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How Do Accountants Use Math?
Using Addition and Subtraction
Accountants use addition and subtraction every day to arrive at totals for management reports, reconciliations and tax reports. They balance or reconcile bank statements in much the same way that individuals do -- by adding deposits and interest and subtracting checks and bank fees. When completing income tax returns, income and expense statements and cost analyses, accountants use addition and subtraction to add income and subtract expenses. When balancing the general ledger, they make adjustments by adding and subtracting the various credits and debits for the month. Accountants also keep department and company budgets current by subtracting expenses from the allotted budget.
Using Division and Multiplication
To calculate the overhead rates that apply to production pieces, accountants divide the total expected overhead costs by the expected number of production pieces. Later, they calculate the cost for each production piece by dividing the total actual cost by the total actual production. To forecast the expected cost for short-term or long-term planning, accountants may multiply actual current costs and expenses by a percentage. The forecast percentage often varies with the expected rate of inflation. When dealing with foreign suppliers or customers, accountants must calculate the currency exchange rates using division or multiplication and the current rate of exchange. Accountants may also state profit margins as a percentage of sales, which requires dividing profit by revenue.
Using Mathematical Formulas
Mathematical formulas help accountants, management and lenders compare income, expenses, profits and debts to other those of other companies in similar industries. These formulas usually result in ratios or percentages that facilitate comparisons between a company and industry standards, although the actual income and expenses of each company may differ. Some of these formulas include debt-to-equity ratio, inventory turnover ratio, operating margin, earnings per share (EPS), P/E ratio and working capital. Accountants may calculate EPS using only outstanding shares of stock or all possible shares, including options. The EPS appears on the company's income statement because of its importance to stockholders and lenders. Accountants also use formulas to calculate depreciation on assets. However, the particular formula depends on the type of asset, such as straight-line and modified accelerated cost recovery system.
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Julia Fuller began her professional writing career eight years ago covering special-needs adoption. She holds a bachelor's degree in accounting from Marywood College, is co-owner of GJF Rental Properties as well as a livestock and grain crop farm. She worked for the United States Postal Service and a national income tax service.