Essential Accounting Principles and Financial Formulas

Key Financial Formulas and Profit Calculations

1. Sales - COGS (Initial Stock - Final Stock + Purchase) = Gross Margin
2. Gross Margin - Operating Expenses = EBITDA
3. EBITDA - Amortization (Value 1 - Value 2) = EBIT
4. EBIT - Financial Expenses = EBT
5. EBT - Taxes = EAT
6. EAT - Dividends = Net Profit

Working Capital (WC) = Current Assets (CA) / Current Liabilities (CL)

Net Income and Revenue Concepts

• Revenues minus expenses = Net income.
• Unearned revenues is a Liability.
• Assets minus liabilities = Equity.

Fundamental Accounting Definitions

• Assets: A resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity.
• Liability: A present obligation of the enterprise arising from past events.
• Equity: What is left of the assets after liabilities have been deducted.
• Revenues: Amounts received or to be received from customers for sales of products or services.
• Expenses: Amounts that have been paid or will be paid later for costs that have been incurred to earn revenue.
• Inventory: Goods held by a firm for resale to customers.
• Accounts Payable: A liability that results from the purchase of goods or services on account.
• Compound Entry: A transaction that affects more than two accounts.
• Creditor: One to whom money is owed.
• Debtor: One who owes money.
• Double Entry Concept: A set of rules for recording financial information in a financial accounting system in which every transaction or event changes at least two different nominal ledger accounts (one side debit left, credit right).

Primary Financial Statements

• Balance Sheet: A financial statement that reports the assets, liabilities, and stockholders' (owner's) equity at a specific date.
• Cash Flow Statement: It describes in summary form how the company generates the cash flow it needs to finance its various financial opportunities and responsibilities during the past year.
• Income Statement: A financial statement that reports the revenues and expenses for a period of time (year or month).
• Changes in Owner's Equity: A financial statement showing the beginning balance, additions to and deductions from it, and the ending balance of the shareholders' equity account for a specific period.

Journal (American English) / Daybook (British English): A list in chronological order of all the transactions for a business, each recorded as a double entry.

Primary Goals of Accounting

• Providing assurances that a business is operating as intended and that the assets of the organization are protected.
• Showing the implications of choosing one plan instead of another.

Cash Flow and Accounts Receivable

Cash Flow: Accounts receivable - last 4 invoices of sales.