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Math in Accounting? Not As Much as You Think

Numbing Numbers...?

Everyone has heard that accounting is all about numbers or sometimes that you should have a lot of math to take accounting. Unfortunately, for many people, just the mention of the word "math" can elicit childhood memories of struggling with long division and fractions or putting off that geometry homework, and later avoiding math in general as much as possible. Usually this is the result of a few bad experiences in elementary or secondary school. For accounting students, the unfortunate result of this is that some students are all too ready to be discouraged before even beginning an accounting class and learning what accounting is all about, and why it is so important in business.

How Much Math? (Scroll down for a basic math quiz)

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.

So why does introductory accounting seem challenging (and a lot of work)? There are two reasons, and they are not about math. First, you are simply learning a lot of ideas, rules, and procedures that are specific to accounting and that are new to you. Secondly, although accounting doesn’t require much math, it does require thinking that is careful and logical (remember “word problems?”). In this sense, accounting has some similarity to math and this is probably why taking math classes helps with accounting classes. However this kind of careful thinking can definitely be learned with practice in accounting classes, without ever having to become some kind of expert math student.

The Math You Need

Here is a summary 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.

What If I Can’t Do the Math? Where Do I Get Help?

Ok, maybe you don't remember or never really learned how to do some of this stuff and you thought it was hard when you were a kid. Maybe as a kid you even decided that you were going to hate math. But here's some good news: the above content is much easier as an adult! Why? Primarily because you are more motivated, more mature and experienced, know how to study and ask questions, and because as an adult you won't tolerate lazy or confusing math teachers. You have many good options. They are: 1) Take a basic math class that contains the above topics. One class should be enough. (Note: “Business Math” is a math class that applies the above topics to common business situations. These classes are useful, but probably best to take after you have completed a basic math class if you want additional review.) 2) Use a math tutor or math lab at school. 3) Do your own math review for only what you need. There are many good basic math books available. Just be sure that they contain lots of examples and problems with complete and detailed solutions.

Note: Worthy and James provides a complete, step-by-step, very low-cost basic math review that you can see and download from this site.

Introductory Accounting Courses

The subject of “accounting” consists of three key elements: accounting theory (underlying concepts), principles (rules) for how to apply the concepts, and the specific procedures that implement the rules. The type of introductory class that you take will determine which of these elements receives the most emphasis. For example, bookkeeping classes emphasize procedures, particularly for recording and organizing financial data. Accounting principles classes or basic accounting classes usually provide a more balanced content that includes all three elements. These classes provide a less specialized, broader understanding and the opportunity for some study of financial statements and the use of accounting information. Introductory financial accounting concentrates more on theory and principles and the preparation and use of financial statements. For any particular class, you can get a good idea of its content emphasis by reading the school catalog, contacting the instructor, and looking at the course textbook in the bookstore.

What If I Want To Major in Accounting?

Very little changes even if you are an accounting major! However, you will need to successfully complete a business statistics class as well as being sure that you are comfortable with basic algebra. (Both basic statistics and basic algebra are pretty important as you continue on in business subjects.) Some schools may require more advanced topics such as linear programming or calculus for accounting majors. However you will never, ever, need this kind of more advanced math in accounting. The courses are really just used as screening devices and to add status to a program. You just have to put up with them or find a different program.

Test Yourself

Here is a quick test to check on your basic math skills. Click on the link at the end of the test to see the answers.

  1. Multiply 3.889 times 112.77 and round your answer to the nearest hundredth.
  2. Add the amounts 4/5 and 2 3/9 and express the answer as a decimal to three places.
  3. A company has budgeted $328,000 to be used by both the marketing department and the finance department. The marketing department uses cash at the rate of $42,000 per month, which is three times the rate of the finance department. How many months until the budgeted amount is used up? Round all amounts to the nearest tenth.
  4. At the end of a year, a company's net income increased 30%. At the end of the second year, the income decreased 25% from the previous year. What was the percentage change for the two years?
  5. Calculate the following two answers: a) What is 25% of 125? and b) 125 is 25% of what amount?
  6. Calculate the following two answers: a) -5 + (-7) - 3 and b) (-3)(-7)
  7. Calculate the following: 81 + (5 - 8)²/(3 + 3²) ÷ 3
  8. The net income of company A is three times the income of company B and the income of company C is two times the income of company B. Show the following two answers: a) Express the incomes of the three companies as a ratio from highest to lowest. b) Express the incomes as fractions using a lowest common denominator to all the fractions.
  9. You just paid $32,400 for a car, including sales tax. The sales tax rate is 8%. What is the price of the car?
  10. The Ames and Johnson partnership allocates profits and losses 80% to Ames and 20% to Johnson. Smith enters the partnership and receives a 25% share of profits and losses. What share of profits and losses does Ames now share?
  11. At the beginning of last year your departmental budget was 40% of the total budget. This year it was 30% of the total budget. What percent did your budget decrease from last year?
  12. The basic idea in accounting is that the total wealth of a company is called assets. There are two possible claims on assets, which are called liabilities and equity. Liabilities and equity together always equal the assets. Express this concept as an equation using the letters A for assets, L for liabilities and E for equity.
  13. George owned a 2/3 share in a partnership. After the partnership was reorganized, George now owns a 3/8 share in the partnership. Did George's share increase or decrease? By what common fraction?
  14. Johnson Company purchased merchandise with an invoice cost of $90,000. The vendor's terms offered a 4% discount on any part of the invoice paid within 10 days. Johnson Company made a cash payment of $48,000 within the 10 days. a) How much discount did Johnson company receive? b) How much did Johnson Company still owe after making the payment?
  15. The total cost formula for a business is T = a + bx, where T is the total cost incurred over a range of output, a is the total fixed cost, b is the cost per unit produced, and x is the number of units produced. Solve the formula for x.

Answers

By Greg Mostyn, Mission College

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Worthy & James Publishing is a provider of basic accounting books covering fundamental accounting principles, business accounting, and business math. Topics in financial accounting and business accounting covered include generally accepted accounting principles (GAAP), the accounting cycle needed to prepare financial statements such as the balance sheet and income statement, financial ratios, and internal control procedures such as the bank reconciliation.

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