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Fundamentals of accounting
Fundamentals of accounting

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2.7 Percentages

Percentages also indicate proportions. They can be expressed either as fractions or as decimals:

45% = 45/100 = 0.45

7% = 7/100 = 0.07

Their unique feature is that they always relate to a denominator of 100. Percentage means simply ‘out of 100’, so 45% is ‘45 out of 100’, 7% is ‘7 out of 100’, etc.

A business is offered a loan to a maximum of 80% of the value of its premises. If the premises are valued at £120,000 then the company can borrow the following:

£120,000 x 80% = £120,000 x 0.80 = £96,000.

Fractions and decimals can also be converted to percentages.

Box 2 Changing decimals or fractions to percentages

To change a decimal to a percentage you need to multiply by 100:

0.8 = 80%

0.75 = 75%

To change a percentage to a decimal you need to divide by 100:

60% = 0.6

3% = 0.03

To convert a fraction to a percentage it is necessary to first change the fraction to a decimal:

4/5 = 0.8 = 80%

3/4 = 0.75= 75%

If a machine is sold for £120 plus VAT (Value Added Tax – an indirect tax in the UK) at 20% then the actual cost to the customer is:

£120 x (20% of 120) = £120 + (0.20 x 120) = £144

Alternatively, the amount can be calculated as

£120 + (100% + 20%) = £120 x (1.00 + 0.20) = £120 x 1.20 = £144

If the machine were quoted at the price including VAT (the gross price) and we wanted to calculate the price before VAT (the net price), then we would need to divide the amount by (100% + 20%) = 120% or 1.2. The gross price of £144 divided by 1.2 would thus give the net price of £120. This principle can be applied to any amount that has a percentage added to it.

For example, a restaurant bill is a total of £50.40 including a 12% service charge. The bill before the service charge was added would be:

£50.40 / 1.12 = £45.00

Activity 6 Use of percentages

  1. Convert the following to percentages:
  • a.0.9
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Answer

90%

  • b.1.2
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Answer

120%

  • c.1/3
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Answer

33.33%

  • d.0.03
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Answer

3%

  • e.1/10
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Answer

10%

  • f.1 1/4
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125% (i.e. 100 x 1.25)

  1. A company sells its product for £65 per unit. How much will it sell for if the customer negotiates a 20% discount?
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Answer

£65 x (1 – 0.2) = £52

  1. If a second product is sold for £36.18 including 20% value added tax, what is the net price before tax?
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Answer

£36.18 / 1.2 = £30.15