5 Accounting Equations Every Business Should Know

As a small business, you would prefer to handle your own accounting and have control over your accounting books. To manage your business transactions better, you should have a good grasp of these formulas.

Being familiar with these formulas you can understand the health of your business.

The asset accounting equation

Assets are all the things that the company owns. They include inventory, properties, equipment, and accounts receivable.

The equation is

Total asset = liabilities+equity

This equation is called the balance sheet equation. The total asset must be a sum of liabilities and equity.

Liabilities are obligations that include lease payments, merchant account fees, debts from other services and accounts payable.

Equity is the portion of the company that belongs to each partner.

Net income calculations

Calculating the net income of your business will provide a glance of your net profit and net loss at the end of the day or year. It is crucial to maintain a positive net income rate as it indicates a strong profit margin.

The equation is

Net income = revenue-expenses

Revenue can be cash flow from your sales and other sources to the company

Expenses are the cost incurred to generate more satisfying revenue.

Break-even points

Your sale over the break-even point will generate profit and provides information about how much you need to sell to cover up your spending cost.

The equation is

 Break-even point= (variable cost-fixed cost-sales=$0 profit)

Variable cost is the cost that keeps changing based on your product sales

Fixed cost is the cost like your employee salaries, insurance, and rent which is predictable and recurring.

The ratio of the current cash flow

The cash ratio gives a clear picture of your business health. The number defines how much cash you have in hand  to pay off your current liabilities

The equation is

Cash ratio = cash/ current liabilities

Here cash means the actual cash and cash equivalents like liquid asset settlements. Liabilities means the current debts that your business incurred.

Cost of good sold

The cost of goods sold determines the amount that you spent to manufacture a product. The profit margin of the product can be evaluated by subtracting the cost of sold goods from revenue.

The equation is

Cost of good sold= initial inventory+ cost of new inventory-ending inventory

Initial inventory is the inventory that you had at the beginning of the product manufacturing process

Profit margins

By dividing your net income with sales, you will get your profit percentage. The high-profit rate denotes healthy business and low margins indicate to maintain your expenses.

The equation is

Profit margins= Net income/Sales

Look after your metrics that bring income to your business, if your sales rate is high but low-profit margin prevails.

Well maintained accounting system helps you to asses the financial health of the company, these equations seems easy but many small businesses find it hard to bring the left and right side of their balance sheet equal. Need better assistance that caters a good accounting system? SmartFin provides end to end accounting service with over a decade of experience in the field. We are proactive in our approach to our clients. we can handle business accounting needs and also providing other additional features. Reach us out to know more about our exciting accounting features