As a math major and accounting major, I sit in the perfect seat to reflect on the usefulness of understanding math in accounting. I have been asked the question “are math and accounting related?” and my answer is “absolutely”.
In a broad way, my mathematical training has helped me think through various accounting concepts and solve accounting problems. It has expanded my brain to be able problem solve efficiently by taking all the information I have and sorting through it to find the good stuff. I feel as though it has also helped me understand concepts. Sometimes in accounting a concept is explained with an equation. When we add, divide, or multiply two concepts or numbers and yield a third, math helps me understand what is actually going on; I don’t have to go through the work of memorizing the accounting definition because I understand the role that these operations have. For example, the following is an accounting equation:
Unit sales to attain the target profit = (Target profit + Fixed Expenses) / Contribution margin per unit
This is hard to memorize if you don’t understand the terms and if you don’t understand the role of division in this example. Target profit is equivalent to contribution margin per unit times the number of units minus the fixed expenses. When we add fixes expenses to this quantity we are simply left with our contribution margin per unit times the number of units, i.e.:
Unit sales to attain the target profit = contribution margin per unit* units /contribution margin per unit
Contribution margin per unit cancels and we are lefts with the number of units. That being said if we understand the algebra used here and we know the concept behind our accounting terms, we can break it down to the basics and understand what is happening in these equations.
Here is another example. In my intermediate accounting class, we just talked about how to calculate the future or present value of loans/investments, bonds, and annuities. Here is an example of a question we might see: You invest 12,000 at 4% interest which is compounded annually. You want to know the future value of the investment after 12 years. If you are familiar with multiplication/math, you might computer 12,000*1.04*1.04*1.04*1.04(12 times total). Then you might realize that this is the same as 12,000(1.04)^12. In my accounting class, we learn that to find the future value, you set up the following equation and solve. 12,000(FVF)=FV where FV is the future value and FVF is the future value factor. The FVF can be found by using a chart where n=12 and i=4%. The values are already computed and given to us. Even though it may seem like using the chart takes fewer steps and less though, I don’t like it. Understanding what is actually happening when we invest 12,000 and collect 4% interest every year is very clear when we actually do the math and think through 1.04 and why we are multiplying. However in the FVF function, it isn’t really clear why we multiplied. How does one calculate FVF? What if I don’t have the chart handy? Similarly if we want to find the present value if we know the future value (lets say it is 12,000 and interest is 4% compounded annually), the math major might do as follows:
Accountants would set it up as follows.
where PVF is equal to the present value factor. Even though in this case we have the end result instead of the initial information, the calculations are the same; multiplication is still used.
This example above is a simple one, but it gets more complicated in accounting. We talk about bonds and annuities. Annuities are where we either add or deduct money from an investment throughout the period of the investment. Sometimes we wait 10 years before we start taking money out. These types of problems make for great math problems! When we use future value factors, or present value factors I think it takes the math out of it. It makes more complicated; it makes it more about memorization than actually understanding the concept. In this way, understanding the math in accounting makes accounting seem more simple because I am able to break it down to the building blocks. I don’t need to spend the time wrapping my mind around the math involved because I know what calculations are being done. I can focus on the concepts.