*Economics
/8. Mathematics Methods in Economics
Babalola, Yisau Abiodun [PhD Student]
Accounting and Auditing Department
East Ukrainian National University [Volodymyr Dahl], Lugansk,
Ukraine
IMPORTANCE OF MATHEMATICS TO ACCOUNTING
An
accountant cannot simply prepare reports that are too confusing for others. The
ability to disclose and discuss information helps all users understand this
often-technical data. Mathematics and accounting
go hand in hand, though not as intertwined as people may believe. The purpose
of having a strong mathematical background is to increase an accountant's
cognitive ability. Many different accounting activities require the use of
mathematics or mathematical principles. Understanding what math abilities are
necessary can help individuals prepare for this business process. The financial
crisis in the word represents another important mathematical concept in
accounting because accountants may need to read and decipher a situation for
financial purposes and information gleaned from the problem or situation then
translates into financial data. Accountants must have the ability to read and
comb through many types of reports in order to fully understand and develop
information from this information. Reading skills are necessary in addition to
mathematical ability.
The
good news is that not a lot of math is needed to study accounting. A working
knowledge of arithmetic and a small amount of basic algebra will allow a
student to successfully complete any introductory accounting courses, which are
described below. The reason for this is that although accounting information
consists of numerical data, the math tools used to record the numerical data
are very simple, really just addition and subtraction. The reason that you need
to know a little more math than this (see below) is that doing accounting
requires first analyzing transactions before recording them. It is the initial
analysis of transactions to determine correct amounts to record that requires
the basic math skills that you see below. Only at very advanced professional
levels would you need more math than this.
The Math You Need
Greg Mostyn, from Mission College summarized the table of the kind of
math that will take you through a year of introductory accounting and a year of
intermediate accounting and most other accounting courses as well.
|
Item |
Example |
|
Whole
number operations |
Adding,
subtracting, multiplying, and dividing numbers like 75, 230, 12, etc. |
|
Decimals
operations and rounding |
Expressing
amounts as decimals and adding, subtracting, multiplying, and dividing
numbers like 75.3, 2.798, 12.61, .75, .05 etc. rounding amounts to a
designated decimal amount. |
|
Percentage
operations and conversion |
Expressing
amounts as percentages and adding, subtracting, multiplying, and dividing
numbers like 20%, 7%, .07%, 150%, etc. |
|
Fraction
operations |
Expressing
amounts as fractions and adding, subtracting, multiplying, and dividing
numbers like 1/3, 15/100, 12/8, 1/10, etc. |
|
Converting
numbers expressed in one form to a different form |
Converting
any decimal, percentage, or fraction into another format, such as converting
30% into a decimal or fraction or converting 6/8 into a decimal or
percentage. |
|
Positive
and negative numbers |
Adding,
subtracting, multiplying, and dividing numbers that are positive and
negative. |
|
Ratios
and averages |
Be
able to express numerical relationships as ratios and averages. |
|
Basic
algebra |
Be
able to create and/or solve a basic algebraic expression such 3x = y + z/8. |
|
Order
of operations |
For
an expression that contains several operations, know the order to calculate
the answer, such as for [8/2 + 3/5]². |
|
Exponents |
Understand
the essential calculations with exponents. |
SOURCE:
Greg Mostyn, Mission College;
Math in Accounting.
Using
Addition and Subtraction
Accountants use math problems such
as addition and subtraction problems every day to arrive at totals for various
management reports, reconciliations and tax reports. Accountants balance or
reconcile bank statements in much the same way that individuals do, by adding
deposits and interest, and subtracting checks written and bank fees. When
completing income tax returns, income and expense statements, and cost
analysis, accountants use addition and subtraction to add sources of income and
subtract expenses to arrive at totals. When balancing the general ledger they
make adjustments by adding and subtracting the various credits and debits for
the month. Accountants keep department and company budgets current by
subtracting department expenses from the allotted budget amount.
Using
Division and Multiplication
In order to calculate overhead rates
to apply to production pieces, accountants must divide the total expected
overhead costs by the expected number of production pieces. Later, actual cost
can be calculated for each production piece by dividing total actual cost by
total actual production. To forecast expected cost for short-term or long-term
management planning, accountants may multiply actual current costs and expenses
by a percentage. The percentage used to forecast or estimate may be based on
the expected rate of economic inflation. When accountants are dealing with
suppliers or customers in other countries they must calculate exchange rates
for currencies by using division or multiplication and the current rate of
exchange. Profit margins may be stated as a percentage of sales, which requires
dividing profit by revenue.
Using
Mathematical Formulas
Mathematical formulas help
accountants, management personnel and lenders to compare income, expenses,
profits and debts to other companies in similar industries. The formulas
usually result in ratios or percentages that can be used to compare companies
with industry standards easily even though a large difference may exist between
the actual income and expenses of each company. Examples of some formulas used
by accountants are Debt-to-equity ratio, Inventory turnover ratio, Operating
margin, Earnings per Share (EPS), P/E ratio and Working capital. EPS may be
calculated using only outstanding shares of stock or stated using all possible
shares of stock, including options. EPS is stated on the face of a company's
income state because of its importance to stockholders and lenders. There are
also formulas that accountants use to calculate depreciation on assets
depending on the type of asset being depreciated, such as straight-line and
modified accelerated cost recovery system.
Calculations
Accounting
activities are full of basic and advanced calculations. These are often
necessary to understand what information needs to go into a company's general
ledger. Many calculations require basic math principles. Other times, however,
many complex issues may require the use of multiple calculations. It is
important to have basic math and algebra skills to complete these tasks and
report accurate financial information.
Time
Value Concepts
One set of complex problems often
seen in accounting is time value of money problems. These tasks require an
accountant to estimate future financial returns, often derived from cost
savings or additional income. Accountants must discount these future dollar
amounts back to a present value. This involves the use of different
mathematical abilities, as multiple data are in these problems.
Accounting
tracks the value of a business or an individual's finances using a method
called double-entry. Double-entry accounting is an algebraic equation
consisting of x = y + z. This system was first published in the 15th century by
Luca Pacioli to describe the accounting method Venetian merchants used.
Fundamental
Equation
The
fundamental algebraic equation in accounting is assets = liability + capital.
Capital is commonly referred to as equity. If the only thing you own is a car
and you still are making car payments, you can use this formula to depict this
particular financial situation as the car's market value = amount you owe +
equity. Accountants refer to the equal amount on both sides of the equation as
"balance."
Debits
and Credits
Accountants refer to entries as
"debits" and "credits." They always enter at least one
debit and at least one credit to balance the equation. If you buy a new
computer and spend $700 on it, you need to debit your assets to reflect the new
total of $16,700. To make the equation balance, you need to add a third column
to indicate expenses paid. The algebraic equation becomes [(x+ 700] = (y + z +
700).
Further
Changes
As you make monthly car payments,
you change amounts on the right side to reflect this. Over the course of time,
your equation might say: $16,700 (car's market value + your savings account +
computer) = $7,000 (amount you owe on the car) + $8000 (your equity in the car)
+ $1000 (your original capital) + $700 (the expenses you paid for the
computer).
Additional
Factors
The algebraic equation becomes more
complicated as more factors are added. For instance, the car depreciates. After
a couple of years, the car is only worth $12,000. An individual keeping track
of personal finances may not feel the need to be so precise, but business
accountants definitely must be. They'll add a factor of depreciation on both
sides of the equation.
REFERENCES
[1] Business Accounting and Bookkeeping : http://wiki.answers.com/Q&A
[2] How Do Accountants Use
Math? | eHow.com http://www.ehow.com/how-does_4913284_accountants-use-math.html#ixzz2MrihVtI3
[3] The Role
of Mathematics in Business Decisions-By Stephen
F Keating – 1973
[4]
Greg Mostyn, Mission College: math
in accounting? Not as much as you think Worthy & James publishing.