BUSINESS MATH

Business Mathematics consists of Mathematical concepts related to business. It comprises mainly

profit, loss and interest. Maths is the base of any business. Business Mathematics financial
formulas, measurements which helps to calculate profit and loss, the interest rates, tax calculations,
salary calculations, which helps to finish the business tasks effectively and efficiently.

Business Mathematics is highly related to the Statistics concepts which give solutions to business
problems. In business, we deal with the exchange of money or products, which have a monetary
value. Each business leads to some profit and some loss. To identify these factors, we have to study
the primary topics of Maths such as formulas to find a profit, loss, their percentages, discount, etc.
Even Though, the requirement of this subject does not contain pure Maths, it needs Mathematical
thinking and some Maths formulas. Here, we will discuss what is Business Mathematics,
terminologies, and important formulas with problems and solutions.

What is Business Mathematics?

Business Math always deals with profit or loss. The cost of a product is fixed by taking into
consideration it’s profit, margin, cash discount, trade discount, etc. Business mathematics is used by
commercial companies to record and manage business works. Commercial businesses use maths in
departments of accounting, inventory management, marketing, sales forecasting and financial
analysis.

Business Mathematics Topics

The most important topics covered in Business Mathematics are:

 Profit and Loss

 Statistics
 Simple and Compound Interest
 Interest Rates
 Loans
 Markups and markdowns
 Taxes and Tax Laws
 Discount Factor
 Annuities
 Insurance
 Credit
 Depreciation
 Future and Present Values
 Financial Statements
Also, read:

 Profit and Loss Percentage

 Simple Interest
 Compound Interest

Business Mathematics Basic Terms

 Selling Price: The market price is taken to sell a product.
 Cost Price: The original price of the product is the cost price.
 Profit: If the selling price is more than the cost price, the difference in the prices is the profit.
 Loss: If the selling price is less than the cost price, the difference in the prices is the loss.
 Discount: The reduced amount in the selling price of a product.
 Simple Interest: Simple interest is that interest which is counted against the capital amount
or the portion of the main amount that remains unpaid.
 Compound Interest: Compound interest is the investment rate that increases exponentially.

Business Mathematics Formulas

Here, the 9 basic Business Mathematics formulas that we cannot ignore. They are:
Net Income Formula:
Net Income = Revenue – Expense
Accounting Equation:
Assets = Liabilities + Equity
Equity = Assets – Liabilities
Cost of Goods Sold Formula:
COGS = Beginning inventory + Purchase during the period – Ending inventory
Break-Even point Formula:
Break-Even Point = Fixed cost / (Sales Price per unit – variable cost per unit)
Current Ratio Formula:
Current Ratio = Current Assets / Current Liabilities
Profit Margin Formula:
Profit Margin = (Net Income/ Revenue) × 100
Return of Investment (ROI) Formula:
ROI = [(Invest gain – Cost of Investment)/ Cost of Investment] × 100
Markup Formula:
Markup Percentage = [(Revenue- COGS)/COGS] × 100
Selling Price using Markup = (COGS × markup percentage) + COGS
Where,
COGS = Cost of goods sold
Inventory Shrinkage Formula:
Inventory Shrinkage = [(Recorded Inventory – Actual Inventory)/ Recorded Inventory] × 100

Business Mathematics Example

While doing business, one can earn a good profit or face loss. The price of a product is fixed, taking
into consideration it’s cost price, profit, margin, trade discount, cash discount, etc. The price marked
on the commodity is called marked price or catalogue price. For trading purposes, the manufacturer
proposes a discount on the MRP to the buyer. This is called a trade discount. In addition to the trade
discount, if the buyer pays cash against goods, he gets another cut called cash discount. The price
of the object after subtracting the trade discount and cash discount is called the selling price. Thus,
we have, Selling price = Cost price – Discounts. Let us discuss the most important concept called
“Profit and Loss” here.
Profit and Loss:
A profit is the earned amount received by a business on selling a product whereas loss is the
amount which is less than the actual price of the product. The formula for profit and loss is given
based on the selling price and cost price of a commodity.

 Profit = Selling Price – Cost Price = S.P. – C.P. (S.P. > C.P)
 Loss = Cost Price – Selling Price = C.P. – S.P. (C.P. > S.P.)
Both these measures have their percentage value also and they are given by;

 Profit% = [(S.P. – C.P.)/C.P]. x 100 = (Profit/C.P.) x 100

 Loss% = [(C.P. – S.P.)/C.P.] x 100 = (Loss/C.P.) x 100

Business Mathematics Problems and Solutions

Question 1: A music system was bought for Rs.10,500 and sold at Rs.9,500. Find the amount
of profit or loss.
Solution: Given,
Cost Price of the music system = Rs.10,500
Selling Price of the music system = Rs. 9,500
We can see here, C.P. is greater than S.P. Therefore, there is a loss in this business.
Hence, we need to calculate the loss amount.
Loss = C.P. – S.P.
Loss = 10,500 – 9,500 = Rs.1,000/-.
Question 2: A pair of shoes is bought at Rs 200 and sold at a profit of 10%. Find the selling
price of the shoes.
Solution: Given,
Profit = 10% of Rs.200
P = (10/100) × 200 = Rs. 20
S.P. = C.P. + Profit
S.P. = 200 + 20 = Rs.220/-
Question 3: If the cost price of an article including 20% for taxes is Rs. 186, then find the
original cost of the article excluding taxes.
Solution:
Let x be the original price of an article.
Tax = 20% of x = (20/100) × x = 0.2x
According to the given statement,
Original cost + tax = New cost price
x + 0.2x = Rs. 186
1.2x = Rs. 186
x = Rs. 186/1.2
x = Rs. 155
Therefore, the cost of the article without taxes = Rs. 155
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Profit And Loss As Percentage

Profit and loss percentage are used to refer to the amount of profit or loss that has been
incurred in terms of percentage. It should be noted that the percentage is one of the methods
for comparing two quantities. Daily we come across a variety of situations where we calculate or
compare things in “per cent”. Most common ones are the situations related to buying and selling
of items. While the sale of a good, one can either gain a profit or bear a loss, which is generally
calculated in terms of percentage.

Profit and Loss Percentage Formulas

Before we go through profit and loss per cent, we need to make ourselves familiar with few
terminologies, that are generally used in sales/purchasing of goods.
Cost Price (CP)
Cost price is the price at which we have purchased an item. This is abbreviated as CP.

Selling Price (SP)

Selling price is the price at which we sell an item; in short, it is written as SP.
During the purchase and sale of an item, depending upon the CP or SP, it can be either profit or
loss for the seller.

Profit
When the Selling Price of an item is more than the Cost Price of the same item, then this is
the condition of profit for the seller.

S.P. > C.P.

The difference in the amount of the Selling Price and the Cost price is the net Profit, given as-

Net Profit = S.P. – C.P.

Loss
When the Cost Price of an item is more than the Selling Price of the same item, then this is the
condition of loss for the seller.

S.P. < C.P.

The difference between the amount of Cost Price and the Selling Price is a net loss.

Net Loss = C.P. – S.P.

Now we can easily conclude whether a sale was profitable or ended in a loss. Also, we know
how to evaluate the profit or loss amount. Let’s learn how to express this amount in percentage.
Also Check: Profit Formula
Using the above formulas we can always estimate what is the profit or loss amount. This can be
converted in terms of percentage as well i.e. profit % or loss %. The formula for estimating profit
% or loss % is as follows:

Profit Percentage
Profit%=S.P−C.PC.P×100=NetProfitC.P×100
Loss Percentage
Loss%=C.P−S.PC.P×100=NetLossC.P×100
Note- It is to be strictly noted that the Profit or Loss percentage is always calculated on the Cost
Price of an item, until and unless it is mentioned to calculate the percentage on Selling Price.

Profit and Loss Percentage Example

Example:
Raj purchased a bike for Rs. 75000 and he sold it for Rs.55000. Is it the condition of profit or
loss? Also, find the profit or loss percentage incurred by him.
Solution:
Given,
Cost price (CP) of the bike = Rs. 75000
Selling price (SP) of the bike = Rs.55000
Here, SP < CP, it is a loss.
Net Loss = CP – SP = 75000 – 55000= Rs. 20000
Now, Raj’s loss % will be-
2000075000×100=803

=26.667%
∴ Loss percent of Raj is 26.667%.
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Simple Interest
Simple Interest is an easy method of calculating the interest for a loan/principal amount. Simple
interest is a concept which is used in most of the sectors such as banking, finance, automobile,
and so on. when you make a payment for a loan, first it goes to the monthly interest and the
remaining goes towards the principal amount. In this article, let us discuss the definition, simple
interest formula, and how to calculate the simple interest with examples.

What is Simple Interest?

Simple Interest (S.I) is the method of calculating the interest amount for some principal amount of
money. Have you ever borrowed money from your siblings when your pocket money is exhausted?
Or lent him maybe? What happens when you borrow money? You use that money for the purpose
you had borrowed it in the first place. After that, you return the money whenever you get the next
month’s pocket money from your parents. This is how borrowing and lending work at home.
But in the real world, money is not free to borrow. You often have to borrow money from banks in the
form of a loan. During payback, apart from the loan amount, you pay some more money that
depends on the loan amount as well as the time for which you borrow. This is called simple interest.
This term finds extensive usage in banking.

Simple Interest Formula

The Formula for simple interest helps you find the interest amount if the principal amount, rate of
interest and time periods are given.
Simple interest formula is given as:
SI = (P × R ×T) / 100
Where SI = simple interest
P = principal
R = interest rate (in percentage)
T = time duration (in years)
In order to calculate the total amount, the following formula is used:
Amount (A) = Principal (P) + Interest (I)
Where,
Amount (A) is the total money paid back at the end of the time period for which it was borrowed.

Simple Interest Formula For Months

The formula to calculate the simple interest on a yearly basis has been given above. Now, let us see
the formula to calculate the interest for months. Suppose P be the principal amount, R be the rate of
interest per annum and n be the time (in months), then the formula can be written as:
Simple Interest for n months = (P × n × R)/ (12 ×100)

Difference Between Simple Interest and Compound Interest

There is another type of interest called compound interest. The major difference between simple and
compound interest is that simple interest is based on the principal amount of a deposit or a loan
whereas the compound interest is based on the principal amount and interest that accumulates in
every period of time. Let’s see one simple example to understand the concept of simple interest.

Simple Interest Problems

Let us see some simple interest examples using the simple interest formula in maths.
Example 1:
Rishav takes a loan of Rs 10000 from a bank for a period of 1 year. The rate of interest is 10%
per annum. Find the interest and the amount he has to the pay at the end of a year.
Solution:
Here, the loan sum = P = Rs 10000
Rate of interest per year = R = 10%
Time for which it is borrowed = T = 1 year
Thus, simple interest for a year,  SI = (P × R ×T) / 100 = (10000 × 10 ×1) / 100 = Rs 1000
Amount that Rishav has to pay to the bank at the end of the year = Principal + Interest = 10000 +
1000 = Rs 11,000
Example 2:
Namita borrowed Rs 50,000 for 3 years at the rate of 3.5% per annum. Find the interest
accumulated at the end of 3 years.
Solution:
P = Rs 50,000
R = 3.5%
T = 3 years
 SI = (P × R ×T) / 100 = (50,000× 3.5 ×3) / 100 = Rs 5250 
Example 3:
Mohit pays Rs 9000 as an amount on the sum of Rs 7000 that he had borrowed for 2 years.
Find the rate of interest.
Solution:
A = Rs 9000
P = Rs 7000
SI = A – P = 9000 – 7000 = Rs 2000
T = 2 years
R=?
SI = (P × R ×T) / 100 
R = (SI  × 100) /(P× T)
R = (2000  × 100 /7000 × 2)  =14.29 % 
Thus,  R  = 14.29%

What is simple interest and example?

Simple Interest (S.I.) is the method of calculating the interest amount for a particular principal amount of
money at some rate of interest. For example, when a person takes a loan of Rs. 5000, at a rate of 10 p.a.
for two years, the person’s interest for two years will S.I. on the borrowed money.
What is simple interest and compound interest?
By definition, simple interest is the interest amount for a particular principal amount of money at some
rate of interest. In contrast, compound interest is the interest calculated on the principal and the
interest accumulated over the previous period.

What are the types of simple interest?

Simple interest can be considered as two categories when the time is considered in terms of days. They
are ordinary and exact simple interests. Ordinary simple interest is a SI that takes only 360 days as the
equivalent number of days in a year. On the other hand, Exact simple interest is a SI that takes exact
days in 365 for a normal year or 366 for a leap year.

What are the 2 types of interest?

In our daily lives, the two types of interest we generally deal with are simple interest and compound
interest.

How do I calculate S.I.?

To calculate the SI for a certain amount of money (P), rate of interest (R) and time (T), the formula is:
SI = (PTR)/100
Here,
SI = Simple interest
P = Principal (sum of money borrowed)
R = Rate of interest p.a
T = Time (in years)

Compound Interest
Compound interest is the most commonly used concept in our daily existence. Suppose when
we observe our bank statements, we generally notice that some interest is credited to our account
every year. This interest varies with each year for the same principal amount. We can see that
interest increases for successive years. Hence, we can conclude that the interest charged by the
bank is not simple interest; but this interest is known as compound interest or CI. In this article,
you will learn what CI is, formula and derivation of formula to calculate the CI when
compounded annually, half-yearly, quarterly, etc. Also, one can understand why the return on
compound interest is more than the return on simple interest through the examples given based
on real-life applications of CI here.  

Compound Interest Definition

Compound interest is the interest calculated on the principal and the interest accumulated over the
previous period. It is different from simple interest, where interest is not added to the principal while
calculating the interest during the next period. Compound interest finds its usage in most of the
transactions in the banking and finance sectors and other areas. Some of its applications are:

1. Increase or decrease in population.

2. The growth of bacteria.
3. Rise or Depreciation in the value of an item.

Compound Interest in Maths

In maths, Compound interest can be calculated in different ways for different situations. We can use
the interest formula of compound interest to ease the calculations. To calculate compound interest,
we need to know the amount and principal. It is the difference between amount and principal.

Compound Interest Formula

The compound interest formula is given below:
Compound Interest = Amount – Principal
Here, the amount is given by:
Where,
A = amount
P = principal
r = rate of interest
n = number of times interest is compounded per year
t = time (in years)
It is to be noted that the above formula is the general formula for the number of times the principal is
compounded in a year. If the interest is compounded annually, the amount is given as:

A=P(1+R100)t
Thus, the compound interest rate formula can be expressed for different scenarios such as the
interest rate is compounded yearly, half-yearly, quarterly, monthly, daily, etc.
Try out: Compound Interest Calculator
Let us see, the values of Amount and Interest in case of Compound Interest for different years-

Time (in years) Amount Interest

1 P(1 + R/100)  PR100

2 P(1+R100)2 P(1+R100)2−P

3 P(1+R100)3 P(1+R100)3−P
 4 P(1+R100)4 P(1+R100)4−P

n P(1+R100)n P(1+R100)n−P

The above formulas help determine the interest and amount in case of compound interest quickly.

NOTE:
From the data, it is clear that the interest rate for the first year in compound interest is the same as that in
simple interest. PR/100.
Other than the first year, the interest compounded annually is always greater than that in simple interest.

Derivation of Compound Interest Formula

To derive the formula for compound interest, we use the simple interest formula as we know SI for 
one year is equal to CI for one year (when compounded annually).

Let, Principal amount = P, Time = n years, Rate = R

Simple Interest (SI) for the first year:

SI1 = P × R × T100
Amount after first year = P + SI1
= P + P × R × T100
= P(1+R100) = P2
Simple Interest (SI) for second year:

SI2 = P2 × R × T100
Amount after second year = P2 + SI2
= P2 + P2 × R × T100
= P2(1 + R100)
= P(1 + R100)(1 + R100)
= P(1 + R100)2
Similarly, if we proceed further to n years, we can deduce:
A = P(1 + R100)n
CI = A – P = P[(1 + R100)n – 1]

Compound Interest when the Rate is Compounded half Yearly

Let us calculate the compound interest on a principal, P for 1 year at an interest rate R %
compounded half-yearly.
Since interest is compounded half-yearly, the principal amount will change at the end of the first 6
months. The interest for the next six months will be calculated on the total amount after the first six
months. Simple interest at the end of first six months,

SI1 = P × R × 1100 × 2
Amount at the end of first six months,

A1 = P + SI1
= P + P × R × 12 × 100
= P(1 + R2 × 100)
= P2
Simple interest for next six months, now the principal amount has changed to P2
SI2 = P2 × R × 1100 × 2
Amount at the end of 1 year,

A2 = P2 + SI2
= P2 + P2 × R × 12 × 100
= P2(1 + R2 × 100)
= P(1 + R2 × 100)(1 + R2 × 100)
= P(1 + R2 × 100)2
Now we have the final amount at the end of 1 year:

A = P(1 + R2 × 100)2
Rearranging the above equation,

A = P(1 + R2100)2 × 1
Let R2 = R′; 2T = T′, the above equation can be written as, [for the above case T = 1 year]

A = P(1 + R′100)T′
Hence, when the rate is compounded half-yearly, we divide the rate by 2 and multiply the time by 2
before using the general formula for compound interest.

Compound Interest Quarterly Formula

Let us calculate the compound interest on a principal, P kept for 1 year at an interest rate R %
compounded quarterly. Since interest is compounded quarterly, the principal amount will change
at the end of the first 3 months(first quarter). The interest for the next three months (second quarter)
will be calculated on the amount remaining after the first 3 months. Also, interest for the third quarter
will be calculated on the amount remaining after the first 6 months and for the last quarter on the
remaining after the first 9 months. We can also reduce the formula of compound interest of yearly
compounded for quarterly as given below:

A=P(1+R4100)4T
CI = A – P
Or

CI=P(1+R4100)4T−P
 
Here,
A = Amount
CI = Compound interest
R = Rate of interest per year
T = Number of years

Formula for Periodic Compounding Rate

The total accumulated value, including the principal P plus compounded interest I, is given by the
formula:
P’ = P[1 + (r/n)]nt
Here,
P = Principal 
P’ = New principal 
r = Nominal annual interest rate
n = Number of times the interest is compounding 
t = Time (in years)
In this case, compound interest is:
CI = P’ – P

How Compound Interest is Calculated

Let us understand the process of calculating compound interest with the help of the below example.
Example: What amount is to be repaid on a loan of Rs. 12000 for one and half years at 10% per
annum compounded half yearly.
Solution:
For the given situation, we can calculate the compound interest and total amount to be repaid on a
loan in two ways. In the first method, we can directly substitute the values in the formula. In the
second method, compound interest can be obtained by splitting the given time bound into equal
periods.
This can be well understood with the help of the table given below.
Compound Interest Examples
As mentioned above, compound interest has many applications in real-life. Let us solve various
examples based on these applications to understand the concept in a better manner.
Increase or Decrease in Population

Examples 1:
A town had 10,000 residents in 2000. Its population declines at a rate of 10% per annum. What will be its
total population in 2005?
Solution:
The population of the town decreases by 10% every year. Thus, it has a new population every year. So the
population for the next year is calculated on the current year population. For the decrease, we have the
formula A = P(1 – R/100)n
Therefore, the population at the end of 5 years = 10000(1 – 10/100)5
= 10000(1 – 0.1)5 = 10000 x 0.95 = 5904 (Approx.)
The Growth of Bacteria
 Examples 2:
The count of a certain breed of bacteria was found to increase at the rate of 2% per hour. Find the bacteria at
the end of 2 hours if the count was initially 600000.
Solution:
Since the population of bacteria increases at the rate of 2% per hour, we use the formula
A = P(1 + R/100)n
Thus, the population at the end of 2 hours = 600000(1 + 2/100)2
= 600000(1 + 0.02)2 = 600000(1.02)2 = 624240
Rise or Depreciation in the Value of an Item

Examples 3:
The price of a radio is Rs. 1400 and it depreciates by 8% per month. Find its value after 3 months.
Solution:
For the depreciation, we have the formula A = P(1 – R/100)n.
Thus, the price of the radio after 3 months = 1400(1 – 8/100)3
= 1400(1 – 0.08)3 = 1400(0.92)3 = Rs. 1090 (Approx.)

Compound Interest vs Simple Interest

Now, let us understand the difference between the amount earned through compound interest and
simple interest on a certain amount of money, say Rs. 100 in 3 years . and the rate of interest is 10%
p.a.
Below table shows the process of calculating interest and total amount.
Compound Interest Problems
Question 1: A sum of Rs.10000 is borrowed by Akshit for 2 years at an interest
of 10% compounded annually. Find the compound interest and amount he has to pay at the
end of 2 years.
Solution:
Given,
Principal/ Sum = Rs. 10000,  Rate = 10%, and Time = 2 years
From the table shown above it is easy to calculate the amount and interest for the second year,
which is given by-

Amount(A2) = P(1+R100)2
Substituting the values,

A2=10000(1+10100)2=10000(1110)(1110)=Rs.12100
Compound Interest (for 2nd year) = A2 – P =  12100 – 10000 = Rs. 2100
Question 2: What is the compound interest (CI) on Rs.5000 for 2 years at 10% per annum
compounded annually?
Solution:
Principal (P) = Rs.5000 , Time (T)= 2 year, Rate (R) = 10 %

We have, Amount, A=P(1+R100)T
A=5000(1+10100)2=5000(1110)(1110)=50×121=Rs.6050
Interest (Second Year) = A – P = 6050 – 5000 = Rs.1050
OR
Directly we can use the formula for calculating the interest for the second year, which will give us the
same result.

Interest (I1) = P×R100=5000×10100=500

Interest (I2) = P×R100(1+R100)=5000×10100(1+10100)=550
Total Interest = I1+ I2 = 500 + 550 = Rs. 1050
Question 3: What is the compound interest to be paid on a loan of Rs.2000 for 3/2 years
at 10% per annum compounded half-yearly?
Solution: From the given,

Principal P=Rs.2000,
Time, T′=2×32 years = 3 years,
Rate, R′=102=5,
Amount, A can be given as:
A=P(1+R′100)T′
A=2000 × (1 + 5100)3
=2000 × (2120)3=Rs.2315.25
CI = A – P =  Rs.2315.25 – Rs.2000 = Rs.315.25

Frequently Asked Questions on Compound Interest – FAQs

What is Compound interest?
Compound interest is the interest calculated on the principal and the interest accumulated over the
previous period.

How do you calculate compound interest?

Compound interest is calculated by multiplying the initial principal amount (P) by one plus the annual
interest rate (R) raised to the number of compound periods (nt) minus one. That means, CI = P[(1 +
R)^nt – 1]
Here,
P = Initial amount
R = Annual rate of interest as a percentage
n = Number of compounding periods in a given time

Who benefits from compound interest?

The investors benefit from the compound interest since the interest pair here on the principle plus on
the interest which they already earned.
How do you find the compound interest rate?
The compound interest rate can be found using the formula,
A = P(1 + r/n)^{nt}
A = Total amount
P = Principal
r = Annual nominal interest rate as a decimal
n = Number of compounding periods
t = Time (in years)
Thus, compound interest (CI) = A – P

What is the formula of compound interest with an example?

The compound interest formula is given below:
Compound Interest = Amount – Principal
Where the amount is given by:
A = P(1 + r/n)^{nt}P = Principal
r = Annual nominal interest rate as a decimal
n = Number of compounding periods
t = Time (in years)
For example, If Mohan deposit Rs. 4000 into an account paying 6% annual interest compounded
quarterly, and then the money will be in his account after five years can be calculated as:
Substituting, P = 4000, r = 0.06, n = 4, and t = 5 in A = A = P(1 + r/n)^{nt}, we get A = Rs. 5387.42

What is the compounded daily formula?

The compound interest formula when the interest is compounded daily is given by:
A = P(1 + r/365)^{365 * t}