# Month: January 2019

## Contribution Margin

What is the Contribution Margin? The contribution margin (C.M.) is the amount of revenue in excess of variable costs. To cover the company’s fixed cost, this portion of the revenue is available. And after all fixed costs have been covered, this provides an operating profit. Hence contribution is a profit measure, although an incomplete one, …

## Break-Even Point

Break-even Point – Definition The break-even point is that volume of activity at which total revenue equals the sum of all variable and fixed costs. The activity can be expressed in unit or in dollar sales. This break-even is the point at which there is no profit or loss. Break-even Point is a point where …

## What is cost volume profit (CVP) analysis?

Definition Cost volume profit (CVP) analysis is a technique used to determine the effects of changes in an organization’s sales volume on its costs, revenue and profit. CVP can also be used to analyze the effects on profit of changes in selling prices, costs, income tax rates and the organization’s mix of products or services. Explanation …

## Worksheet MCQs

We have prepared MCQs test for Worksheet Chapter that may be helpful for students to clear their concepts about Worksheet topic. There is 10 MCQs in this Test. All questions have 4 answers, you need to choose the correct one. If you find any difficulty to answer these questions please go to our Explanation section labeled ‘Financial …

These Adjusting Entries MCQs will be helpful for the students to prepare their exams, interviews and viva. This MCQs test consists of Question 15 to 25. To Take MCQs 1 to 14 please click “Adjusting Entries MCQs 1“. If you feel any difficulty to answer these MCQs we advise you to read Adjusting Entries Chapter …

## Final Accounts MCQs

We have prepared a Multiple Choice Questions (MCQs) test for Final Accounts Chapter for the ease of students to clear their concepts. Final Accounts MCQs test consists of 20 questions, every question must be answered to move to the next question. This MCQs test will help students to prepare for their objective exams as well …

## Accounts Payable

Accounts Payable Definition Accounts payable are monies owed to the enterprise’s suppliers or vendors for the purchase of goods and services. Explanation Traders also receive the benefit of the discount by making payment to the Creditors/Accounts payable within the prescribed time. In other words, it is an anticipated income, which a trader estimates by way …

## Provision for discount on debtors

At the end of the trading period, there is always number of outstanding debtors or accounts receivable. In order to motivate his debtors to pay their debts, the trader sometimes offers attraction in the form of ca ash discount. As he knows from experience that customers are always anxious to enjoy the benefits of cash discount. …

## Difference between Trial balance and balance Sheet

The following are the main points of difference between Trial Balance and Balance Sheet. Trial balance Balance Sheet It is prepared to check the arithmetical accuracy of the ledger accounts. It is prepared to show the financial position of the business on a particular date. It includes the balances of all the accounts appearing in the …

## Difference between Profit & Loss Account and Balance Sheet

The following differences are observed between the Profit & Loss Account and Balance Sheet. Profit and Loss Account Balance Sheet It is an account. It is a statement of assets and liabilities. it is not an account. It is the second stage of Final Accounts. It is prepared before the Balance Sheet. It is the …

## Functions and Limitations of Balance Sheet

What is a Balance Sheet? The balance sheet may be defined as a statement of Assets, Liabilities and Capital prepared on the last date of the accounting period to show the financial position of the business. It is prepared with a view to measure the exact financial position of the business on a certain fixed …

## Marshalling of Balance Sheet

Definition The arrangement of assets and liabilities in balance Sheet is called “Marshalling“. Explanation The main purpose of Balance Sheet is to show the financial position of the business. Therefore, assets and liabilities in Balance Sheet should be shown in such an order which help to understand the financial position easily. To serve this purpose assets …

## Assets

Learning Objectives: What are assets in accounting? Types of Assets Classification of Assets Definition properties, things and receivables having certain value owned by the business are called assets. Examples Following are some examples of assets. Cash, Debtors, Stock, Accounts Receivable, Prepaid Expenses, Land, Building, plant, Machinery, Motor Vehicles, Furniture, Fixture, Goodwill, Patents, Copy Rights, Trade …

## Difference between gross profit and net profit

Gross profit of any business determines through Trading Account and the net profit determines through Profit and Loss Account. Below is the difference between gross profit and net profit. Gross Profit Net Profit It is ascertained through Trading Account. It is ascertained through Profit and Loss Account. It is the gross result of the business activities. …

## Difference between Trading Account and Profit and Loss Account

Below is the difference between Trading Account and Profit and Loss Account. Trading Account Profit and Loss Account Trading Account is the first stage of Final Accounts. As it is prepared before preparing Profit & Loss Account. It is the second stage of Final Accounts, As it is prepared after preparing Trading Account. It shows gross …

## Profit and Loss Account

Profit and loss account – Definition The account that shows annual net profit or net loss of a business is called Profit and Loss Account. It is prepared to determine the net profit or net loss of a trader. P&L account is a component of final accounts. The following items usually appear on the debit and …

Definition Trading account shows the result of buying and selling of goods, It is prepared to determine the gross profit or the gross loss of a trader. It is prepared at the stage of final accounts preparation. The following items usually appear on the debit and credit side of Trading Account. On the debit side: …

## Accounting treatment of closing stock

Closing stock consists of different types of finished goods in case of trading business. Whereas in case of manufacturing business closing stock is consisted of raw materials, work-in-progress and finished goods. The unsold closing stock of the current year is the opening stock of the next year. As the current year’s unsold closing stock will …

## Revenue

Definition The amount a business earns by selling goods or providing services is called revenue. Explanation The remuneration of goods sold or services provided is called revenue. It includes both cash received for goods sold and services rendered and accounts receivable for goods sold and services rendered on credit. Revenues appear in trial balance are …

## Final Accounts

Final Accounts – Definition The accounts which are prepared at the final stage of the accounting cycle to know the profit or loss and financial position of a business concern are called Final Accounts. Explanation Every businessman enters into business activities to earn profit. It is the accounting that shows profit or loss of a business …

## Explanation and treatment of direct expenses

All direct expenses are recorded on the debit side of Trading Account. The detailed explanation of some direct expenses is as under: Opening stock or opening inventory The opening stock consisted of different types of finished goods in case of trading business. Whereas in case of manufacturing business opening stock consisted of raw materials, work-in-progress …

## Rules for determining revenue expenditures

Revenue expenditures There is a difference between “Income” & “Revenue”. Income of any form is called Revenue, whereas, Revenue represents any income or expenditure. Revenue expenditures refer to the amount spent on routine expenses of the business e.g. salaries paid to employees, Rent of office paid etc. As revenue expenditure provides benefits for the current …

## Rules for determining capital expenditure

If an expenditure is incurred for one of the following purposes it will be considered as Capital: 1. Purchase of fixed assets Amount spent to purchase fixed assets on a long term basis. It means they are purchased to earn profit and not for resale. Such expenditure will be considered as Capital Expenditure. Example If …

## Accounting treatment of some special items of Non-trading concerns

There are some special items which are used in the accounts of non-trading concerns or non-profit organizations. which are as under. 1. SUBSCRIPTIONS It is an amount paid by the members of non-trading concerns at regular intervals to keep their membership alive. It is the main and regular source of income of non-profit organizations. The …

Non-Trading Concerns or Non-Profit Organizations have the following features. 1. Non-Profit Motivation: Non-Trading Concerns are not operated with the objectives of earning the profit. Their main objectives are to serve their members or the whole society. 2. Entity: The entity concept is also applied to non-trading concerns, as these organizations do not have owners. 3. Forms …

## Petty Cash Book

Petty Cash Book – Definition Petty Cash Book is maintained to record small expenses such as postage, stationery, telegram. A separate column is allotted for each type of expenditure. The difference between the total of the debit items and that of the ‘total column’ on the credit represents the balance of the petty cash in …

## How to locate errors of a trial balance?

Steps to locate errors of a trial balance The errors of trial balance can be located through taking following steps. Verify the totals of both columns of trial balance. If the errors are not located, then divide the difference carrying disagreement in trial balance by 9, through this procedure two types of errors can be …

## Difference between Journal and Ledger

In this article, we are providing the difference between Journal and Ledger in the form of a comparison chart. Journal Ledger 1 In journal, the transactions are recorded chronologically. In ledger, the transactions are recorded in classified form. 2 The process of entering a transaction in Journal is called “Journalizing”. The process of entering a …

## When is purchases account credited?

Purchases Account will be credited in the following cases. If goods are given as free sample. If goods are stolen. If goods are lost. If goods are given away as charity. If goods are withdrawn by the proprietor for personal use. Normally when goods are going out from the business are termed as sales. But …

Advantages of the double entry system of accounting The advantages of the double entry bookkeeping may be summed up as under: Under this system, each transaction is recorded with its twofold aspect, so the total of one side must be equal to the total of other side. This helps in proving the accuracy of records. Maximum …

## Rules for determining a cash or credit transaction

Often students get confused in deciding about the nature of a transaction i.e. cash or credit. These points can guide those students. Signs of Cash Transaction (i) All transactions in which the word ‘Paid’ is mentioned are termed as “Cash Transactions “e.g. Rent paid, Salaries paid etc. (ii) All transactions in which the words “Cash …

## Accounting concepts and conventions

Accounting concepts These are the basic assumptions or ideas upon which the science of accounting is based. These are fundamentals to accounting practice. These include: Separate Entity Concept Going Concern Concept Money Measurement Concept Cost Concept Dual Aspect Concept Accounting Period Concept Matching Concept Realization concept Accounting Conventions The term “Accounting Conventions” includes those customs and …

## Accounting terms – British vs American

Although Basic Principles of Accounting are almost the same all over the world but the American Accounting practices differ to some extent from the British Accounting practices. Some American terms are given below which are equivalent to British terms: Sr. No. British Terms American Terms 1 Goods Merchandise 2 Stock Inventory 3 Purchases on credit Purchases …

## Credit Note

Definition If a buyer returns goods to the seller bought on credit, the buyer’s account will be credited by the seller and will be informed by the seller through a note. This note is called “Credit Note“.

## Debit Note

Definition If a buyer returns goods to the seller which are bought on credit, the seller’s account must be debited by the buyer and send this information to the seller through a note. This note is known as “Debit Note”.

## What is a source document?

An accounting entry is based on some document. This document is known as source document. Source Documents include the followings: Sales Order Purchase Order Invoices and Credit Notes Petty Cash Voucher Credit Card Sales Voucher

## Stock or inventory

Definition When at the end of a day, month or year some goods remain unsold that will be called as stock or inventory.

## How to define invoice in terms of accounting?

Definition When a seller sells goods to a buyer on credit, he issues a document that is called invoice.

## How to define cash memo?

Definition The document that a seller issued to a buyer while selling goods on cash is called a cash memo.

## Accounting period

What is an accounting period? Definition The length of time for which separate business records (financial statements) are prepared is known as accounting period. Accounting period varies according to the nature of the business. It may consist of three months or six months but normally accounting period consists of one year. Example If a business maintains …

## How to define account in accounting?

Definition A recorded summary of all transactions related to a particular person or thing is called an account. Example Building Account, Plant Account, Salaries Account, Rent Account etc.

## Expense – Definition

Definition The cost required to run a business is called expense. These include the routine expenses like salaries, commission, utility bills, etc. OR An expenditure, whose benefit is finished or enjoyed immediately or within the period of one accounting year, is called expense. OR The dollar amount of the resources used up by the firm …

## Expenditure

Definition When a business spends some amount to acquire an asset, that benefited that business for a long period of time, it is called expenditure. Example Amount spent to purchase Building, Furniture, Plant etc.

## Income or revenue

Definition The amount or value received by a business or organization against goods sold or services rendered to customers or buyers is known as income or revenue. OR “Revenue is the amount of goods or product sold and services rendered during a specific accounting period.” Example Sales. Commission earned etc.

## How to define commission?

Definition It is the remuneration for the services rendered by one person to another. Example Amount paid to a commission agent.

## Liabilities Definition

What are the liabilities? Those obligations or debts which are payable by business to its owner and others are called liabilities. Or Liabilities are the obligations of the enterprise. The amount owed to creditors, employees, the government, or others. Example Creditors, Loan, Capital, etc.

## What are assets? – Definition and examples

Definition Those valuable things which are possessed by the business are called assets. OR Assets are economic resources that are owned by a business and are expected to benefit future operations. OR Properties, things and receivables having certain values owned by the business are called assets. Example The following are some examples of assets. Land, …

## Creditors or accounts payable

Definition The persons or company from whom the goods or services are purchased on credit and to whom the amount is payable are called creditors. Creditors are also termed as Accounts Payable. Example John Sold goods to Harry on credit for \$500, John is a Creditor of Harry.

## Debtors or account receivable

Definition The persons to whom the goods or services have been sold on credit and from whom the amount is receivable are called “Debtors”. Debtors are also termed as Accounts Receivable. Example John Sold goods to Harry on credit for \$500, Harry is a Debtor of John.

## Cash Discount

What is Cash Discount? Definition It is a rebate or allowance from the amount due granted by the creditor to the debtor at the time when the debtor makes payment before the due date. Cash discount is offered to encourage the early payment. If payment is due within a specified period of time after the …

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