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Accounting » Mathematical Concepts used |
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Accounting is a concept involving mathematical ideas. The early developments of accounting involved mathematicians.
The first printed treatise of bookkeeping in the world is the "Summa de Arithmetica, Geometria, Proportioni et Proportionalita" written by Luca Pacioli. The treatise was published in Venice in 1494, and was reprinted at Toscolano in 1523. This work is one of the most important books on mathematics and has had an enormous impact on the field of accounting ever since. • Equation
An equation is a term relevant to the field of mathematics. It is something without which the field of mathematics has no meaning and existence.. (Can you think of a topic in mathematics where you do not come across the "=" sign).
An equation is a statement of equality between two expressions (expression1 = expression2). » Numerals and Literals
Numerals are numbers. Literals are alphabets used in place of (or to represent) numbers.
» Constants, Variables, Unknowns
Constants are those which have a fixed value. Variables are those which are capable of having more than one value. When the value represented by the constant is not known we call it an unknown.
Numerals are always constants whereas literals can be either constants or variables. » Terms
Constants and variables combined together with the mathematical operations of multiplication (×) and division (÷) form terms.
» Expressions
Terms combined together with the mathematical operations of addition (+) and subtraction (−) form expressions.
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The Fundamental Accounting Equation |
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The total idea of accounting is built around an equation which is a mathematical equation called the "Fundamental Accounting Equation". It is a statement of equality between assets and liabilities. For a business Assets should be (and are) always equal to its liabilities. • Isn't it Liabilities = Assets?
Yes, the fundamental accounting equation in its true sense should be Liabilities = Assets and it is true even.
The explanation for the equation being written as Capital + Liabilities = Assets lies in the separate entity concept. Since the owner is also an alien to the business, the amount that is contributed by the owner towards his capital should also be treated as a liability to the business. But since it is of a special nature and it is a liability which differs from the others in the sense that it takes the maximum amount of risk in the business, it would be appropriate to show it separately always. Therefore the liabilities on the LHS of the accounting equation are divided into two as capital and liabilities. • Total Liabilities = Total Capital Employed (= Owned Capital + Loaned Capital)
The total capital employed in the business comes from two sources. One the ownership of the business (which we call owned capital) and two as liabilities (which we call loaned capital). Since the owners contribution is also to be treated as a liability we can say that total liabilities is equal to total capital.
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What are Assets? |
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This can be a very big topic for discussion. In the initial stages of learning accountancy, it would be better to have a simple understanding on what an asset is.
An asset is something capable of being liquidated and realised. • Liquidation
The process of converting something into cash. The greater and faster an asset is capable of being converted to cash, the more liquid it is.
Cash is the highest liquid asset as you need no time to convert into cash. Goodwill of a business is the least liquid asset as it can generally be realised only when the business is disposed/sold. Some examples of Assets
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| Author Credit : The Edifier | ... Continued Page 9 |
