are earning it.

It essentially means “interest on the interest” on both the principal. The calculate compound interest, there is a mathematical formula that you can use

A = P(1 + r/n)nt

where:

  • A = Amount accumulated
  • p = Principal
  • r = Interest rate
  • n = Compounding per period
  • t = Number of periods

Cash Flow

The cash flow shows how much you earn in relation to how much you spend. Cash flow analyzes the liquidity position of the company. It can either be positive or negative. It is calculated by subtracting the cash with opening balance. Below is a mathematical formula that you can use it

Cash Flow = Income – Expenses

Formally, cash flow is an assessment and understanding of coming out of cash into and flowing out of the venture in some period of time.

Rule Of 72

The rule of 72 is a quick estimate that how long will it take to double the investment. Take the rate of return on investment and divide 72 to determine how many years it will take to double your money. Its mathematical formula is

Rule of 72/r

where

  • r = interest rate

Credit Card Equation

The final equation to find out how long you will pay your credit card. Although this is the most complex equation in this list, it is easy to do this with the calculator. Credit card equation formula is

N = −130⋅ln(1+bp⋅(1−(1+APR365)30))ln(1+APR365)

where:

  • In = Natural of function
  • APR = Credit card annual interest rate
  • b = Balance of the credit card
  • p = Monthly payment to be made
  • i = Daily interest rate=APR/365

Break-Even Point

It tells you how much of your product you need to sell to cover all of your cost and generate a profit. This equation takes a little more work to calculate but is one of the most important accounting formulas you can use in your business. Calculate your Break-even point as follows.

Break-Even Point = (Sales – Fixed Costs – Variable Costs = $0 Profit)

Most widely used Break-even point formulas is as follows

Break-even point = fixed costs/sales price per unit/service – variable costs per unit service

It determines when a product or service is profitable. This is an equation and is easily calculated.

Gross Profit

Gross Profit is the benefit that does business after covering the expenses required for making a sale. Simply put, gross profit is the total sales of a business, which is less than the cost of goods sold.

The equation of calculating gross profit is straightforward

Gross Profit = Sales – Cost of Goods Sold

Keep in mind that to understand gross profit, you have to understand the difference between variable and fixed expenses.

Net Income

The net income tells you how profitable your business operations are but it can not show how healthy your cash flow is.

Net income(NI) = Sales-Cost of goods sold-Operating expenses +Other Revenue-Other expenses

Net Income = Income-Expenses

It is also known as the bottom line because in many ways it is the sum total of accounts work.

Cash Ratio

Cash ratio is the ratio of the total cash and cash equivalents of a company, which is equal to its current liabilities. This information is useful for creditors when they decide how much debt if any, then they will be ready to expand the asking side.

cash Ratio = Cash/Current liabilities

Profit Margin

It is one of the commonly used profitability ratios. However, it represents how much percentage of sales has turned into profits. In very simple words it says that the percentage figure indicates how many cents of profit the business has generated. It mathematical calculation is very simple as shown below

Profit Margin = Net Income/Sales

By using this formula you can compute a retailer’s cost of goods sold.

It shows how much you are doing per sale. If it is too low, it may be reflected that your cost is very high, or your business is not very healthy.

Debt To Equity Ratio(D/E)

It is calculated by dividing a company’s total liabilities by its shareholder equity. This equation is available on the balance sheet of a company financial sheets.

It mainly uses in commercial loans.

Debt To Equity Ratio = Total debt/Total Equity

The D/E ratio is an important metric which is used in corporate finance. If you are trying to seek more financing, then a higher debt-to-equity ratio can be more difficult to find in creditors or investors who are willing to provide funds for your company.

Cost Of Goods Sold

This refers to the direct costs attributable to the production of the goods to be sold in a company. Therefore, this amount includes the cost of the materials which is used in creating the good along with direct labor costs. It is quite easy to use and implement in a low volume, plus high cost per item in retail format. Hence, its mathematical formula is written below

COGS = Costs of materials – Costs of outputs

Cost of goods which is also known as “costs of sales”. Fortunately, these accounting formulas do not apply too much by business owners, but they mostly use by manufacturers, distributors, and many retailers.

Contribution Margin

Contribution margin tells the difference between total sales and total variable costs and increases net income. This equation helps the managers by explaining how the decision will impact income. And therefore, to calculate the contribution margin subtract total variable costs from total sales.

C.M= Total Sales – Total Variable Costs

Total Assets

The total amount of gross investments, cash, and other assets as they represent in the balance sheet. Total assets refer to the total amount of assets. For a company, it represents an economic resource. Here is the formula of Total assets

T.A= Current Assets + Other Assets +Net Fixed Assets

There are mainly 3 properties of asset

  • Ownership
  • Economic Value
  • Resource

Leverage Ratio

Leverage ratio is just the same as the financial ratio that indicates the level of debt. So, if you have taken so many loans then your leverage ratio will be high.

Another name called debt ratios. It is mainly used to measure the solvency of your company. And it is calculated as

Leverage Ratio = Total Liabilities + Total Debts/Total Income

Double Entry Accounting

It is one of the most important and basic transactions in accounting and it also does a business transaction recorded twice and sees where the money came from. And it also to show where the money is. So it helps to understand the accounting systems and it is very important.

Assets=Liabilities+Equity

Double entry accounting enters in such a way that the accounting equation is always in balance.

Average Inventory

It uses to estimate the quantity of inventory. And this is the average value of inventory in a specific time period.

Average Inventory – Beginning inventory + Ending inventory/2

It is also useful for comparing revenue since revenues are typically represented in the income balance sheet. And it may vary due to the average amount over a period of time, depending upon sudden inventory or large supplier delivery.

Trade Discount

Trade discount means that the customer pays less than the printed prices from any of the products. The discount gives access to the company to vary the final price depending on each customer’s volume or situation.

Trade Discount (T.D) = LP * R

Where,

LP = list price
R = Trade discount Rate

In other words, Trade Discount which is deducted by the manufacturer or the wholesaler or a retailer.

Revenue

Revenue is the total value generated by a company, Which means that it’s the value of all sales of goods and services by the company in a period of time. It is calculated as the following formula.

Revenue = The sales of good/Services

Revenue generated is the main activity of any particular company, and they are considering to be operating revenues. It is also called a sale that earned income by the sale of a product. Even there are many types of revenues including product sales and other services.

Short Summary Of Accounting Formulas

I’m going to make it short and sweet because I know that time is money. And I know that your every second is important for you.

  1. Basic Accounting Formula – Liabilities + Equity = Assets
  2. Simple Interest – principal * interest rate * numbers of periods
  3. Compound Interest – A = P(1 + r/n)nt
  4. Cash Flow – Income – Expenses
  5. Rule Of 72 – Rule of 72/r
  6. Credit Card Equation – N = −130⋅ln(1+bp⋅(1−(1+APR365)30))ln(1+APR365)
  7. Break-Even Point – (Sales – Fixed Costs – Variable Costs = $0 Profit)
  8. Gross Profit (G.P)- Sales – Cost of Goods Sold (COGS)
  9. Net Income – Income-Expenses
  10. Cash Ratio – Cash / current liabilities
  11. Profit Margin – Net income / Sales
  12. Debt To Equity Ratio (DTER) – Total debt / Total equity
  13. Cost Of Goods Sold – Costs of materials – Costs of outputs
  14. Contribution Margin (C.M) – Total Sales – Total Variable Costs
  15. Total Assets (T.A) – Current Assets + Other Assets +Net Fixed Assets
  16. Leverage ratio – Total Liabilities + Total Debts/Total Income
  17. Double Entry Accounting – Assets=Liabilities+Equity
  18. Average Inventory – Beginning inventory + Ending inventory/2
  19. Trade Discount  – list price * Trade discount Rate
  20. Revenue – The sales of good/Services

Last Thoughts:

In this article, we mentioned the List of Accounting Formulas. It will be very easy to remember and implement in your business at any time when you need it. Fortunately, if you ever forget one of them then you can refer back to this blog for a refresher. And for that, we also mentioned some small summaries which you can easily see. If you like this blog lets us know your view in comment sections. And if you have any suggestions or I miss out any important business formulas please let me know.

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