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Accounting Medium- English Random Thoughts

The Things I Like Most About Accounting

1.   The Use of Mathematics

My predecessor would not know that it is possible to determine the exact amount of bonus of certain percentage based on net income after bonus is deducted from gross income along with other expenses-  until I used algebra.  She used to use the Gross Profit  figure as basis of bonus which I think is not appropriate. She argued, “How come you come up with bonus based on income you could not come up with without coming up with the bonus first?”

Obviously, she is neither an Accounting nor a Math major.

Nosebleed?

Brainfreeze?

To illustrate:  This my pro-forma for simplified Statement of Income

Sales                                                                   Php      xxx,xxx,xxx.xx

Less:  Cost of Sales                                                         xxx,xxx,xxx.xx

Gross Profit                                                                       xxx,xxx,xxx.xx

Less:  Administrative Expenses                                     xxx,xxx,xxx.xx

Gross Income before Bonus                                           xxx,xxx,xxx.xx

Less:  Bonus                                                                     xxx,xxx,xxx.xx

Net Income                                                                    xxx,xxx,xxx.xx

Lets substitute arbitrary values:

Sales                                                                 Php         100,000,000.00

Less:  Cost of Sales                                                            87,000,000.00

Gross Profit                                                                      13,000.000.00

Less:  Administrative Expenses                                        7,000,000.00

Gross Income before Bonus                                             6,000,000.00

Less:  Bonus                                                               5% of Net Income

Net Income                                                                     xxx,xxx,xxx.xx

Now, let’s solve for the value of Bonus:

Let

B = Bonus

GIB = Gross Income before Bonus

NI  = Net Income

It can be deduced that

NI = GIB – B

But

B = 5% or .05 of NI

Then,

NI = GIB – .05NI

Transpose, add similar terms

NI + .05NI = GIB

Or

NI (1 + .05) = GIB.

NI = GIB ÷ 1.05

Substitute:

NI = 6,000,000.00 ÷ 1.05

NI = 5,714,285.71

B = 5% of NI

B = 285,714.29

And your Statement of Income will look like this:

Sales                                                                   Php      100,000,000.00

Less:  Cost of Sales                                                          87,000,000.00

Gross Profit                                                                      13,000.000.00

Less:  Administrative Expenses                                        7,000,000.00

Gross Income before Bonus                                             6,000,000.00

Less:  Bonus                                                                        285,714.29

Net Income                                                                     5,714,285.71

 

Disclaimer

  1.  This approach is not the most efficient.  You can use any other formula, just be sure we’ll have the same answer.
  2. The problem may seem not to be a problem at all for someone,  but for the benefit of the doubt and the majority,  and for the sake of this post,  laissez-faire!
  3. This example is just one of numerous mathematical problems I encounter (she encounters) in the workplace.  Some others are far more challenging.

More things I love Most About Accounting.. soon

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