Accounting Percentages: the Fundamentals

Posted by: Patricia Barlow Post Date: 28th November 2014

Percentages form part of everyday life, such as in 20% discounts, or 8.9% interest on loans and credit cards.

Percentages are equally a part of any accountancy role, where you’ll be calculating discounts, calculating ratios, and many other things.

A percentage helps to quantify a figure. For example, an increase in sales of £60,000 can mean different things, depending on what the figures were like before. If sales were £2,000 previously, then it’s fantastic.

Accounting Percentages: the Fundamentals

It is not so good, however, if sales were already £3 million! If we present this as a percentage, we can easily see if this is a large increase or not.

So what types of percentage are faced in an accounting role, and how do we work them out?

Discounts

Let’s start with a 20% discount. If there is something that we would like to buy with an original price of £560, and a 20% will be applied, how do we work out the price after the discount?

To do this with a calculator, take the following steps:

  • 1. Turn the percentage into a decimal, by dividing it by 100 – this makes 0.2.
  • 2. Multiply 560 by the answer to the first step, 0.2 – this will give £112 as the discount amount.
  • 3. The item now costs £560 – £112 = £448.

If you don’t have a calculator, the easiest way to work out 20% of £560 is:

  • 1.Find out what 10% is. To work out 10% of £560 just take off the zero. So 10% becomes £56.
  • 2. We need 20%, so we need £56 twice. This is £112.

This is particularly useful for your AAT level 2 Foundation Certificate studies, when you are working out trade and settlement discounts.

Profit margins

Let’s take a look at a percentage of a certain figure.

So, let’s say we have sales of £100,000 and net profit of £6,000, and we need to work out the net profit percentage. To get the answer, we need to take the following steps:

  • Divide the net profit of £6,000 by the sales of £100,000, giving us an answer of 0.06.
  • Multiply this by 100, giving the percentage 6%.

This is particularly useful for AAT level 3 Advanced Diploma studies, when you are working out net profit margins.

Markup calculations

The next percentage we want to look at is where the percentage is included in the original figure and we need to take it out. For example, in many cases the gross value includes the VAT figure, and we need to remove it.

We can start by looking at the original figure as a percentage. So, if the gross figure including VAT is £480, then this represents 120%. This is because the net figure represents 100%, plus the VAT rate of 20%. So, how do we work out what the figure is without VAT?

  • 1. Work out what 1% is. As we are working with 120% to start with, divide the original figure, 480, by 120. This gives 1% of the figure as 4.
  • 2. We can now work out what amount the extra percentage is (in this case, 20%). If we multiply the answer to step 1, which is 4, by the extra percentage, 20, this tells us that the VAT amount is £80.
  • 3. We can now take the VAT away from the net figure. So, £480 – £80 = £400.

This is particularly useful on the AAT level 2 Foundation Certificate when dealing with VAT, and again on the level 3 Advanced Diploma when doing markup and margin calculations.

Percentage increases

Finally, you may be given a figure that is less than 100%, and you need to work out what 100% would be. For example, the total number of units produced is 45,000 units, and this is 98% capacity.

If we want to know what the extra capacity is, we need to find the 2%. To do this, follow these steps:

  • 1. Find 1% by dividing the figure, 45,000, by the percentage you are starting with, 98.
  • 2. Multiply by 100, giving 45918 as the full capacity.

This is required on the AAT level 4 Professional Diploma when looking at financial performance or budgeting.

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