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# What Are the Eight Accounting Equation?

## Anyone who wants to start a small business should know the success equations! We have come up with the same in this blog.

The accounting equation, also known as the fundamental equation of accounting, is a principle that states that assets equal liabilities plus equity. It serves as the foundation for the double-entry bookkeeping system used in financial accounting.

## Accounting Equation

The accounting formula reveals how much of your assets were financed by debt instead of equity. To start, you must be familiar with your company’s assets, liabilities, and equity. Business assets are valuable possessions that your company owns. Your debts are considered liabilities. Additionally, business equity measures your ownership stake in the company.

In accounting, the formula is:

Liabilities + Equity = Assets

Something is wrong if your assets do not equal the sum of your liabilities and equity. There’s a chance you didn’t record a transaction. You can also use the accounting equation to calculate how much money your company would still have after paying off all of its liabilities. Use the equation to your advantage to determine the difference between your assets and liabilities.

Equity = Assets – Liabilities

## Net Income Equation

Calculating your company’s performance requires using financial accounting formulas like net income. The difference between your income and expenses is displayed as net income. Net income is also referred to as net profit, net earnings, or your company’s bottom line. A net loss occurs when your net income is zero. The Net Income calculation is important for any business, be it a or any large corporation.

No one desires a negative net income, of course. If your company has a negative net income, this indicates that expenses outweigh income. However, until you reach your break-even point, negative net income is typical when a business is just getting off the ground.

You need to know your total business revenue and expenses (including the cost of goods sold) for a given time in order to calculate your net income. The costs associated with running your business, paying employees, and making loan payments should all be added up. Use this formula after that:

Net Income = Revenue – Expenses

## Cost of Goods Sold Equation

How much does your unique spend on manufacturing its goods or providing services? Spending too much will result in a low-profit margin. To calculate how much it costs to develop products or services over time, use the cost of goods sold (COGS) formula.

COGS = Beginning Inventory + Purchases during the Period – Ending Inventory

Knowing your COGS is necessary to set prices, compute net income, and more.

## Income From Investment

You should invest your money wisely. How would you know? When your investments outperform your costs, you have made wise decisions. Find your return on investment (ROI) percentage to determine how effectively you are investing your company’s funds. Use this equation to calculate ROI:

ROI = [(Investment Gain – Cost of Investment) / Cost of Investment] X 100

## Breakeven Point Equation

When a company’s total sales and total expenses are equal, it reaches its break-even point. When you reach your break-even point, neither a profit nor a loss is produced. Do you know the number of goods or services you must sell or render for your company to break even?

Using the break-even point formula, calculate how many products you must sell in a given time frame. You must be aware of the fixed and variable costs in your company. You should also note your sales price per unit.

Break-even Point = Fixed Costs / (Sales Price Per Unit – Variable Costs Per Unit)

## Profit Margin Equation

Is your company profitable? How much of that profit did your revenue represent? Find out your company’s profit margin to determine the portion of the revenue you keep after paying expenses. The profit margin equation is as follows:

Profit Margin = (Net Income / Revenue) X 100

Aim for significant profit margins. The higher your margin, the more money your company will make.

## Current Ratio Equation

To compare your current assets and liabilities, use the current ratio. Your company’s assets that can convert to cash in less than a year are known as current assets. Similarly, your debts that are due within a year are considered current liabilities. Divide your current assets by your current liabilities to calculate your current ratio:

Current Ratio = Current Assets / Current Liabilities

The outcome demonstrates how much more assets you have than liabilities. It would be best if you had a current ratio that is greater than one. A current ratio of less than one indicates that you have more short-term liabilities than short-term assets.

## Markup Equation

You can try using the markup formula if you need assistance pricing your goods. The markup percentage demonstrates how much more you charge for your offerings than their original cost. A larger profit margin may result from a higher markup. Though keep in mind that markup and margin are different. Use this formula to determine your markup percentage:

Markup Percentage = [(Revenue – COGS) / COGS] X 100

To determine your selling price, you can also select a markup percentage and multiply it by the cost of your good or service. Use the following formula to determine your selling price using markup:

Selling Price Using Markup = (COGS X Markup Percentage) + COGS

## Inventory Shrinkage Equation

Use the inventory shrinkage formula to calculate the percentage of Inventory your company is losing. You must be aware of the recommended amount of Inventory. Additionally, you need to know how much inventory you have after losing some to theft and damage.

Establish how much Inventory you should have first. The quantity of Inventory that is listed in your books is this. To determine your recorded Inventory, deduct the cost of goods sold. The formula for inventory shrinkage is:

Inventory Shrinkage = [(Recorded Inventory – Actual Inventory) / Recorded Inventory] X 100

Your inventory shrinkage percentage should be as low as possible.

Conclusion

Try these business success equation in your company when you decide to launch a new business or even if you already have one. It will undoubtedly increase your company’s growth and profitability. You must keep detailed records of your transactions to calculate important business formulas correctly. Contact Vakilsearch if you require additional assistance or if running your business is proving to be difficult.