7 Useful Accounting Formulas
There are a lot of different accounting formulas out there and it can be confusing for an investor or business manager to know how figures are arrived at. Accountants love to throw around terms like contribution margin, break even, or debtor days that can leave non accountants confused. Despite the names, most accounting formulas are actually very easy to calculate once you know what the inputs are. Here are some commonly used accounting formulas and how they are calculated.
The Basic Accounting Formula
The most basic accounting formula upon which the balance sheet is based is: Assets = Liabilities + Equity In essence every dollar of value in the business is generated either by incurring a liability or is some form of equity (either contributions from the owners or retained earnings).
So the total assets of any balance sheet should equal the liabilities and equity of that same balance sheet.
Gross Profit vs. Net Profit
While these may sound the same they are very different figures that reflect the financial performance of a company. Gross Profit
= Sales â " Cost of Goods Sold (COGS) Net Profit
= Sales ÃƒÂ¢ " Costs of Goods Sold ÃƒÂ¢ " All other expenses Sales are self explanatory but Cost of Goods Sold
refers to the direct costs of making your revenues. In a manufacturing scenario this would be your raw material and labour costs directly related to the production of goods. ÃƒÂ¢
By InvestorGuide Staff