2 Basic Accounting Formulas Every Business Owner Must Know

Financial Horizons: Insights for Building Wealth and Securing Your Legacy

By Dr. Jose G. Cardenas, Chief Tax Strategist at The C & R Group, LLC

Here’s the deal—if you’re running a business and don’t understand a couple of key numbers, you’re flying blind.

You don’t need to become a CPA. But if you want to grow, stay profitable, and stop wondering where all the money went, you absolutely need to understand two basic accounting formulas:

1. The Accounting Equation
2. Gross Margin

These are the “vital signs” of your business. Once you know how they work, you’ll make smarter decisions about spending, pricing, and taxes—without needing to be a math genius.

Formula #1: The Accounting Equation

Assets = Liabilities + Owner’s Equity

This is the backbone of your balance sheet and the foundation of all accounting.

What it means in plain English

• Assets – What your business owns
  Cash
  Equipment
  Inventory
  Vehicles
  Accounts receivable (money customers owe you)
• Liabilities – What your business owes
  Credit card balances
  Loans
  Unpaid bills
  Lines of credit
• Owner’s Equity – What’s left for you after the bills are paid
  Your investment in the business
  Retained profits

The equation says:

Everything the business owns (assets) is financed either by debt (liabilities) or you (owner’s equity).

Why you should care

Because this formula tells you one powerful thing:

💡 How healthy your business really is.

If your liabilities are growing faster than your assets, your equity is shrinking—and that’s a warning sign.

If assets are growing and liabilities are under control, your equity is building—which means your business is actually increasing your net worth, not just keeping you busy.

Quick example

• Assets: $100,000
• Liabilities: $60,000

Using the formula:

Owner’s Equity = Assets – Liabilities
Owner’s Equity = $100,000 – $60,000 = $40,000

That $40,000 is essentially your stake in the business. As you grow profits and manage debt wisely, that number should rise over time.

Formula #2: Gross Margin

Gross Margin = Net Sales – Cost of Goods Sold (COGS)

(Note: Many people say “plus” by mistake—what they really mean in practice is sales MINUS costs.)

Breaking it down

• Net Sales – What you actually bring in after discounts and returns
• Cost of Goods Sold (COGS) – Direct costs to deliver your product or service
  Materials
  Direct labor
  Production costs

Gross Margin is what’s left to cover:

• Rent
• Utilities
• Marketing
• Admin staff
• Your pay
• Profit

Why gross margin is a game-changer

Gross margin answers a critical question:

“For every dollar I sell, how much do I actually have left to run and grow my business?”

If your gross margin is too low, you’ll always feel broke, even when sales look strong.

If your gross margin is healthy, you have room to:

• Pay yourself
• Hire help
• Invest in growth
• Survive slower months

Quick example

Let’s say:

• Net Sales = $200,000
• COGS = $120,000

Gross Margin = $200,000 – $120,000 = $80,000

That $80,000 is what you have to pay everything else.

If your overhead (rent, software, salaries, etc.) is $70,000, that leaves $10,000 as profit.

Now you can ask real questions:

• Do I need to raise prices?
• Can I negotiate better costs from suppliers?
• Is my overhead too bloated?

Without understanding gross margin, you’re just guessing.

How These Formulas Connect to Taxes and Wealth

This isn’t just accounting theory—these formulas have direct impact on your tax bill and long-term wealth.

• A strong balance sheet (assets vs. liabilities) influences financing, growth, and even exit strategies.
• A healthy gross margin tells you whether your business model is sustainable and how much profit is actually available for tax planning, retirement contributions, and reinvestment.

When we work with clients at The C & R Group, LLC, we don’t just look at “What did you make?”

We look at:

• What you own vs. what you owe
• How much profit you really keep after direct costs
• How to structure that income for optimal tax treatment

That’s how you go from “I hope this works” to “I’m building something that lasts.”

You Don’t Have to Do This Alone

If these formulas feel new or you’re thinking, “I should have been tracking this years ago,” you’re exactly who I built our advisory process for.

Together, we can:

• Review your balance sheet and see what your assets, liabilities, and equity are really saying
• Analyze your gross margin and pricing to see where money is leaking
• Build a tax-efficient strategy around your real numbers—not guesses

🔗 Read more at: https://thecrgroupllc.com/financial-horizons

📅 Ready to understand your numbers and use them to build real wealth—not just survive tax season?
Book a consultation with Dr. Cardenas

About the Author

Dr. Jose G. Cardenas is a retired U.S. Army Finance Officer and the Chief Tax Strategist at The C & R Group, LLC. With a Doctorate in Business Administration and over 20 years of experience in tax planning, accounting, and financial strategy, Dr. Cardenas helps business owners understand their numbers, reduce taxes legally, and turn their companies into wealth-building machines. Learn more at thecrgroupllc.com

📌 Disclosure

This article is for educational and informational purposes only and is not intended to serve as personalized legal, tax, or investment advice. Financial and tax strategies should be tailored to your specific situation and comply with current laws and regulations, which may change over time. You should consult with a qualified tax or financial professional before implementing any strategy discussed here. Dr. Jose G. Cardenas, DBA, provides tax advisory services through The C & R Group, LLC. Insurance and investment strategies may be offered through his role as a licensed financial professional affiliated with Experior Financial Group.

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