Classification of assets and liabilities

What are assets and liabilities? A balance sheet is a statement that presents a financial position of an enterprise, it is necessary that it shows the assets and liabilities based on their characteristic features. If assets are the property and possessions of the business, liabilities are the legal obligations of the business, i.e., the claim …

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Financial Reporting

What does Financial Reporting mean? Financial reporting has a broader scope than just reporting information through income statements, balance sheets, authoritative pronouncements, and regulatory rules. It means reporting consists of not only monetary information but also non-monetary information. Financial reporting does not mean reporting information only through income statement (profit and loss account) and balance sheet. …

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Inventory Control System

What is an inventory control system? Inventory Control system is critical to business enterprise because of the importance of the inventory which is a major asset. It is through inventory that most of the operating activities take place. Therefore, there is a need to establish better control systems to safeguard the inventory, i.e., to prevent …

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Cash accounting definition

What is Cash Accounting? Cash Accounting is the system of accounting for receipts and payments in cash or through bank accounts – effectively a part of a normal accounting system.

Computerized Accounting

Introduction Before explaining computerized accounting, let us discuss how an accounting system can be represented: The purpose of accounting is to provide information used in decision making. Accounting may be viewed as a system (a process) that converts data into useful information. The information processes include recording, maintaining and reporting. Every business has numerous processes. …

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Adjusting Entry for Accrued Income

What is Accrued Income? Accrued income is the income earned but not received during the accounting period. For example, interest on deposits, rent, commission, discount. Since such incomes of the current year, they should be credited to the income statement (trading and profit and loss account) and accrued income account should be debited, which appear …

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Accounting Conventions

What are Accounting Conventions? Accounting conventions are ‘general rules of practice’ formulated out of customs, usages and traditions as guiding principles for accounting. The accounting follows these rules on a conviction that the accounting practices should be consistent, the financial statements should be prepared on a conservative basis to mitigate the risk of loss and …

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Economic Value Added (EVA) Concept

What is Economic Value Added (EVA) Concept? Economic Value Added (EVA) is a new concept that is used by companies and their consultants as a performance measure. In generic terms ‘value-added’ refers to the additional or incremental value created by an activity or business venture. Economic Value Added (EVA), or economic rent, is a widely …

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Creative Accounting

What is meant by Creative Accounting? Creative accounting or Aggressive accounting is a method adapted to manipulate the financial numbers, usually, within the letters of the law and accounting standards, but very much against their spirit and certainly not providing the true and fair view of an enterprise that accounts are supposed to project. Areas …

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Window Dressing

What is Window Dressing? ‘Window dressing is the adaptation of the rules to present financial statements in a better light’. In this sense, it is the ability of the enterprise to make decisions which affect their apparent performance in their financial statements. Therefore, ‘window dressing is making a situation appear better than it actually is’. …

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Enterprise Value

What is enterprise value (EV)? Enterprise value (EV) is an economic measure reflecting the market value of the whole business. It is also called ‘Entity Value’ or ‘Firm Value’. It is the sum of claims of all the security holders, i.e., debt holders, preference shareholders, minority shareholders, common equity shareholders and others. Enterprise value is …

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Carrying Value or Book Value

What is Carrying Value? In accounting ‘Carrying Value or Book Value‘ is the value of an asset according to its balance sheet. In other words, it is the value at which an asset is shown (carried) on the balance sheet. For assets, the value is based on the original cost of the asset less any …

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Indifference Analysis

What is Indifference Analysis? It is through ‘debt-equity mix’ that financing decision are made to increase EPS of a company, EBIT-EPS analysis involves determining the ‘crossover’ or ‘indifference’ EBIT at which the EPS is the same between two financing alternatives. In other words, the use of a financial break-even level, and the return from alternative …

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Combined Leverage

What is Combined Leverage (CL)? Combined leverage (OL + FL) is expected to take care of the total risk of the company, i.e., the risk arising out of operating leverage and the risk arising out of financial leverage and their net effect on the EPS. As we know already, operating leverage has its effects on …

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Financial Leverage

What is Financial Leverage? If operating leverage results from the existence of operating expenses in the enterprise’s income stream, then financial leverage results from the presence of fixed financial charges in the firm’s income stream. In fact, financial leverage relates to financing activities, i.e., the cost of raising funds from different sources carrying fixed charges …

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Operating Leverage

What is Operating Leverage? The leverage associated with investment activities or asset acquisition is called operating leverage. In fact, the relationship between sales revenue and EBIT is termed as operating leverage because when the sales level increases or decreases, EBIT also changes. That means, the operating leverage measure the relationship between sales revenue and EBIT. …

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What is leverage?

Definition of Leverage Leverage refers to employment of an asset or source of funds for which the enterprise has to pay a fixed cost or fixed return. In other words, it refers to a relationship between two variables. Such variables may be cost, output, sales, revenue, earnings before interest and taxes (EBIT), earnings per share …

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DuPont Analysis

DuPont Analysis – A Significant Measure For Investment Decisions The proponents of DuPont analysis believe that ‘measuring assets at ‘ gross value’ removes the incentive to avoid investing in new assets. Explanation During 1970s DuPont Corporation used a performance measurement different from the common measurement applied by business enterprises for measuring their investment projects. The …

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Trend Analysis of Financial Statements

What is Trend Analysis of Financial Statements? Trend analysis of financial statements helps the users of information to observe the percentage changes over time of the selected data. For example, it helps the users to observe whether the net profit of the enterprise is increasing, decreasing or stable, or there are ups and downs over …

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Accounting for Sales Tax

What is the Sales Tax? The tax, called a sales tax, is collected from the customer by the seller and later paid to the appropriate tax official in the state government. Explanation Most state governments and some county and city governments in a country levy a tax on the retail price of goods and services …

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Cash Flow from Investing Activities

What Is Cash flow From Investing Activities? Cash flow from investing activities typically refers to cash generated in a company by making or selling investments and/or earning from it. Cash flow from investing activities is a major component of cash flow statement which is one of the four annual financial statements that are prepared by …

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Accounts Payable Ledger

What is Accounts Payable Ledger? Accounts Payable Ledger is a subsidiary ledger that lists the individual accounts of creditors; also referred to as the creditors’ ledger. What is a Subsidiary Ledger? A subsidiary ledger is a ledger that contains only one type of account, such as the accounts payable ledger. Explanation When a business has …

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Statement of changes in working capital

What is the statement of changes in working capital? Statement of changes in working capital is prepared by recording the changes in current assets and current liabilities during the accounting period. The working capital during the accounting period is bound to change due to increase or decrease in the current assets and current liabilities. Purpose …

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Funds From Operations (FFO)

What is Fund From Operations (FFO)? Funds from operations is the difference between the inflow of funds in the form of expenses. The funds from operations are the largest sources of funds which are used for repayment of loans, purchase of assets, payment of dividends, taxes, etc. Explanation The controversial point here is that an …

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Cash Flow Statement Practical Problems and Solutions

Cash flow statement practical problems and solutions are prepared by our professional accounting team for the students to get clear their concepts and prepare for their exams and interviews. Problem No. 1 From the summarized cash book of Zenith Ltd. calculate net cash flow from operating activities. Zenith Ltd.  Summarized Cash Book Particulars $ Particulars …

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Company Final Acounts Practical Problems and Solutions

We have prepared Company Final Accounts Practical Problems and Solution paper for the ease of students to understand the concept of Final Accounts more clearly. Problem No. 1 For the year ended 31st December 2019 the profit of Krebs Ltd. before changing depreciation on fixed assets and Managerial commission amounted to $300,000. Depreciation for the …

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Underwriting of Shares Questions and Answers

Underwriting of Shares Question No. 1 (Partial Underwriting) A Company issued 100,000 shares of $100 each. These shares were underwritten as follows: X—-30,000 shares and Y—– 50,000 shares. The public applied for 70,000 shares. Determine the liability of X, Y and the Company. Answer Marked applications are not given in the problem. Therefore, applications be …

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Issue and redemption of debentures practical problems and solutions

Issue of Debentures Journal Entries Practical Problem No. 1 A company issued 1,000 10% debentures of $100 each at par, payable $40 on application, and the balance on allotment. The public applied for 800 debentures. These applications were accepted. All money was received. Give Journal entries. Solution Issue of Debentures for Consideration other than Cash …

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Redemption of Preference Shares Practical Problem and Solutions

Redemption of Preference Shares at Premium Practical Problem No.1 A Limited Company issued on 1st July 2000, 10,000 redeemable preference shares of $10 each. Such shares wee redeemable at a premium of 10%. Two-fifths of this issue was redeemed out of profits on 10th January 2004. On 20th January 2004, the Company issued 20,000 equity …

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Acquisition of a Business

What does the acquisition of a business mean? While dealing with partnership accounts, we have seen that a sole proprietorship or a partnership firm, doing business more or less on the same line, may be converted into a firm in order to get the advantage of securing the economy and to avoid competition. Similarly, a …

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Cash Account

What Does Cash Account Mean? The cash account is first explained as part of the ledger system. Some students may already be familiar with the simple recording of receipts and payments of money. The main rule for all cash accounts is that you debit cash coming in and credit cash paid out. Setting up a …

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Source Documents

What are the source documents in accounting? In order to complete the accounting records, a bookkeeper needs to have source documents to work from which show what the financial effect of the transactions is. Types of Source Documents The source documents themselves are introduced here. They come in many different shapes and sizes, but they …

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Statement of Financial Position

What is a statement of financial position? – Definition A Statement of Financial Position is a snapshot in time looking always at past events, i.e. transactions that have already taken place. An accounting period of 12 months is generally used for this type of financial reporting. Users of this type of information include management, owners, …

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Accrual Concept of Accounting

What does the accrual concept of accounting mean? – Definition The accrual concept of accounting is based on the economic premise that profits are best measured by changes in owner’s equity between the beginning and the end of any accounting period. Explanation As we know in relation to the accounting equivalence concept, when sales of …

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Corporation

What is a Corporation? – Definition A corporation is a separate body, authorized by law, owned by one or more persons and having its own rights, privileges, and obligations distinct from those of its owner(s). In effect, under the Constitution, a corporation is a separate legal entity with a continuous life that has rights and …

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Accounting for leases

How to define a lease? A lease is a contractual agreement between the lessor (the owner of the property) and the lessee (the user of property) that gives the lessee the right to use the lessor’s property for a specific period of time in exchange for stipulated cash payments. Accounting for leases has long been …

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Mortgages Payable

What is meant by a Mortgage Payable? A mortgage is a promissory note secured by an asset whose title is pledged to the lender.  It is a form of long-term liability. Mortgages generally are payable in equal installments consisting of interest and principal. Accounting procedures To demonstrate the accounting procedures, assume that on January 2, …

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Amortizing the bonds discount or premium

The straight-line method or the effective-interest method can be used to amortize the bond discount or premium. As we noted, if there are material differences between the two methods, the effective-interest method should be used. However, for ease of illustration, we will use the straight-line method in this article. Regardless of which method is used, …

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Double Entry Bookkeeping MCQs Quiz

Double Entry Bookkeeping MCQs will be helpful for the students of accounting and finance to prepare themselves for their exams and interviews. If you are feeling hard to answer the questions, we strongly recommend you to read our “Double Entry Bookkeeping” sections thoroughly. Let’s Start the MCQs test below: