What is an Accounting Formula?
The accounting equation or formula is contemplated to be the basis of the double-entry accounting method. The entirety of all the assets or belongings of a firm must be equivalent to the sum of all its records in the B/S. Based on this double-entry method, the accounting formula guarantees that the balance sheet persists ‘equalised’ and every entry obtained on the debit side must have an identical record (or coverage) on the credit side.
What is the basic Accounting Equation?
The formula for accounting equation is obtained on the basic hypothesis that the equity owners have a claim on the entire assets of a firm post subtracting all the liabilities that is outstanding by the firm. This is depicted by the equation: Shareholders’ Equity = Assets – Liabilities.
| Important Accounting Formulas |
| Assets = Liabilities + Equity |
\(\begin{array}{l}\frac{Current Assets}{Current Liabilities}= Current Ratio\end{array} \) |
| Income – Expenses = Net Income |
| Beginning inventory value + Purchases of inventory – Ending inventory value = Cost of goods sold |
| Sales – Cost of goods sold = Gross profit |
\(\begin{array}{l}\frac{Gross Profit}{Sales} = Gross Profit Margin\end{array} \) |
\(\begin{array}{l}\frac{Fixed costs}{Sales \, price \, per \, unit-Variable \, cost \, per\, unit}=Break\, Even \, Point\end{array} \) |
\(\begin{array}{l}Sales\, price \, per \, unit \, \times Break-even \, point \, in \, units = Breakeven\, point \, in \, Rupees\end{array} \) |
\(\begin{array}{l}Inventory \, turnover \, ratio= \frac{Cost\, of \, Goods \, Sold}{Inventory}\end{array} \) |
\(\begin{array}{l}Accounts \, Receivable \, Turnover \, Ratio = \frac{Sales\, on \, credit}{Accounts\, Receivable}\end{array} \) |
\(\begin{array}{l}Total\, Asset\, Turnover= \frac{Sales}{Total\, Assets}\end{array} \) |
\(\begin{array}{l}Debt\, to \, Equity \, Ratio =Debt – equity \, ratio = \frac{Total \, Liabilities}{Shareholder’s\, Equity}\end{array} \) |
\(\begin{array}{l}Quick\, ratio= \frac{Current\, Assets-Inventory}{Current\, Liabilities}\end{array} \) |
\(\begin{array}{l}Current\, Ratio= \frac{Current\, Assets}{Current\, Liabilities}\end{array} \) |
\(\begin{array}{l}Return\, on\, Assets= \frac{Net\, Income}{Average\, Total\, Assets}\end{array} \) |
\(\begin{array}{l}Return\, on\, Equity = \frac{Net\, Income}{Average\, Shareholder’s\, Equity}\end{array} \) |
| Beginning balance + net income – net losses – dividends = ending balance |
The above mentioned is the concept, that is elucidated in detail about ‘Accounting Formulas’ for the Commerce students. To know more, stay tuned to BYJU’S.
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