4 Basic Formulas Of Accounting 

4 Basic Formulas Of Accounting

Accounting, also known as accountancy, is the measurement and communication of economic information. It helps to understand the economic state of a company or organization. There are many types of accounting, from financial to non-financial. However, we will discuss some basic accounting formulas generally used by accounting firms in UAE.

Gross profit margin:

Gross profit margin is the percentage of a business’s profits that exceed expenses. The gross profit margin is calculated using net income, the total revenue fewer expenses such as debt payments, general administrative expenses, taxes, and investments. Another key accounting formula is the cost of goods sold, which is a business’s price for a unit. Using this formula, a business can accurately predict its revenue.

Variable cost per unit:

Variable cost per unit (VCPU) is an accounting formula used to determine the costs of producing a unit. In simple terms, VCPU represents the changing nature of variable costs, including the costs of raw materials, direct labor, packaging, and fuel. The number of units produced is called the output.

Fixed costs:

Fixed costs are costs that a business cannot change, even if the company grows or shrinks. They are similar to personal expenses but are constant. Therefore, a business must determine how to manage these costs. For instance, a company’s rent, insurance premiums, and utilities are fixed costs. Regardless of a business’s size, it must manage these costs effectively.

Straight-line depreciation:

Straight-line depreciation is one basic accounting formula that can help you calculate the depreciation of an asset. It works like this: If you buy a car that costs DH 17,000 in the first year, you depreciate it by Dh 3,000 per year. If you depreciate an asset over five years, you’ll get a net book value of DH 2000 at the end of the fifth year.

This method is different from other methods and is based on time. When a fixed asset is purchased, its cost is reduced yearly until it reaches its salvage value. The depreciation expense is reported on an income statement for the accounting period. The depreciation expense is also reported on the balance sheet, showing the total depreciation for the asset over its life.