Accounting careers are some of the most lucrative and sought after careers. A career in accounting must necessarily be preceded by some accounting training. During accounting training you will most definitely come across and become very familiar with the different types of accounting equations. Here is a list of some of the more common accounting equations:
- Assets = Liability + Capital/Owners’ Equity – This is referred to as the accounting equation. It is the most basic of all the accounting equations and it is on this equation that the double entry system is based on. The double entry system of accounting is simply stated as ‘for every debit, there is a corresponding credit’. The assets are debits and the liabilities are credits. The debits and credits must always be equal because they represent two different views of the same business resources, that is one side shows the resources (the assets) and the other side the claim on the resources (the people who paid for the resources – the owner and the creditors).
- Assets = Capital/Owners’ Equity – This is a simplified version of the accounting equation. In this case, there are no liabilities. Liabilities usually represent money owed to other people (creditors) by the business. Creditors only hold a claim to the business resources until their debt is paid off. This equation represents a situation where the business has no liabilities.
- Current Ratio = Current Assets – This is what is referred to as a liquidity ratio. This measures
Current Liabilities ability of the business to meet its short term liabilities. That is, it measures the business’ ability to pay should all its creditors demand payment. A healthy company should have a current ratio of between 1 and 2. A current ratio of less than 1 means that current liabilities exceed current assets, and therefore the business is in danger of insolvency.
- Profit Margin Ratio = Net Income – This is a profitability ratio. It is used to determine if the
Sales business is making enough money to stay in business. It shows how profitable the sales are. If the ratio is poor, that is less than 2% it means that the money should be invested in another, more profitable business venture. The higher the ratio is, the better the business id doing.
- Return on Capital Employed = Net Profit x 100 – This ratio measures the performance of the
Capital business and its profitability. The higher the ratio is the better. Return on Capital Employed (ROCE) is commonly used by prospective investors to make comparisons between different investment opportunities.