Magic Accounting FormulasWell, not magic in a jack-and-the-beanstalk kind of way, but sprinkle some magic accounting formulas onto a set of business accounts near you and it's surprising how your learning can grow overnight! It isn't long after you start looking at a set of accounts that you start wondering about how to make sense of it all. If only I could understand what all of this means, you think. If only there was a way. Well you can, and what you need are formulas also called financial ratio formulas and ratio analysis What is a formula?A formula - apart from those horrible things you used to have to do in math at school - is just a set way of doing something. A way which if performed time and again would deliver the same result. A recipe if you like. And it's no different in accounting. You apply the same formula to two seperate businesses and suddenly you can compare them on the same basis. Like I said. Magic. Example Accounting FormulasAlright, alright, give me an example I hear you say. A balance sheet is a snap shot of a business at a point in time. It shows the assets in use, and how those assets are funded. Total Assets = Owners Equity + Liabilities As liabilities consists of items both long term and short term in nature then we can also say Total Assets = Owners Equity + Long Term Liabilities + Current Liabilities Total assets consists of items durable in behaviour such as patents and licenses (Intangible), or robust in their lifespan and physical items such as plant and machinery(fixed) and those that are more current e.g. cash, then we can also say. Total Assets = Intangible Assets + Fixed Assets + Current Assets Top of Accounting Formulas More about Financial Ratio Analysis Operating Performance RatiosProfitability Ratios Valuation Ratios Small Business Finance Tips Home Page |