Explanations

This part comprises clear explanations of assorted financial and managerial accounting subjects. We’ve tried to clarify every accounting topic in simple language. A number of examples have been given to make the idea simply comprehensible for college students, managers and different enterprise professionals. You’ll be able to enter this part from any web page of this website by clicking on the ‘explanation’ tab offered within the top menu.

 

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Sinking Fund Method of Assets Depreciation

This method is known by different names such as Redemption Fund Method, Amortization Fund Method, Sinking Fund Method of Assets Depreciation. It requires the depreciation on the asset to be provided through a depreciation or Sinking Fund brought into being by accumulating thereon the amount of depreciation at a flat rate charged to the profit …

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Capital and revenue expenditures multiple choice questions (MCQs)

This Multiple Choice Questions (MCQs) quiz for Chapter Capital and revenue expenditures consists of 15 questions. Each question has 4 answers from which you need to choose the correct one. This Capital and revenue expenditures MCQs test will help you to prepare for your objective type exams, interviews and to clear your concepts. If you …

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Bank reconciliation statement MCQs quiz

Students can take the bank reconciliation statement multiple-choice questions (MCQs) quiz that we have prepared to test their knowledge about BRS concepts. This quiz may be helpful for the students to prepare them for their objective quiz and interviews. The BRS MCQs Test is consists of 10 Questions, every question has four options as answer …

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Limitations of financial accounting

What is Financial Accounting? Financial accounting, which is historical in nature, is mainly concerned with the recording of day-to-day business transactions. It is simply a post-mortem of the past events. Under financial accounting, business transactions are first recorded in the books of original entry, then classified into ledger and finally summarised by preparing Trial Balance. …

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Zero-based Budgeting (ZBB)

What is Zero-based Budgeting? – Definition In the Zero-based budgeting approach, all organizational activities are initially set to zero. Zero-based Budgeting is the newest approach to Budgetary Planning and Control. It was successfully developed and implemented in the seventies by Peter A. Phyrr. The approach became further popular when President Jimmy Carter, in 1979, required its use …

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Budgeted Statement of Financial Position (Balance Sheet)

Definition The budgeted statement of financial position depends upon the various individual budgets which have been prepared. The budgeted income statement and the cash inflow or outflow position must be known clearly before the budgeted statement of financial position can be prepared. Also, all the other transactions during the year as shown in the period budgets must …

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Cash Budget

Cash Budget – Definition The cash budget is an estimate of cash receipt and its payment during a future period of time. It deals with other budgets such as materials, labor, overheads and research and development. The cash budget is a statement of receipt and payment of cash during a specific time. It is a …

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Selling Expenses Budget

The selling expense budget is the responsibility of the sales department and includes selling expenses like sales salaries, sales commissions, advertising, sales office rent, shipping expenses, sale supplies etc. The selling expenses may be both fixed and variable.

Production Budget

Production Budget – Definition A manufacturing firm develops a production budget, which shows the number of units of products to be manufactured. This is based on forecast sales, adjusted for planned inventory levels. Based on the production budget, a manufacturer develops cost budgets for the direct materials, direct labor and overhead that will be required …

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Sales Budget

What is a Sales Budget? The starting point for the preparation of all other budgets is the Sales Budget. Sales predictions are made which are based on an analysis of past sales and an estimate of future economic prospects. Sales from past years are usually broken down by product line, regions, and sales-people. Management tries …

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What are cost variances?

Definition A variance exists when standard costs differ from actual costs. The difference between standard cost and actual cost is called a Cost Variance. Explanation Cost variances for Material, Labour and Overhead result from a variety of different causes. Hence, in evaluating the efficiency of a manufacturing organization, these variances should be measured and analyzed. …

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Overhead variances

Controlling overhead costs is more difficult and complex than controlling direct materials and direct labor costs because responsibility for overhead costs is difficult to pin down. The total overhead cost variance can be sub-divided into a budget or spending variance and an efficiency variance. The budget or spending variance is the difference between the budget and the …

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Direct Labor Variances

Like direct material standards, direct labor standards also consist of two components, quantity and price. The direct labor quantity standard is usually referred to as labor efficiency variance while the price standard is referred to as labor rate variance. Formula Labour Cost Variance = (Standard hours for Actual output x Standard Rate) – (Actual Hours …

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Material Variances

Explanation Material variances include two factors: (1) the quantity of materials that should have been used to produce one unit of output and (2) the prices that should have been paid in acquiring this quantity of materials. Hence the total material cost variance may result from difference between standard and actual quantities of materials used …

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Variance analysis

Standard costs (SC) are an indication of what costs should be for a unit of production. The difference between actual cost (AC) and standard cost (SC) is called a variance. Variances can be analyzed to determine why they exist and this analysis can provide a basis for taking corrective action. If the actual cost is …

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Standard Costing

Definition of Standard Costing “Standard costing is a system of accounting which makes use of predetermined standard costs for direct material direct labour and factory overhead.” Standard Costing is the second technique of cost control (the first being the Budgetary Control) and is one of the most recently developed refinements of cost accounting. The standard …

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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 …

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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 …

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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 …

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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 …

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Trading Account

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: …

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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 …

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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 …

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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 …

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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 …

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