Key Accounting Formulas and Concepts

Accounting Equation

Assets = Liabilities + Equity

Retained Earnings Formula

Opening RE + Net Profit - Dividends = Closing RE

Net Profit Formula

Revenue - Expenses

Gross Profit Formula

Revenue - Cost of Sales

Current Ratio

Current Assets ÷ Current Liabilities

Quick Ratio

(Current Assets - Inventory) ÷ Current Liabilities

Inventory Turnover

Cost of Sales ÷ Average Inventory

Receivables Turnover

Net Sales ÷ Average Accounts Receivable

Average Collection Period

365 ÷ Receivables Turnover

Net Profit Margin

(Net Profit ÷ Net Sales) × 100

Gross Profit Margin

(Gross Profit ÷ Net Sales) × 100

Return on Assets (ROA)

Net Profit ÷ Average Total Assets × 100

Return on Equity (ROE)

Net Profit ÷ Average Equity × 100

Debt to Assets Ratio

Total Liabilities ÷ Total Assets × 100

Times Interest Earned (TIE)

EBIT ÷ Interest Expense

EBIT Formula

Net Profit + Tax + Interest

Journal Entry: Revenue in Advance

Dr Cash / Cr Unearned Revenue

Journal Entry: Earned Revenue

Dr Unearned Revenue / Cr Revenue

Journal Entry: Depreciation

Dr Depreciation Expense / Cr Accumulated Depreciation

Total Cost Formula

Fixed Costs + (Variable Cost × Units)

Cost Per Unit

Total Cost ÷ Units

Break-even (Units)

Fixed Costs ÷ Contribution Margin per Unit

Break-even (Dollars)

Break-even Units × Selling Price

Contribution Margin per Unit

Selling Price - Variable Cost

Profit Formula

(Selling Price - Variable Cost) × Units - Fixed Costs

Budgeting Purpose

Planning, controlling, and communication

Decentralisation

Decision-making by lower-level managers

Decentralisation Advantage

Faster, more informed local decisions

Decentralisation Disadvantage

May lead to lack of coordination

Responsibility Accounting

Managers are only responsible for what they control

Activity-Based Costing (ABC)

Allocates overhead based on activity drivers

ABC Advantage

More accurate product costing

ABC Disadvantage

Complex to set up and maintain