First there’s the accounting equation itself:

A=L+E

That is, the total value of Assets will always equal the total value of all Liabilities and Equity. This is a fundamental platform on which all accounting has been based, for centuries, since the development of double entry accounting. It is also the reason why the Statement of Financial Position used to be called the Balance Sheet - because that’s where each of these (A, L and E) accounts is reported.

Other equations found in the Statement of Financial Position include:

• Working Capital = Current Assets less Current Liabilities
• Net Assets = Total Assets less Total Liabilities. As you can see from the above Net Assets will also equal Equity.

There are equations, too, in the Statement of Financial Performance. Unlike the above, these equations may vary slightly, depending on the industry or accounts make-up of the entity concerned. They include the following:

• Cost of Sales = Opening stock, plus Purchases, Freight In, Consumables and Direct Wages, less Closing Stock
• Gross Profit = Sales less Cost of Sales
• Net Profit = Gross Profit less Overheads

These are the simple equations used in the definitions within the financial statements. There are many others relating to the financial statements, generally called KPIs (Key Performance Indicators).