What are Percentages?

A percentage is a proportion or a fraction of 100. So for example, 50% of 100 is equal to 50, or a half of one hundred. Percentages are commonly used in accounting and financial statements as they make it easy to compare and interpret different figures.

Users of financial statements must be careful to not rely purely on the absolute dollar values contained in the statements. More meaningful analysis comes from expressing dollar values relative to other numbers. For example, this might involve comparing figures from one year to another, or from one financial statement to a series of others. These comparisons are usually expressed as a percentage or a percentage change.

For example, if Company A made a profit of \$100,000, and Company B made a profit of \$50,000, the absolute dollar value profit of Company A is higher than Company B. However, this does not mean Company A is more profitable relative to Company B as there has been no comparison with the resources required to generate the profit. Company A may have needed to invest \$800,000 in assets to generate their profit, while Company B may have only invested \$200,000.

To compare the profitability of the companies we can calculate the profit for each company as a percentage of investment made:

$$ \newcommand{\ctext}[1]{\style{font-family:Arial}{\text{#1}}} \begin{align*} \ctext{Company A percent profit} &= \frac{\$100.000}{\$800,000} \times 100\% \cr &= 12.5\% \cr \ctext{Company B percent profit} &= \frac{\$50,000}{\$200,000} \times 100\% \cr &= 25\% \end{align*} $$

 Investors and business people can use percentage calculations to work out which entity or business decision would generate a higher return per dollar of investment.

Previous  | Next