Accounting

Core accounting identities, financial-statement measures and ratios used to read a company’s books

Accounting formulas help you understand how a business’s money moves, how its financial statements fit together, and whether it is healthy, efficient, and profitable. From the accounting equation and gross profit to liquidity and leverage ratios like the current ratio, quick ratio, and debt-to-equity ratio, these measures are useful for students, exam prep, and anyone reading real company accounts or making business decisions.

Accounting Equation

Assets = Liabilities + Equity

The foundation of double-entry bookkeeping: everything a business owns is financed either by debt or by owners’ capital.

Cost of Goods Sold

COGS = Opening\ Inventory + Purchases - Closing\ Inventory

The direct cost of the inventory actually sold during a period.

Gross Profit

GP = Revenue - COGS

What remains from sales after subtracting the direct cost of the goods sold, before operating expenses.

Net Income

NI = Revenue - Expenses

The “bottom line” — total earnings after all expenses, interest and taxes are deducted from revenue.

Retained Earnings

RE_1 = RE_0 + NI - Dividends

Cumulative profit kept in the business rather than paid out to shareholders.

Current Ratio

CR = \dfrac{Current\ Assets}{Current\ Liabilities}

A liquidity measure of whether a firm can cover its short-term obligations with short-term assets.

Quick Ratio (Acid Test)

QR = \dfrac{Current\ Assets - Inventory}{Current\ Liabilities}

A stricter liquidity test that excludes inventory, which can be slow to convert to cash.

Working Capital

WC = Current\ Assets - Current\ Liabilities

The short-term capital available to run day-to-day operations.

Debt-to-Equity Ratio

D/E = \dfrac{Total\ Debt}{Total\ Equity}

Measures financial leverage by comparing borrowed funds to owner-supplied funds.

Inventory Turnover

IT = \dfrac{COGS}{Average\ Inventory}

How many times inventory is sold and replaced over a period.

Return on Assets (ROA)

ROA = \dfrac{Net\ Income}{Total\ Assets}

How efficiently a company turns its assets into profit.

Return on Equity (ROE)

ROE = \dfrac{Net\ Income}{Shareholder\ Equity}

The profit generated for each dollar of shareholders’ equity.

Net Profit Margin

NPM = \dfrac{Net\ Income}{Revenue}\times 100\%

The percentage of revenue that survives as profit after all costs.

EBITDA

EBITDA = NI + Interest + Taxes + Depreciation + Amortization

Earnings before interest, taxes, depreciation and amortization — a proxy for core operating cash generation.

Double-Declining Balance

D = \dfrac{2}{n}\times Book\ Value

An accelerated depreciation method charging more expense in an asset’s early years.

Book Value per Share

BVPS = \dfrac{Equity - Preferred}{Shares\ Outstanding}

The net asset value backing each common share.

Accounting Equation

Assets = Liabilities + Equity

The fundamental balance-sheet identity.

Net Income

NI = Revenue - Expenses

Profit after all expenses.

Retained Earnings

RE = RE_0 + NI - Dividends

Accumulated profit kept in the business.

Cost of Goods Sold

COGS = Beginning + Purchases - Ending

Direct cost of goods sold in a period.

Quick Ratio

QR = \frac{Current Assets - Inventory}{Current Liabilities}

Stringent liquidity measure excluding inventory.

Inventory Turnover

IT = \frac{COGS}{\text{Avg Inventory}}

How many times inventory is sold per period.

Double Declining Depreciation

D = \frac{2}{n}\times BV

Accelerated depreciation of an asset.

Book Value

BV = Cost - \text{Accumulated Depreciation}

Asset value on the balance sheet.

Operating Margin

OM = \frac{\text{Operating Income}}{Revenue}\times 100

Profit from core operations as a percent of revenue.

Contribution Margin

CM = Price - \text{Variable Cost}

Revenue per unit left to cover fixed costs.