Want to learn more about the Accounting rate of return? In this post, we go through the basics of accounting rate of return.

Accounting rate of return

When someone invests capital in your company, they expect returns. The accounting rate of return measures the expected profitability for capital investment. Businesses, analysts, and accountants use accounting rate of return or ARR capital budgeting. It indicates profitability from simple estimates to evaluate capital projects. We divide the net income from the investment by the total amount invested.

Investors use ARR to decide on the viability and profitability of a capital project before investing. Investors can analyze the risk involved in the investments. Businesses get a snapshot of the potential earnings power of a particular investment. In this blog, we elaborate on what does arr mean?

Also read: A guide to expanded accounting equation

What is ARR?

What is ARR?, ARR is an acronym for Accounting Rate of Return.

ARR’s definition is as follows, ARR is the average net income an asset should generate divided by the capital cost. We express ARR as an annual percentage.

The accounting rate of return is an important measure for investors and management. Companies use ARR to decide on the viability of a project or acquisition.

ARR = average annual profit / average investment

Significance of accounting rate of return

The accounting rate of return is a vital metric used by companies before investing. The significance of the accounting rate of return is as follows-

• ARR is easy to calculate and understand. The method considers total profits or savings over the entire project life.
• Analysts factor in depreciation and expenses while appraising a project.
• Companies use ARR to allocate funds. They can compare multiple projects. Companies decide on expansion or acquisition based on figures in accounting rate of return.
• The accounting rate of return gives a clear picture of the profitability of a project.
• ARR considers the profit earned for calculating the rate of return. Accounting profit is easily available from the accounting records.
• ARR helps owners and investors learn about the return on their investment. 
• ARR helps to measure the current performance of the company.

Also read: Fund accounting | A complete guide

Accounting rate of return formula

The accounting rate of return formula is as follows:

ARR = average annual profit/ average investment

Where,

Average annual profit = total profit over the investment period/number of years

Average investment = (Book Value at Year 1 + Book Value at End of Useful Life) / 2

If you calculate the average rate of return and it equals 10%. It means the annual rate of return is 10 cents for every dollar invested per year.

The ARR should be greater than or equal to the company rate of return for the project to be viable.

How to calculate ARR?

The concept of ARR is simple, but how to calculate ARR? We calculate ARR by dividing the total contract value by the number of years.

1. The first step will be calculating the annual net profits of your investment. Accountants calculate profits after deducting operating expenses, taxes, and interest associated with the project or investment.
2. If the investment is a fixed asset, such as property, you need to calculate the deprecation and expenses. 
3. To get the annual net profits we deduct depreciation expenses from the revenue figures. 
4. In the last step, you divide the annual net profit from the initial cost of the investment. You multiple the net profit by 100 to see the percentage return.

If, you find the arr calculation cumbersome, there are readymade average annual return calculators available online.

Also read: 10 Best accounting calculators and how to use of them

Example of accounting rate of return

ABC Company wants to invest in some capital equipment to replace the old machine. The new machine cost $42 0,000 and would increase the revenue by $200,000. The annual expenses are $50,000. The machine should have a useful life of 12 years and have zero salvage value.

Step 1 Calculate Average Annual Profit
Inflow, year 1-12 (200,000 x12)	$2,400,000
Less Annual expenses (50,000×12)	-$600,000
Less deprecation	-$420,000
Total Profit	$1,380,000
Average Annual Profit  (1,380,000/12)	$115000
Step 2 Calculate Average Annual Investment
Average Investment ((420,000+0) /12)	$210,000
Step 3 Calculate Annual Recurring Revenue
AAR formula	average annual profit/ average investment
Annual Recurring Revenue (115000/210000)	54.76%

This means for every dollar invested, the investment will return a profit of about 54.76 cents.

A capital equipment costs $350,000 would increase the annual revenue by $100,000. The company’s expenses of the company are $10,000. The equipment has life of twenty years with no salvage value. 

Step 1 Calculate Average Annual Profit
Inflow, year	$100,000
Less Annual expenses (10,000)	-$10,000
Less deprecation  (350,000/20)	-$17500
Total Profit	$72500
Average Investment	$350000
Step 3 Calculate Annual Recurring Revenue
AAR formula	average annual profit/ average investment
Annual Recurring Revenue (72,500 / 350,000 )x100	20.71%

This means for every dollar invested, the investment will return a profit of about 20.71 cents.

Also read: Accounting Ratios | All you need to know

How to calculate ARR in excel?

Excel has long been used for accounting purposes.  To keep track of ARR you can use annual rate of return excel. Here are the steps you can use to calculate ARR

Let us take the example of a company that has recently invested $60 million in setting up a new plant. The company expects to generate revenue of $15 million in the first year while operating expense is likely to be 30% of the revenue. The asset is expected to be scrapped after 10 years of estimated life with zero salvage value. Calculate the accounting rate of return for the investment based on the given information.

	A	B
5	Particulars	Amount (in millions)
6	Revenue	$15
7	Initial investment	$60
8	Estimated life of Asset	$10
	Operating Expenses is calculated as
	Operating Expenses	30% x Revenue
9	Operating Expenses Formula	30% *B6 = 30/100*(15)
10	Operating Expenses	$4.5
11	Depreciation is calculated using the formula
12	Depreciation	(Initial Investment –Salvage Value)/Estimated  Value
13	Depreciation Formula	(B7-0)/B8
14	Depreciation	$6
15	Incremental Accounting Income is calculated  using formula
16	Incremental Accounting Income	Revenue – Operating Expenses –Depreciation
17	Incremental Accounting Income Formula	= B6-B10-B14
18	Incremental Accounting Income	$4.5
19	Accounting Rate of Return is calculated using the formula
20	Accounting Rate of Return	Incremental Accounting Income/Initial Invesment*100
21	Accounting Rate of Return Formula	=B18/B7*100
22	Accounting Rate of Return	7.5%

This means for every dollar invested, the investment will return a profit of about 7.5 cents.

Also read: A complete guide to Public accounting 

What is required rate of return formula?

Investors expect return on investment when they invest in a company.  The required rate of return is the minimum return of investment an investor expects for investing the company stock. There are two methods to calculate the required rate return formula

Capital Assets Pricing Model (CAPM) method

RRR = RRR = rf + ß(rm – rf)

Where

• RRR – required rate of return
• rf – risk-free rate
• ß – beta coefficient of an investment
• rm – return of a market

Weighted Average Cost of Capital (WACC)

RRR = wDrD(1 – t) + were

 Where:

• wD – weight of debt
• rD – cost of debt
• t – corporate tax rate
• we – weight of equity
• re – cost of equity

Also read: 3 steps on how to setup a successful tax consulting business

What is simple rate of return?

Simple rate of return is an estimated return of investment. We calculate it by calculating profit before taxes and interest. The simple rate of return is easy to calculate. The drawback of simple rate of return is that it does not focus on cash flow but on net operating income.  

We estimate the revenue that will be generated from the proposed investment and deduct projected expenses from the project. The simple rate of return formula

Simple rate of return = (Incremental revenues − Incremental expenses, including depreciation

= Incremental net operating income) / Initial investment]

Simple rate of return = (Cost savings − Depreciation on new equipment) / Initial investment*

*the investment should be reduced by any salvage from the sale of old equipment.

Also read: Materiality accounting – What is materiality accounting & 5 practical examples

What is expected rate of return formula?

The expected return definition is as follows is the profit or loss that an investor expects on an investment. Expected rate of return or return on investment is calculated by multiplying the potential outcomes with the chances of the event occurring and then adding the results.

Investments are inherently is a risky the return on investment help companies and investors consider the risk factors linked with the investment. The rate of return helps investment companies develop model portfolio. Those who trade in the stock market examine stock history and market trends to calculate expected rate of return. 

The expected rate of return formula =  Sum (Returni x Probabilityi)

ER= R1P1+ R2P2 + R3P3 +…..+RnPn

What is annual rate of return formula?

The annual rate of return or yearly rate of return or nominal annual rate is the amount earned on a fund during the year. The annualized rate of return works by calculating the money gained or lost at the end of the year dividing it by the initial investment at the beginning of the year. 

The annual rate of return formula

Annual rate of return =(BYPEYP−BYP​)×100

where:

EYP=End of year price

BYP=Beginning of year price

Investments in different firms are difficult to compare. Since the annual rate of return calculates the return of return every year, we can compare different types of investments and judge which investments gave the best returns.  A major drawback of the nominal annual rate is it does not consider the potential of the investment compounding over a period.

Also read: How to set up your startup consultancy?

What is ARR stock dividend?

Companies use ARR stock dividend to distribute  wealth to the shareholders.  The dividend is made company shares rather than cash. Stock dividend are made in lieu of cash,  when company is low on liquid cash. The company can reward its investors without reducing its cash reserves, but can reduce the earning per share.

Investors are paid a fraction of their existing shares. Stock dividend is not taxed till the shares are sold. When companies issue the shares it dilutes the value of existing shares because of the increase in the number of shares.

What is rate of return on asset?

Return of assets (ROA) measures the profitability of a business in a relationship with its total assets. Investors, managers or analyst use the ROA to find out how the company are using  its assets to generate revenue.  ROA is displayed as percentage. Companies try to achieve higher return on assets.

Businesses operate for profits while using all resources available to them. Stakeholders and analyst calculate the ratio of profit to resources available to find out feasibility of a project. You can use ROA to find out how quickly you will get returns on your investment.

Return on Assets formula =Total Assets/Net Income​

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What is accrual accounting rate of return?

Accrual accounting rate of return is the percentage of rate of return on an investment or assets, for the initial investment. The ARR formula divides the average revenue of the company by its initial investment cost.  You can derive the ratio or return on investment over the life of the assets or related to the project. 

This accounting rate of return calculates the profit related to the project using accrual and non-cash expenses and depreciation. The accrual accounting rate of return formula is as follows –

Accrual accounting rate of return = Average annual accounting profit/ Initial investment.

What is ARR dividend?

ARR dividend is the total expected dividend payment from an investment fund or portfolio expressed annually plus any non-recurring dividend received in the period. Companies may choose to offer their subscribers a fixed or adjustable dividend. Dividend rate and dividend yield are used interchangeably. 

ARR dividend is a financial ratio that shows how much the company pays out in dividends each year relative to its stock price. Companies should aim to generate a healthy dividend to pay out dividend.

You can use dividend rate to estimate the dividend only return on investment. Dividend amount is unchanged, the dividend rate improves if a company stock prices falls. The converse is also true the dividend rate falls if the company stock prices rises.

Want to know what is public accounting and the top 10 service providers? In this article, we will learn all about public accounting.

Public accounting

Public accounting refers to a business or an individual that provides accounting services to other firms. They serve businesses, individuals, governments, and non-profits by preparing their financial statements, filing tax returns, conducting audits, providing consultation and advice, etc.

What is a public accountant?

A public accountant is an accounting professional licensed by the board of accountancy of each state. The resources to obtain the license are provided by the American Institute of Certified Public Accountants (AICPA). The CPA designated accountants help in enforcing professional standards in the public accounting industry.

These accounting professionals offer financial statements audits and other attestation services to help organizations get information regarding their financial health. They help families and individuals as well by providing valuable knowledge and advice on taxes and financial planning. Public accountants are committed to lifelong learning and follow a strict code of professional conduct.

Also read: Fund accounting | A complete guide

What is private accounting?

Private accounting definition refers to the business practices of an accountant serving a single company. A private accountant is responsible for analyzing and preparing financial reports internally of a company, sending invoices to clients, and holding accounts payable. When a company is getting audited, the work of the private account department is reviewed by the public accounting firm professionals.

The basic motive of establishing a private accounting department is to set up an internal system to record business transactions. They also help company’s stay informed regarding their financial statements. In terms of education, there isn’t much difference between public and private accounting.

Certified public accountant definition

A certified public accountant definition, an accounting professional who has met licensing requirements through educational training, public accounting experience, and qualifying for the CPA exam successfully is known as a CPA certified accountant. Typically, if a local certified public accountant earns a license in one state they can get licensed in other states as well based on reciprocity laws.

Across the industry, jobs for certified public accountants are higher due to their reliability, in-depth industry knowledge, and credentials. While we define certified public accountants, we should understand that along with keeping and interpreting financial records they perform several additional services.

Also read: Expanded accounting equation 

Top 10 public accountants services

A public accountant job description includes multiple job roles for his or her clients. Below, we will look into some of the major services provided under public accounting,

• Audits and reviews

The primary task involved in public accounting jobs is to audit the books of clients. A lesser form of audit is known as a review, which a business might prefer due to its lesser cost.

• Consulting services

A business may hire the services of a public accountant for consulting activities such as describing possible strategic options, advising on the adequacy of a system of controls, and providing assistance in information system installation.

• Taxation services

Another important role of a public accountant job is to advise individuals or businesses on effective tax strategies and provide their expertise in preparing tax returns for the clients.

• Forensic accounting

Forensic accounting is a specialized field in public accounting where accountants reconstruct destroyed financial records or investigate if there are any signs of fraudulent activities. Certified public accountants gain specialization in forensic accounting to perform this role.

• Financial planning

Public accounting job description includes advising a client with financial planning strategies, such as how to transfer a business to a buyer to minimize the short-term tax impact on the client.

• Litigation services

Public accounting job descriptions also involve providing detailed analysis to an attorney in order to present a winning case in court. Public accountant titles typically use these skills for divorce settlements, bankruptcy proceedings, business disputes, etc. They may also provide testimony as an expert witness.

• Valuation services

Valuation services are provided as part of public accounting that includes valuation reports, valuation engagements, limited scope valuation engagements, calculation engagements, and more.

• Financial reporting services

Under financial reporting services, a public accountant performs several jobs such as compilation, preparation of financial statements, disclosures and notes to accounts, corporate secretarial services, performing calculations required by accounting standards, etc. The financial reporting framework has a summary of significant accounting policies and other explanatory information.

• Bookkeeping

Public accountant job title includes bookkeeping services that comprise of preparing budget, income and loss statements, maintaining and evaluating financial records, making statutory returns as permitted by law.

• Management accounting

Accounting job titles often cover management accounting services that contribute to a company’s long-term growth. They help managers make smart business decisions by providing accurate and timely financial and statistical information through management reports and accounts.

Also read: A guide to buying the right Accounting Calculator 

Public versus private accounting

While comparing private vs public accounting, the main difference is that in public accounting the professionals keep account of financial documents which are supposed to be declared to the public by an individual or a business, whereas private accounting is the accounting of financial information of a business in which an accountant manages internal finances.

In public accounting vs private accounting, the latter exposes an individual to more industry experience as compared to the former. Public accounting vs private also suggests that a public accountant must be CPA certified while it is not compulsory for a private accountant.

Top 10 public accounting firms

According to the Inside Public Accounting’s IPA top 400 firms list, here are the top 10 public accounting firms in the U.S.

1. Deloitte provides audit, consulting, tax, and advisory services to many of the world’s largest organizations, including nearly 90 per cent of the Fortune 500 and more than 7,000 private companies
2. PwC is a New York-headquartered professional services firm
3. Ernst & Young LLP is a member firm of Big 4 accounting legend EY
4. KPMG fourth-largest accounting firm in the U.S. by revenues
5. RSM US LLP in Chicago is the leading U.S. provider of audit, tax, and consulting services focused on the middle market
6. BDO USA, LLP is the U.S. member firm of BDO International Ltd., one of the world’s largest accounting and advisory organizations serving the middle market
7. Grant Thornton LLP is one of the world’s largest organizations of independent audit, tax, and advisory firms
8. CLA (CliftonLarsonAllen) is the 8th-largest CPA and consulting firm in the country according to Accounting Today’s 2021 Top 100 rankings
9. Baker Tilly US, LLP (Baker Tilly) is an advisory, CPA firm headquartered in Chicago. It currently ranks among the top 15 largest CPA firms in the U.S.
10. Crowe Horwath LLP was founded in 1942 and is a public accounting, consulting, and technology firm with offices around the world

Also read: Accounting ratios | An ultimate guide

Public versus private accounting

The top differences between public accounting and private accounting are,

1. Professionals in public accounting are more likely to move up the ladder as compared to private accounting due to their vast industry exposure.
2. Public accounting professionals may have to travel frequently to the client’s office whereas private accountants are usually linked to a single business or company.
3. Public accounting professionals get more opportunities to specialize in a particular area unlike private accountants
4. There is a huge amount of stress on public accountants to carry out their duties effectively whereas a private accountant works in a stress-free environment.

Also read: 10 Recession-proof businesses that have stood strong for over a century

Key items to include in public accounting resumes

Keep in mind these 4 key items while writing a certified public accounting resume,

• Relevant experience – Make sure to mention the experience relevant to the public accounting job position you are applying for.
• Mention the right skills – Don’t forget to mention the right skills for the role. Look at the keywords in the job description and find the ones applicable to you.
• Achievements and accolades – List quantifiable achievements instead of writing dry job descriptions.
• ATS-friendly – Use keywords smartly to get past the Application Tracking System used by the hiring managers.

Also read: How to become a startup consultant and list of incredible 10 career paths!

Differentiating accountant versus bookkeeper

Here’s what you should know about the difference between an accountant and a bookkeeper,

1. A bookkeeper keeps a direct record of all purchases and sales related to a business whereas in public accounting the collected data is analyzed to find out what that means for your business.
2. An accountant cannot be a bookkeeper, but a bookkeeper cannot be an accountant without earning a proper certification.
3. Bookkeeper is more of an administrative role that handles day-to-day financial tasks. Comparatively, an accountant is a more subjective role in which an accountant uses bookkeeping data to provide financial insights to the business owner.

Want to learn about Accounting ratios? In this blog, we provide a cheat sheet of financial ratios and some basic accounting equations.

Accounting ratios

The accounting ratios are ratios that compare two or more financial data. The ratios are great tools to analyze the financial statements of companies. Various stakeholders in the business examine the ratios to understand the financial status of the company.

What are accounting ratios? 

Accounting ratios or financial ratios are comparisons made between one set of figures with another set of figures. Analysts use the ratios to determine if the company can pay off its debt and find profitability. The ratio can predict if the company is likely to go bankrupt.

We can source the ratio from – balance sheet, income statement, and cash flow statement. Statements about the change in equity are a valuable source of data. There are different types of financial performance ratios are –

• Liquidity Ratios
• Assets Turnover Ratios
• Financial Leverage Ratios
• Profitability Ratios
• Dividend Policy Ratios

Also read: The ultimate guide to Fund Accounting

Importance of accounting ratios

The financial statements are elaborate documents. Different items on the statement are interrelated. Accounting ratios are important because –

• Accounting ratios help us to analyze and scrutinize past results. The ratios help to analyze the relationship with different items.
• We can derive the ratios after analyzing and scrutinizing past results. Companies use the ratios to prepare budgets, estimates, formulating policies, and prepare an action plan. 
• Trend analysis helps us to take into account the time dimension while analyzing the account statement. We can determine if the company’s performance is improving and deteriorating over the years.
• Ratio analysis helps to determine how efficiently the company runs and how it utilizes the company’s assets.
• Compare the performance of two companies having similar products, or the performance of two departments in the same company.

Types of financial ratios

 Accounting ratios help to measure the efficiency and profitability of an organization. The different types of financial ratios are-

• Gross margin and operating margin – The income statement of the company contains information like company sales, expenses, and net income. Accountants get an idea about company earnings. Figures used to analyze company profitability are –

We can calculate gross profit or gross margin by dividing gross profit by sales. High gross profit indicates the company has a higher proportion of profits rather than expenses. 

Operating profit or operating margin is a percentage of sales. It is the ratio of operating profit by sales. 

• Debt to Equity Ratio – The debt to equity ratio is an important measure in the balance sheet. We calculate the ratio by dividing debt by equity. The ratio shows how much business is leverage. It shows how much debt it is using to finance operations as opposed to company funds.

• Quick Ratio – The quick ratio or acid-test ratio helps to or show a company’s short-term liquidity and measures if the company can measure if the company can meet its short-term obligations with its liquid assets. 

• Dividend Payout Ratio – provides data for ratios dealing with cash. For example dividend payout ratio is the percentage of net income paid to investors through dividends.

Also read: Accounting Calculator | 10 Best accounting calculators to choose from 

Frequently used accounting ratios

Accounting formulas and bookkeeping processes are tedious,but gives a clear picture of the financial health of your company. The accounting ratios help you make important decisions. Here are some the most important financial ratios to analyze a company.

1. Profitability ratios

These ratios help accountants measure business earnings versus expenses.

• Return on Assets indicates the profit made by the company compared to the assets.
• Return on Equity shows profitability in the stakeholder’s investment.
• Profit Margin shows the income that comes from sales.
• Earnings Per Share indicates your profitability from outstanding shares.

Total assets formula – Assets are resources owned by the company for future economic benefits. Total assets formula = non-current + current assets.

Non-current assets are assets held for more than one financial year and are difficult to convert into cash or equivalent.

Current Assets are assets can be easily converted into cash and cash equivalent within one financial year. Ideally, total assets should equal the sum of shareholders equity and total liabilities combined.

2. Liquidity ratio formula

Liquidity ratios are financial metrics to determine a company’s ability to pay the current debt without raising more capital. Internal or external experts carry out the analysis. Here are the different liquidity ratios with the liquidity ratio formulas.

• Current Ratio = Current assets/current liability
• Quick Ratio = (Cash + marketable securities+ account receivable)/current liabilities
• Days sale Outstanding = Average account receivables/Revenue per day

3. Equity ratio formula

The equity ratio or solvency ratio, measures the assets funded by the owner’s investment. It compares total equity in the company to total assets. A low equity ratio means the company acquires assets by taking debt which is risky. A high equity ratio indicates minimal debt. The equity ratio formula = Total Equity/Total Assets.

4. Accounts payable turnover ratio

The accounts payable turnover ratio is a short-term liquidity measure. We use it to quantify how fast a company pays its suppliers. The ratio measures how many times the company pays the payable amount during a specified period. 

Account payable is short-term debt owed to suppliers and creditors. 

Accounts payable turnover ratio =(BAP + EAP)/2TSP​

where:AP = Accounts payable

TSP = Total supply purchases

BAP = Beginning accounts payable

EAP = Ending accounts payable​

Also read: Basic Accounting terms that newbies must know

5. Average total assets formula

The average total assets is the average amount of assets recorded on a company’s balance sheet at the end of the year and the previous year. Accountants use it to compare the sales figure of the current year, to calculate the assets required to support the sales.

The average total assets formula = (Aggregate assets at end of current year + Aggregate assets at end of the preceding year)/ 2

Also read: How to set-up a Tax consultant business

6. Asset management ratios

Asset management ratios are also called turnover ratios or efficiency ratios. You use the ratios to analyze how effectively and efficiently small businesses manage their assets to produce sales. Here are the different assets management ratios.

• Inventory Turnover Ratios are applicable if a business sells physical products. The Inventory turnover ratio = Net Sales/Inventory.
• Day Sales Inventory will tell the management how many days does it take to sell inventory. The Day sale inventory = 365/Inventory Turnover.

7. Industry average ratios

You use industry average ratios to evaluate industry performance. We can calculate industry average ratios by comparing the financial statements of many firms. Analysts use industry average ratios for trend analysis and industry comparison.

8. Market value ratios

You can evaluate the current share prices of public-held company stock. The ratios help investors determine, if share prices are over-priced or under-priced. The market value ratios are 

• Book value per share 
• Dividend Yield 
• Earnings per share 
• Market Value per share 
• Price/earnings ratio

9. Working capital ratios formula

Working Capital ratios is also called current ratios or liquidity ratios. The ratios measures the company’s ability to pay off its current liabilities with current assets. The ratio shows the liquidity of the company. It is healthy if a company can pay off current liabilities with current assets (cash, cash equivalent, and marketable securities). The working capital ratios formula = current assets/current liabilities.

10. Cash coverage ratio formula

The cash coverage ratio is a liquidity ratio. It measures the company’s ability to pay off current liability with only cash and cash equivalent. Creditors examine the ratio to find out if the company maintains an adequate cash balance to pay off current debt. The cash coverage ratio formula = (cash + cash equivalent)/total current liabilities.

Also read: Recession proof businesses | A list of best business ideas 

11. Sales to assets ratio

We can calculate sales to assets ratio by dividing total sales by total assets. It can determine how many assets the company has relative to the revenue generated. Sales to assets ratio = total assets/sales revenue. You can determine if a company is using assets by studying the sales to assets ratio.

12. The ratio of liabilities to stockholders’ equity

You use the ratio of liabilities to stockholder’s equity to evaluate a company’s financial leverage. It is an important financial ratio. Accountants use the ratios to measure which company is funding itself through debts versus wholly funded groups. The ratio of liabilities to stock equity = Total liabilities/Total Shareholders Equity. 

13. Leverage ratio examples

Leverage ratios are popular in accounting. The financial ratios help determine the ability of a company to meets its financial obligation. Common leverage ratios examples are –

• Debt-equity ratio = total liabilities/total shareholders’ equity
• Equity multiplier = total Assets/Total Equity
• Degree of financial leverage = (SD+LD+SE)/(SD+LD)​ where, SD=short-term debt, LD=long-term debt, SE=shareholders’ equity​
• Consumer leverage ratio = Total household debts/Disposal personal income.

14. Average total assets formula

The average total assets is the average amount of assets recorded on a company’s balance sheet at the end of the year and the previous year. It is used to compare the sales figure of the current year, to calculate the assets required to support the sales. 

The average total assets formula = (Aggregate assets at end of current year + Aggregate assets at end of the preceding year)/ 2

15. Asset management ratios

Asset management ratios or turnover ratios or efficiency help you analyze how effectively and efficiently small businesses manage their assets to produce sales. The different assets management ratios are-

• Inventory Turnover Ratios are applicable if a business sells physical products. The Inventory turnover ratio = Net Sales/Inventory 
• Day Sales Inventory will tell the management how many days does it take to sell inventory. The Day sale inventory = 365/Inventory Turnover.

Read More: Best Pomodoro App | What is Pomodoro technique and how to use it 

16. Industry average ratios

You use industry average ratios to evaluate industry performance. We can calculate industry average ratios after comparing the financial statements of hundreds of firms. Analysts use industry average ratios for trend analysis and industry comparison.

17. Market value ratios

You can evaluate the current share prices of public-held company stock. The ratios help potential and current investors determine if share prices are over-priced or under-priced. The market value ratios are –

• Book value per share 
• Dividend Yield 
• Earnings per share 
• Market Value per share 
• Price/earnings ratio

18. Working capital ratios formula

Working Capital ratios or current ratios or liquidity ratios measures the company’s ability to pay off its current liabilities with current assets. The ratio shows the liquidity of the company. It is healthy when companies pay off current liabilities with current assets (cash, cash equivalent, and marketable securities). The working capital ratios formula = current assets/current liabilities.

19. Cash coverage ratio formula

The cash coverage ratio is a liquidity ratio measuring the company’s ability to pay off current liability with only cash and cash equivalent. Creditors examine the ratio to ascertain if the company maintains an adequate cash balance to pay off current debt. The cash coverage ratio formula = (cash + cash equivalent)/total current liabilities.

20. Sales to assets ratio

The sales to assets ratio is calculated by dividing total sales by total assets. The ratio helps to determine how many assets the company has relative to the revenue generated. Sales to assets ratio = total assets/sales revenue. You can determine if a company is using assets by studying the sales to assets ratio.

Also read: A guide to Remote accounting jobs

21. The ratio of liabilities to stockholders’ equity

You use the ratio of liabilities to stockholder’s equity for evaluating a company’s financial leverage. It is considered to be an important financial ratio and is used to measure which company is funding itself through debts versus wholly funded groups. The ratio of liabilities to stock equity = Total liabilities/Total Shareholders’ Equity. 

22. Leverage ratio examples

Leverage ratios are widely used in accounting financial ratios that help determine the ability of a company to meets its financial obligation. Common leverage ratios examples are –

• Debt-equity ratio = total liabilities/total shareholders’ equity
• Equity multiplier = total Assets/Total Equity
• Degree of financial leverage = (SD+LD+SE)/(SD+LD)​ Where: SD=short-term debt, LD=long-term debt, SE=shareholders’ equity​
• Consumer leverage ratio = Total household debts/Disposal personal income.

What are balance sheet ratios?

The most important financial ratio balance sheet ratio is –

• The current ratio is the ratio of current assets to current liabilities. It indicates the company’s ability to pay off its short-term liabilities with current assets. It is an important measure of liquidity.
• Debt to equity ratio or financial gearing is the ratio of total long-term debt to shareholder funds.
• Return on Assets measures the efficiency with total assets of the company can generate profit. 
• The solvency ratio is the ratio of the sum of net income and depression to the total liabilities. We can use the ratio to determine if the company can pay off the long-term debt of the company.

Also Read: Remote work habits | A comprehensive guide

How to calculate average total assets?

How to calculate average total assets? 

Average total assets = Total assets (current year) + Total assets (previous year)/2.

We can calculate the average total assets as the sum of the total assets each month divided by twelve. 

Average total assets = (Total assets at P1+Total assets at P2+…+Total assets at P12)/12

We use the formula when the management wants an in-depth analysis for more accurate results.

List of liquidity ratios

Basic liquidity ratios are financial ratios to find out a company’s ability to pay the short-term debt obligations. We use the ratio to determine if the current or liquid assets can pay off the current liabilities. The list of liquidity ratios is as follows

• The current ratio is the ratio of current assets to the current liabilities.
• The quick ratio is the ratio of the sum of cash, account receivables, and marketable securities to the current liabilities. Analysts consider the quick ratio to be a stricter check than the current ratio. 
• The cash ratio is the ratio of the sum of cash and market securities to the current liabilities. The cash ratio only considers a company’s most liquid assets.

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What are the most important financial ratios?

The most important financial ratios are:-

1. Quick ratio The quick ratio is one of the most important accounting ratios of a company. It is a good indicator of a company’s liquidity.

Quick ratio = (Current Assets – Inventory)/Current Liabilities

2. Debt to equity ratio helps to determine if a business can repay debt using equity as a metric.

Debt to equity ratio = Total liabilities/ Shareholder’s equity

3. The working capital ratio determines how well a company can pay its existing debt.

Working capital ratio = current assets/current liabilities

4. Price to earnings ratio measures how much investor would pay for dollars earned. You can learn if stock is overvalued or undervalued.

Price to earnings ratio = Share price/Earnings per share.

5. Profit margin shows analysts how effectively a company is managing its costs. 

Profit margin = Profit/Revenue

What is ratios analysis?

Ratio analysis helps to gain insight into a company’s liquidity, operational efficiency, and profitability by analyzing the financial statements like balance sheet and income statement. There are different accounting ratios used for ratio analysis. We can group ratio analysis under the following categories as below.

• Liquidity ratios measure the company’s ability to repay debt using current assets. If a company is unable to repay its debt it can convert its assets to cash and settle the pending debt.
• Solvency ratios measure the company’s long-term financial feasibility. The ratios compare the company debt to its assets, equity, or yearly earnings.
• Profitability ratios measure the ability to earn profit about its associated expenses.
• Efficiency ratios measure how effectively a company is using its assets and liabilities to generate sales and earn profits.
• Coverage ratios measure the ability to repay its debt `and other obligations. 
• Market prospect ratios help investors determine the return on investments.

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How to calculate profitability?

Profitability is a significant parameter to measure the financial performance of a company. It helps you to plan and check the profits earned. Use profitability to calculate your breakeven point. The profitability ratio formula will help you calculate profitability

1. Gross Profit Margin is the ratio of gross profit to sales. It measures if a business can recover the cost of production from its earnings.

Gross profit margin = Gross Profit/sales

Where, Gross Profit = Sales – Purchase – Direct Cost.

2. Net Profit Margin is the ratio of net profit to sales. The company earns net profit after reducing operational costs, depreciation, and dividend from gross profit.

Net profit margin = Revenue – Cost/Revenue.

3. Operating profit margin is the percentage of earnings to the sale before interest expenses and income taxes. 

Operating Profit margin = Operating profit/sales

Where, Operating Profit = Sales – Expenses excluding interest and taxes.

Thinking of buying an accounting calculator but not sure which one? In this article, we discuss how to use an accounting calculator, which is the best calculator for accounting, where to buy a financial calculator and more.

Accounting calculator

An accounting calculator is a valuable device or software for Chartered Accountants and students undergoing accounting classes. Various financial calculations like profit margins, cash flows, expenses, interests, taxes, etc. are performed by an accounting or a financial calculator.

What is a financial calculator?

A financial calculator is designed and developed to perform certain mathematical and financial calculations that an ordinary calculator cannot. Unlike a basic calculator, it has specific standalone keys for financial functions like cash flow, interest (simple and compound) for faster calculations. Besides you can program and create additional financial functions required for the daily accounting activities. An accounting calculator can also graph certain financial calculations which are applicable for different industrial sectors. 

Chartered Accountants are now hired in several diverse companies, and some are involved on a contractual basis. Accounting or business calculators aid them to perform complex calculations.

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How are financial-calculators different?

Let us now try to understand the difference between financial-calculators and regular scientific calculators.

• An accounting calculator can perform certain complex financial calculations like simple interest, compound interest, amortization, cash flow, gross profit margin, etc. These calculations cannot be performed by a regular calculator straightforward.
• A financial calc has standalone keys available to perform direct financial calculations unlike regular calculators
• A financial accounting calculator allows the programming of specific finance functions for storage and usage in future calculations. In regular calculators, you cannot program or create functions for accounting.

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Top 15 Types of an accounting calculator

In this section, we will be elaborating on the 15 key types of an accounting calculator for your reference and guidance. Depending on your needs for daily accounting activities, you can leverage their extensive features for faster, and accurate calculations.

1. Net income calculator accounting

Net income is calculated by subtracting operating expenses, taxes, and interest from the gross profit. Calculating net income is one of the top uses of an accounting calculator. The calculation of each of the elements of the net income demands time and effort; hence an accounting calculator comes to the rescue.

2. CPA exam calculator

Students appearing for the CPA exam have to perform critical calculations such as unearned revenue, retained earnings, profit on the sale of inventory, and many others. A Financial CPA exam calculator is thus a must need for them, provided they do not program any functions or formulas into it. One of the best ways of using a financial calculator

3. Small business or office calculator

Preparing the financial statements like Profit and Loss, Balance Sheet is the common requirements at month-end, quarter-end, and year-end for a small business and in an office. An accounting calculator used for calculations related to liabilities, assets, revenue, receivables, etc. is referred to as the small business or office calculator.

4. Accounting profit calculator

In the finance world, accounting profit is calculated by subtracting the cost of goods sold, operating expenses, and taxes from the total revenue. An accounting profit calculator performs the functions with ease and is referred by a majority of the Chartered Accountants while preparing financial reports and balance sheets.

5. BA II plus amortization calculator

BA II plus amortization calculator from Texas Instruments is a powerful calculator to calculate amortizations. Amortizations are mainly used for mortgages and loans, wherein the periodic payments for a debt need to be calculated for a certain date.

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6. Personal finance calculators

Personal finance involves managing your finance and wealth. You need to calculate your budget, income, expenses, insurance, mortgages, etc. for ensuring financial security and safety. Personal finance calculators serve the purpose and prove to be very effective in such calculations.

7. Average accounting return calculator

The accounting rate of return is calculated by dividing the average net profit by average investment. Such complex calculations require time and effort which can be easily resolved by using an average accounting return calculator. This helps in faster capital budgeting and forecasting decisions by an accountant.

8. Accounting problem solver

Accountants have to solve several challenges related to the financials and accounting domain of a company. Changes in the tax laws, cash flow calculations, analyzing and judging the financial well-being of the company, updating income and expenses at frequent intervals, etc. are the common ones. A basic financial calculator is the best accounting problem solver.

9. Accounting equation calculator

Accounting equations are the fundamental elements of a balance sheet and serve as the basic principles of accounting. 

Assets = Liabilities + Shareholder’s Equity 

The above is the basic equation and each element of the equation needs to be calculated. The financial calculator serves as the accounting equation calculator, aiding the process.

Also read: Expanded accounting equation | A complete guide

10. Business finance calculator

Business finance involves calculating bank loans, shareholder’s equity, taxes, and rent expenses mostly. Besides budgets, forecasts, equity, and debt financials are also some of the critical components of business finance. Hence a business finance calculator is very much useful.

11. Financially programmable 12 c calculator

A financially programmable 12 c calculator is a type of accounting calculator that is capable of critical financial calculations. The key ones being loan payments, interest rates, standard deviation, Net present value, Internal rate of return, cash flows, bonds, etc.

12. Simple financial calculators

Simple financial calculators are used to perform accounting calculations that are beyond basic arithmetic operations. The calculations involve present and future value, payments, and interest rate. They provide standalone keys to arrive at the numbers.

13. Similar figures calculator

A similar figures calculator is specifically used for performing mathematical operations on significant figures or numbers. Complex calculations using the figures are often a need from the accountants. The calculator will help to resolve the dilemma.

14. BCE calculator

Business and Computing Examinations (BCE) help accountants for gaining additional qualifications and knowledge beyond the regular accountancy exams. A BCE calculator will help in the examinations and is the best calculator for accounting students.

15. Accounting ratio calculator

Calculating financial ratios like debt ratio, debt to equity ratio, current ratio, quick ratio, return on equity, gross margin, return on assets, etc are the common calculations for an accountant. An accounting ratio calculator helps in performing such a wide range of calculations.

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How to use a financial calculator?

In this section, we will discuss the different ways of using an accounting calculator. Accountants can refer to the sub-sections for quick guidance on the usage and leverage for their daily accounting activities.

1. Accountant calculator for financial ratios 

An accountant calculator is best used for calculating and computing financial ratios. The prominent among them being the working capital ratio, earnings per share, debt-equity ratio, quick ratio, return on equity, and price-earnings ratio.

2. Professional calculators for budgets, forecasts, and cash flows

Professional calculators for accounting are used effectively for budgeting and forecasting. The inflow and outflow of cash are computed easily with accuracy through an accounting calculator. It’s a very efficient way to use a financial calculator.

3. Financial cal for personal wealth management

A financial cal proves to be very beneficial for personal wealth management. Financial planning, asset management, and investment management are some of the essential calculations and computations needed for individuals or private investors.

4. Business finances calculator

A Finances calculator for business has a wide variety of uses. Loans, mortgages, interests, stakeholder’s equity, and even budgets are the key constituents of business financing. Hence if financial function calculators aid in such calculators, it’s a boon.

5. Accounting calculators for financial reports

Accounting calculators are beneficial for computations for generating financial reports and statements. The key ones being the balance sheet, income statement, cash flow statement, and statement of shareholder’s equity. 

Hope by now, you have understood how to use finance calculator.

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Top 10 Best financial calculators

Here are the top 10 best financial calculators to pipe up your daily accounting activities and financial calculations. The list will help to understand the best adding machine for accountants and where to buy financial calculator

1. Texas Instrument BA II Plus is one of the best financial calculators. Basic and advanced mathematical calculations can be performed by the calculator like amortization on BA II Plus. 
2. HP 12CP Financial Calculator is an accounting calculator that is dominating the market currently. The processing speed is quite high and has 120 in-built functions
3. Sharp QS-2130 Financial Calculator is powered by solar energy. It has all the standard functions but can perform complex mathematical calculations. 
4. HP 12 Platinum has been in the market for almost 30 years now. It has light control features and is energy efficient. Allows storing custom programs with complex formulas. It is a cheap financial calculator
5. HP BII+ Financial Calculator has 170 functions and 22 memory registers. The lighting can be adjusted and has a high processing speed
6. 3405 CE Calculator from Calculated Industries is available at an affordable price. It is mainly used for performing calculations related to real estate.
7. Casio FC-200V Financial Calculator is used mainly for calculating amortization and investment appraisal. It has a 12 digit 4 line display.
8. Sharp EL-738F Financial Calculator is calculator finance, used for advanced financial and business functions. It has 12 memories and 100 registrars.
9. 3430 Qualifier Plus IIIFX from Calculated Industries is used specifically to calculate IRR, cash flows, and other calculations related to the real estate business. 
10. Staples Calculators have a 12 digit display and is one of the preferred accounting calculators in the US. Financial calculator Staples is good in computing IRR, NPV, Cash flows, and so on

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Top 5 accounting calculators online

The top 5 accounting calculators online allowing easy mathematical and financial calculations are illustrated below. Each one has online learning guides for example how to make financial calculator show more decimals, how to program etc.

1. Desmos is an accounting calculator online. The user interface has several tabs and buttons for performing the calculations
2. Web2.0 Calc is an accountant calculator online, that can be operated with the keyboards and mouse buttons
3. Good Calculators is listed among the best download financial calculators and is essentially a project. It has more than 300 free and high functioning calculators for computing business and mathematical operations
4. Calculator-1 is an online accounting calculator that has functions to calculate basic and complex calculations
5.  Symbolab is the best business calculator online with buttons and tabs for straightforward calculations

Top 5 accounting calculator app

In this section, we will discuss the top 5 accounting calculator app. 

1. 10bii is considered among the best financial calculator app category. It has 105 functions for financial, business, mathematical and statistical calculations
2. Financial Calculators by Bishinews is an accounting calculator app used for investment and complex financial calculations
3. Vicinno Financial Calculator is an app that supports calculations for bonds, amortization, bonus, depreciation, and other statistical analysis
4. Touch RPN is an accounting calculator app used for programming accounting functions
5. PowerOne financial calculator is ranked high as the best financial calculator app for computing investment and accounting calculations

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5 Best accounting calculator brands for design and ruggedness

The 5 best accounting calculator brands best known for their design and ruggedness are listed below. The suggestion is to buy financial calculators for sale from popular stores 

1. HP 12C Platinum Accounting Calculator is elegant in design and with high durability. It has excellent battery life. The accounting calculator from HP has 130 built-in functions.
2. Texas Instruments BAII Plus Accounting Calculator has a 10 digit display. It has inbuilt memory for programming and storing the accounting functions
3. Casio DM-1200BM Accounting Calculator has good review ratings. It has a 12 digit extra-large display with independent memory
4. Canon HS-1200TS is one of the best accounting calculator brands. It has a 12-inch liquid crystal display with an ergonomic design
5. Helect H1006 is the best buy financial calculator with a large 12-digit display and an attractive model

In this post, we look at the answers to – What is the fundamental equation? How to expand an equation? And what are some expanded basic accounting example problems?

Expanded accounting equation

We derive the expanded accounting equation from the basic accounting equation. The equation provides more details about an owner’s equity. Accounting equations expanded are different for sole proprietorships and stock holder’s equity. The expanded accounting equation divides equity into four elements – owner’s capital, withdrawals, revenue, and expenses.

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Two accounting equation formula

Accounting is an essential part of the business. It involves tracking and recording financial transactions in the company. We use accounting formulas to describe the financial health of a company. We use them to produce financial statements like the balance sheet and profit and loss statement. The two accounting equations are:- the basic accounting equation and the expanded accounting equation.

1. Basic accounting equation

The basic accounting equation is also known as the balance sheet equation. The equation is the foundation of double-entry bookkeeping. The basic accounting equation is

Assets = Equity + Liability

Assets are company resources or things the company owns. These assets can be short-term or long-term. 

Liabilities are assets owed to the creditors. Creditors are entities (vendors, government, bank, employees) that the company owes money to. We can subdivide liabilities into short-term liabilities and long-term liabilities.

Equity is the value of assets that belong to the owners. Equity is the amount left for the owner once assets and liabilities are paid. The owner’s equity increases, when the owner’s investments and revenue increase.

The owner’s equity decreases if there are cash withdrawals, business expenses, or losses.

2. Expanded accounting equation

The expanded account equation uses the basic accounting equation and adds equity items to show how it affects the company. We split the equity account into four or five categories. This split depends on the ownership patterns. The expanded accounting equation is 

Assets=Liabilities+CC+BRE+R−E−D

where:

• Liabilities are all current and long-term debts and obligations
• CC – contributed capital (paid-in-capital) or the capital provided by the original stockholders
• BRE or Beginning retained earnings are earnings that are not distributed from the previous period.
• R or revenue is the income generated by the company from the ongoing operations.
• E or expenses are the costs incurred for business operations.
• D or dividends are earnings distributed to the stockholders.

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Difference between basic and expand equation

The expanded equation is the expanded form of the basic equation. We subdivide the equity components into four elements. The four elements are the owner’s capital, owner’s withdrawals, revenues, and expenses. The section in the basic equation dealing with assets and liabilities remains unchanged. The two equations are as follows:-

Basic equation

Assets = Equity + Liability.

Accounting equation formula

Assets=Liabilities+ Contributed Capital +Beginning retained earning +Revenue –Expenses −Dividend

The expand equation shows the various units of stockholder equity in greater detail. We change the terminology depending on the type of company. We use the term member’s capital in partnerships and owner’s capital to describe sole proprietorships. We substitute dividends by distribution and withdrawals.

The expanded equation gives analysts more information about the health of the company. The expanded accounting equation allows the analyst to scrutinize –

• The effect of net income (due to increase in revenue and decreased expenses) has on equity.
• The effect of transitions with owners (draws, dividends, sale, or purchase of ownership interest).

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Importance of expanded accounting equation

The expanded accounting equation considers the different components of equity. Equity is important because it represents the amount of the investor’s stake in the company and represents the proportion of their shares in the company. The expanded account equation shows the debit and credit entries in the double-entry form.

The equation helps businesses to calculate the assets, liability, and owner’s equity in a period. The investor can track the profitability and finances of the company.

Analysts use the equation to understand the breakdown of equity. The revenue and expenses show the change in net income over the period. They can understand stockholder transactions through contributed capital and dividend.

The equations help determine the effect of change on owners. It helps to save time.

We can rearrange the expanded accounting equation for different purposes

• Assets – Liabilities = Shareholder’s Equity
• Assets – Liabilities = Share Capital + Retained Earnings
• Assets – Liabilities = CC + BRE + R + E + D

These rearrangements are useful when companies are studying bankruptcy. Stockholders can use the equation to understand their compensation. Owners need to pay the liability made up of short-term and long-term debt needs. They can use the remaining liquidated assets to pay off parts of shareholder’s equity.

It is important to remember to balance the equations.

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How does the full accounting equation work?

Analysts want to understand the breakup of the company’s shareholder’s equity. The general accounting equation contains assets and liabilities. We can expand shareholder’s equity into:-

• Contributed capital is the capital provided by the original stockholder.
• Beginning retained earnings or BRE is the carryover retained earnings that were not distributed to stockholders before.
• Revenue comes from the sales and operations of the business.
• Expenses are the costs associated with running the operation.
• Dividends are the earnings distributed between the stockholders of the company.

Analysts examine contributed capital and dividends to understand stockholder’s transactions. The net income earned by the company is the difference between revenue and profit generated and expenses and loss incurred.

The net income earned by the company influences the equity.

The analyst uses the full accounting equation to understand the breakdown of shareholder equity. They can analyze how the equity changes over a period.

The terminology used in expanded accounting equations varies depending on the ownership patterns of the company.

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Real-life examples of the extended accounting equation

The extended accounting equation and used in the balance sheet. We call the extended equation the balance sheet equation. Any changes to the equation will result in the same changes with the balance sheet. Some real-life examples will help understand the accounting equation.

Sole Proprietary expanded basic accounting equation

Here are expanded basic accounting example problems for a sole proprietorship. Alicia Jones runs a wholesale clothing shop Adorables. During the fortnight of operations, she engages in the following transactions:

• Mar. 01: Alicia invests $60,000 in the business.
• Mar. 05: She purchases clothing items costing $20,000.
• Mar. 12: She sells clothing items to a retailer for $8,000 cash, the cost of goods sold is $5,000.
• Mar. 14: Alicia takes $200 cash for her personal use.

	Assets	Liabilities	+Owners Capital	+Revenue	-Expenses	-Drawing
March 01	+60,000		60,000
March 05	-20,000 +20,000
March 12	+60,000 +8,000 -5,000		60,000	8,000	5,000
March 14	+63,000 -200		60,000	8,000	5,000	200
	62,800		60,000	+8,000	-5000	-200

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Journal entry for expanded accounting equation examples

1. Mr. Alex invested $20,000 to start a printing business
2. The company obtained a loan from a bank, $30,000
3. The company purchased printers and paid a total of $1,000
4. Rendered services and received cash, $500
5. Rendered services on account, $750
6. Purchased office supplies on account, $200
7. Had its equipment repaired for $400, to be paid after 15 days
8. Mr. Alex, the owner, withdrew $5,000 cash for personal use
9. Paid one-third of the loan obtained in transaction #2
10. Received customer payment from services in transaction #5.

Assets = Liabilities + (Capital at beginning + Additional Contributions – Withdrawals + Income – Expenses)

	A	L	Con	With	Inc	Exp
1	20,000		+20,000
2	30,000	30,000
3	1,000 (1,000)
4	500				+500
5	750				+750
6	200	200
7		400
8	(5000)			5000
9	(10,000)	(10,000)
10	750 (750)
Balance	36,450	20,600	+20,000	-5000	+1250	-400

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Corporation expanded accounting equation example

Foods & Drugs Inc. The Company was incorporated on 1 June 2019 with a paid-up capital consisting of 1000 shares having a value of $50. During the first month of its operations, the company has entered into the following transactions:

• 1-Jun Capital introduced – $ 50,000
• 6-Jun Paid $10,000 for purchase of furniture and computers.
• 15-Jun Paid $ 5,000 towards purchase of machinery and equipment.
  Paid $ 1,000 towards purchase of raw materials
• 22-Jun Incurred expenditure towards advertising and marketing amounting to $200
• 25 June Earned revenue of +10,000
• 26 June Earned revenue of +15,000
• 30-Jun Paid salaries to its employees – $13,000
• 30-Jun Paid Rent and telephone bills – $15,000
• 30-June Paid dividend of -500

Date	Nature	Asset	Paid up Capital	Liabilities	Income	Expenses	Dividend
June 1	Capital and Assets	50000	50000
6 June	Expenses and Assets (Fixed Assets)	-10,000				10,000
15 June	Expenses and Assets (Fixed Assets)	-5000				5000
15 June	Expenses and Assets (Inventory)					1000
22 June	Expenses and Assets (cash)					200
25-June	Revenue and Assets (cash)				10,000
26-June	Revenue and Assets (cash)				15,000
30 June	Expenses and Assets (cash)					13000
30 June	Expenses and Assets (cash)					15000
30 June	Dividend						50

Assets = Paid-up Capital – Treasury Stock (if any) + Liabilities + Income – Expenses – Dividends

Assets = 50000 – 0 + 0 + 25000 – (-44200) – (-50) = 30,750

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What is the expanded accounting equation for a sole proprietorship?

The expanded accounting equation for sole proprietorship shows accounts for the components that make up the owner’s equity. These components are –

• Owner’s Capital
• Revenues
• Expenses
• Withdraws

The elements of the accounting equation are represented by

Assets =Liabilities + owner’s capitals+ Revenues – Expenses – owners draw

Where,

The owner’s capital or owner’s equity is the equity account that shows the owner’s stake in the business.

The owner draws is the amount of the money taken from the sole proprietorship, partnership, or LLC or corporation by the owner for their personal use. It is a way owner pays themselves instead of a salary.

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What is the expanded accounting equation for corporations?

The expanded accounting equation gives us a break-up of the shareholder’s equity amount. 

The expanded accounting equation for corporations is as follows –

Assets = Liabilities + Paid-in Capital + Revenues – Expenses – Dividends – 

Treasury Stock.

Where,

Liabilities are obligations made by the corporation. These may be financial, account-related, or legal. Accounting liabilities appear on the balance sheet.

Paid-in capital is cash or asset that a shareholder gives to the company in exchange for stock. 

Revenue is the value earned from the sale of goods and services.

Treasure Stock or reacquired stock is the stock. 

The dividend is the distribution of profit to shareholders. 

Expenses are the cost incurred running the company.

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What is the expanded accounting equation for corporations?

The expanded accounting equation for corporations 

What is the meaning of an l/c r e and d in an expanded accounting equation?

The expanded accounting equation is   

Assets = Liabilities + CC+ BRE+R-E-D

Where,

CC – Contributed Capital i.e. capital provided by the original stockholder (paid-in capital)

BRE – Beginning retained earning. The BRE is earnings that have not been distributed to the stockholder previously.

R = Revenue is the amount a company receives in exchange for its good and services or conversely. It is the income generated from the ongoing operations of the company.

E = Expenses are the cost incurred to run operations of the business

D = Dividends, earnings distributed to the stockholders of the company. Dividends can be in the form of cash payment, stock, or other forms. Dividends are a part of the profit that a company shares with its stockholder.