Accounting Formulas - Meaning, Terms
The accounting formulas are meant to serve as the foundation for the double-entry accounting system. Read the complete blog to know more!
Izhar Ahmad21 Nov, 2023
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Accounting is about keeping track and recording an organization's money matters. It includes different tasks like sorting, summarizing, checking, interpreting, and noting down information related to the finances.
For a company, accounting involves dealing with profits and losses from buying and selling. It also means keeping track of what the company owns and owes. All this financial information is represented in numbers, and figuring out what it means involves using the right accounting formulas.What are Accounting Formulas?
Accounting formulas are mathematical expressions used to calculate and analyze various financial metrics in the field of accounting. These formulas help in summarizing and interpreting financial information, aiding in the assessment of a company's performance.List of Important Accounting Formulas
Given below in the table is a list of the most important accounting formulas. These formulas provide insights into a company's financial health, profitability, and efficiency.| Metric | Accounting Formulas |
| Current Ratio | Current Assets/Current Liabilities |
| Net Income | Income−Expenses |
| Cost of Goods Sold (COGS) | Opening Inventory +Purchases−Closing Inventory |
| Gross Profit | Sales−COGS |
| Gross Profit Margin | Gross Profit/Sales |
| Break-Even Point | Fixed Costs/Sales per Unit−Fixed Cost per Unit |
| Inventory Turnover Ratio | COGS/Inventory |
| Accounts Receivable Turnover Ratio | Sales on Credit/Accounts Receivable |
| Quick Ratio | Current Assets−Inventory/Current Liabilities |
| Return on Assets (ROA) | Net Income/Average Total Assets |
| Return on Equity (ROE) | Net Income/Average Shareholder’s Equity |
| Earnings Per Share (EPS) | Net Income/Number of Outstanding Shares |
| Debt-to-Equity Ratio | Total Debt/Shareholders’ Equity |
| Return on Investment (ROI) | (Net Profit/Investment Cost)×100 |
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Important Terms Used in Accounting Formulas
We have provided below a few of the most important terms used in accounting formulas:Current Ratio:
A financial indicator that analyzes a company's ability to meet its short-term commitments with its short-term assets. Current Assets: Resources projected to be turned into cash or used up within one year. Current Liabilities: Obligations due within one year, indicating the company's short-term indebtedness.Net Income:
The profitability statistic indicates the total profits after removing all costs from total income. Income: The entire revenue earned by the firm from its principal activities. Expenses: The expenditures incurred by the firm in the process of creating money.Cost of products supplied (COGS):
The direct costs involved with manufacturing products or services supplied by a firm. Opening Inventory: The value of inventory at the beginning of a defined accounting period. Closing Inventory: The value of inventory at the conclusion of a particular accounting period.Gross Profit:
The profit produced by a corporation after subtracting the cost of items sold from its revenue. Sales: Total income gained by selling products or services. COGS: The direct costs connected with manufacturing the products or services offered.Gross Profit Margin:
A percentage that reflects the proportion of income that exceeds the cost of products supplied. Gross Profit: The profit received after subtracting the cost of products sold from revenue. Sales: The entire money produced by selling products or services.Break-Even Point:
The amount of sales at which total income equals entire expenses, resulting in neither profit nor loss. Fixed Costs: Costs that stay constant regardless of the number of products or services produced. Sales per Unit: Revenue made from the sale of each unit of a product.Inventory Turnover Ratio:
A measure of how many times a company's inventory is sold and replaced during a period. COGS: The cost of products sold within a certain time. Inventory: The average value of inventory for the same time.Accounts Receivable Turnover Ratio:
A measure of how effectively a firm receives money from its consumers. Sales on Credit: Total sales done on credit for a certain time. Accounts Receivable: The average amount owing to the firm by customers throughout the same time.Quick Ratio:
A liquidity ratio that analyzes a company's capacity to meet its short-term obligations using its most liquid assets. Current Assets - Inventory: Liquid assets such as cash, marketable securities, and accounts receivable. Current Liabilities: Short-term commitments due within one year.Return on Assets (ROA):
A profitability measure demonstrating how effectively a business uses its assets to create profits. Net revenue: The profit after subtracting all costs from total revenue. Average Total Assets: The average value of assets during a specific time.Return on Equity (ROE):
A measure of a company's profitability compared to its shareholders' equity. Net revenue: The profit after subtracting all costs from total revenue. Average Shareholder’s Equity: The average value of shareholders' equity during a certain time.Earnings Per Share (EPS):
A financial statistic measuring the fraction of a company's earnings given to each outstanding share of common stock. Net revenue: The profit after subtracting all costs from total revenue. Number of Outstanding Shares: The entire number of shares owned by investors.Debt-to-Equity Ratio:
A leverage ratio that analyzes the percentage of a company's debt to its equity. Total Debt: The total of a company's short-term and long-term obligations. Shareholders' Equity: The leftover stake in the assets of the corporation after subtracting obligations.Return on Investment (ROI):
A performance metric measuring the return produced on an investment compared to its cost. Net Profit: The profit after subtracting all expenditures from total revenue. Investment Cost: The overall cost spent to acquire or make an investment.| Read Related Topics | |||
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Accounting Formulas FAQs
What is the basic financial formula?
The basic financial formula is the accounting equation: Assets = Liabilities + Equity.
What are the fundamental equations of accounting?
The fundamental equations include the income statement equation (Revenue - Expenses = Net Income) and the balance sheet equation (Assets = Liabilities + Equity).
What are the 3 cost formulas?
The three cost formulas are Total Cost = Fixed Costs + Variable Costs, Average Cost = Total Cost / Quantity, and Marginal Cost = Change in Total Cost / Change in Quantity.
What are the 7 types of cost?
The seven types of cost include fixed costs, variable costs, direct costs, indirect costs, explicit costs, implicit costs, and opportunity costs.
What is EOQ in cost accounting?
EOQ (Economic Order Quantity) in cost accounting is the optimal inventory level that minimizes total inventory costs.
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