Showing posts with label Financial Accounting. Show all posts
Showing posts with label Financial Accounting. Show all posts

Wednesday, August 31, 2016

Explain the limitations of ratio analysis | MYACCOUNTINGINFO.NET

Ratio analysis is a very important technique used in both small and big companies. It provides businessmen the information required to analyze their company’s growth in the industry. Financial ratio analysis is all about comparisons. However, there are few limitations in using ratio analysis.

Incorrect Standard

Ratio analysis benchmarks to the standards set by leaders and not the industry. This might seem different from all that is thought. However, think about the topic. Are you concerned about the performance of your company or the market? Or, do you aim for average results? Everyone wants high performance. But, ratio analysis stresses on average rations and not the best performers.

Heavy Inflation

It is quite interesting to note that most balance sheets are distorted by heavy inflation. The balance sheets are filled with historical data. When you look back at the balance sheets, you will see only past details. These figures will be completely different from the real ones. When you compare information from balance sheets and make your ratios, everything will be distorted.

Mere Numbers

Ratio analysis is all about numbers and not the root cause. There are several ways to calculate ratios. If you don’t find the actual reason behind the numbers, you are doing a useless and meaningless job. And, there is no meaning in playing this useless game with ratios and old industry data. Ratio analysis differs from one industry. You need to compare with all the divisions in mind. This is when ratio analysis represents something important.

Ratio analysis is based on hard-core facts. This means firms can manipulate it to suit their needs. Also, the statement doesn’t represent seasonal fluctuations. Most firms use ratio analysis as a window for amending their financial values and interpretations. So, if firms need better values in their annual report – they can work on the ratio analysis report.

Limited Views


Moving on, ratio analysis gives a very small and limited view of the company. It doesn’t describe the business and its performance completely. There are so many other factors to judge the overall growth and performance of a company. This includes staff relationship, monopoly positions and morale. 

SEE ALSO: 

Debtors Turnover Analysis
Measuring Expected Returns
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Saturday, June 11, 2016

Valuable Information on Accumulated and Depreciation Expense

For any business to succeed its most important key is cash flow, and it is very imperative that cash flow is managed  as well as planned properly. It is very imperative in any business before knowing the difference between depreciation expense and accumulated depreciation to know the actual implication of the two types of depreciation. The amount of reduction that is stated in the income statement is referred to as the depreciation expense. In simple words, it is the sum total that pertains exactly to the period of time assigned to the title of the income statement. These two balances include inference for financial reporting in addition to the taxes.
depreciation expense and accumulated depreciation
What is Accumulated Depreciation?

Accumulated depreciation, on the other hand, is the overall amount of reduction that has been in use by a company's possessions till the date the balance sheet has been prepared. Accumulated depreciation is also the designation of the opposing benefit financial credit that is accounted in the property as well as equipment sector of the balance sheet.

The most fundamental distinction amid depreciation expense and the accumulated depreciation is that one comes into view as expenditure on the income statement, and the other is a competing asset which is described on the balance sheet. Both these depreciation relate to the taxing out of the machinery, equipment or a further asset and it facilitates to affirm an accurate price of the asset. It is very obligatory that when you prepare the tax returns or financial statements to seek advice from with a qualified public accountant.

Fundamental Variation between Depreciation and Accumulated Depreciation

Accumulated depreciation is very imperative for tax purposes and for calculating the assessable gain on a transaction. A business investment in an asset is cut down depending on how much reduction it takes whilst it is owned.  The distinction among the accustomed basis and the profits received decide the loss or gain. It is only in certain circumstances that the amount of earnings that associate to the decrease taken at some stage in the asset’s life may be summoned up or taxed at the advanced normal tax rate in evaluation to the average capital rate.




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Tuesday, May 24, 2016

The Implications And Differences In Liquidity And Solvency Ratios

Solvency and Liquidity, both terms are used to define the financial obligations and the asset conversation ratio of the company, but the tenure varies as per the terms. The goal of the financial ratio analyzers is to estimate the debt and financial obligations management capacity of the company through these reports. Based on these ratios the company can get loans, collect funds through equity etc. Thus for the financial portfolio of  a business these two term are quite important.
Liquidity And Solvency Ratios
What Liquidity ratio implies

The Liquidity ratio is the measure of the company’s capacity to convert its short term obligations into cash assets. The Liquidity ratio always refers to the cash inflow which helps meet smaller short term goals, like paying the immediate bills of the company, and meeting daily day to expenses at the moment.

With this ratio, it is possible to measure how much capable the company is at present, and how much revenue they are generating now so that they can do all transaction in the coming weeks or months. This gives a clear picture of the present, unlike solvency, which draws the picture of the future.

What solvency ratio implies

Solvency ratios are to measure the ability of the company to meet its financial debts and liabilities on a longer time, like a few years or so. This tells about the future of the company, and how it is like to perform in the coming years, and if it has chancing of growing, improving or getting into loss or bankruptcy.


The only similarity between the two is that, they both measure the financial capacity to meet obligations of the company. But the tenure varies as making it short term analyses for liquidity and long term analysis for solvency. The Liquidity ratio is important for the company’s employees, banks and short term lenders, as they would want to know the ability of the business to convert its assets into cash so that it never has difficulty paying. Solvency deals with the future prospects and is important for shareholders, banks and loan giving funds to speculate their money’s safety with the company.


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Tuesday, April 21, 2015

Basic Difference between Public Accounting and Nonpublic Accounting

When you are to pursue your studies in accounting and consider it to be your future work, then you would be left with two options, you have to choose from public accounting and non-public accounting. When you are a public accountant, you would be acting as a third party who would examine the accounts prepared by any concern, while as a non-public accountant, you would be maintained the accounts of any concern on behalf of the concern.
If you know the difference between public accounting and non-public accounting, it would be easy for you to pursue one.   

Public Accounting and Nonpublic Accounting

Training 
Being a student pursuing Public accounting, you would be trained to analyzing the accounting system, collecting various evidences, and testing out if all the assertions are correct. You would be trained of the accounting standards and need to check those.
However, if you take private accounting or non-public accounting as your specialization, you have to learn about the accounting transactions, recording them and maintaining them. Your knowledge would be limited to those areas where you would be accountable.
Certification and Experience
For being pursuing public accounting you would need certification from CPA or certified public accountant, whereas a private accountant would not need any such certifications. Depending upon the range of clients that you have, you experience would vary when you would be pursuing the job of public accountant, whereas as a private accountant your experience would be confined to the type of industry you are working.
Other differences
Apart from the basic differences mentioned, in public accounting, the work space would vary from one client to another. Hence, in some places when you can expect to have good people around you, somewhere things would be tough. In case of private accounting, you would be working with your colleagues in a more stable position where tensions would not be that much.

Again, in public accounting, there would be harsh deadlines that you have to follow, and one have to travel a lot, however, there would be no such requirement in case of private accounting. The exposure is much more in public accounting than in private accounting, thus while choosing one; you need to check out your qualities and skills.
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Thursday, April 9, 2015

Give example of simple balance sheet | MYACCOUNTINGINFO.NET


Financial statements have been described as the final result of outcome of transactions among specific entity, individuals and companies. The transactions could include general cash flows, purchases and sales. Several financial statement types exist, which include simple balance sheet, cash flow statement, owner’s equity change statement and income statement.

Simple Balance Sheet


Balance sheet

Balance sheet is regarded to be a statement, which describes financial position of an entity at a specific point of time, which is usually at the accounting period’s completion. It tends to depict the owners’ equity, liabilities and assets.

Equation of balanced as followed: 

Assets = Owners Equity + Liabilities

The equation’s two sides balance out, the reason why statement is known as Balance Sheet.

  •  Assets: These are economic benefits which would be controlled and acquired by the organization due to past transactions. The fact is that assets are tangible and include accounts receivable, equipment, inventory and cash. Assets could be broken further into long and current term. Current assets like accounts receivable and cash are assets, which could be converted to cash or benefit the organization in a year. Long term assets include inventory, equipment and land are paid off. It benefits the organization over extended time period. Accumulative depreciation is utilized on balance sheets for explaining as to how long term asset costs are ‘used up’ while running a simple or a huge business . Cost is spread across asset life. 

  •  Liabilities: It is termed as amounts that other organizations are owed to, like asset transfer, services to be provided. It also is created of long term and current liabilities. The latter is said to be those which would be paid within a year, including notes payable, accounts payable, payroll taxes and long term debt maturities. Long term debt is paid off across extended time period.

  •  Owner’s equity: It is also known as net assets. It is regarded to be the entrepreneur’s ownership rights after subtracting liabilities. Few examples include additional paid-in capital, retained earnings and common stock. 

Purpose of Balance Sheet

  • Firstly, entrepreneurs make use of balance sheets to simply analyze the capabilities and strengths of the business.

  • Secondly, it describes trends, more specially in accounts payables and receivables area. 

  • Finally, it is examined by investors, vendors and banks for determining credit amount to be provided to the entity.


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Sunday, March 8, 2015

Sample of Accounting Equation | MYACCOUNTINGINFO.NET



Accounting equation is the very basic concept of accounting. Without this, it is impossible to understand the higher, more complex topics. Thus, when you are studying accounting equation, it is best to be proficient and fluent with all concepts and variables of this particular topic. 
Accounting Equation

It is easier to understand when you have samples and examples at hand, to work with. Although this equation is basically simple, it is the foundation upon which the whole world of accounting rests.

The equation in itself is simple. It says that the assets are always equal to the liabilities. The liabilities are that of the owner’s and also of the creditors. This equation holds true for every single transaction, without exceptions or conditions.

Explanation of the Accounting Equation

The equation in itself is not very difficult to understand. It says that the total assets equal the total liabilities. As mentioned above, liabilities can be that of the owner’s or of the creditor’s. Thus, it can also be said that the total assets equal the total outside liabilities, along with the total owner’s liabilities. Outside liabilities is another name for creditor’s liabilities. Hence, it can also be said that total assets are equal to total creditor’s equity along with the total owner’s liability. Thus, as a conclusion, it can be said that total asset equal the total creditor’s equity, along with the owner’s capital and the total income from which the total expenses must be reduced.
Total assets = Total creditor’s equity + (owner’s capital + total incomes – total expenses)

Conclusion of the Equation

When you are working out the samples of the accounting equation, it becomes evident that there are some set conclusions and results that you are bound to see. Every single transaction results or concludes in an equal effect to asset and liabilities, plus the capital. The initial balance with which you start is equal and so are the changes that arise from the equation. By the rules of geometry, the equation can also be written as Liabilities = Assets – Capital, as was established in the equation mentioned above, or even Capital = Assets - Liabilities. 

SEE ALSO: 
The accounting equation



 
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Sunday, March 1, 2015

Periodic Inventory System

The periodic inventory system is mainly used by business that sell relatively inexpensive merchandise and that are not yet using any computerized scanning systems method in analyzing the cost of good sold of the merchandise. A characteristic of the periodic inventory system is that no entries are made to the inventory account as the merchandise was bought and later to be sold. 
Periodic Inventory System
When goods are purchased, separate account should be made, (ex : purchases, purchases discounts, purchases allowances and returns, and transportation in) is used to accumulate data on the net cost of the purchases only its accounting period. However, when the inventory is counted, transaction entries will be made to the inventory account to establish its proper accounting balance. 
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Wednesday, February 4, 2015

What are the Accounting Concepts?

Accounting is the most important function of every size business as it is based on certain accounting concepts and values and is different from book keeping. In fact, accounting is the process of dealing out with the bookkeeping statistics and obtaining some significant information from it.


What are Accounting concepts?


Accounting concepts are a set of wide principles which have been formulated to provide a fundamental outline or agenda for financial reporting. Basically, financial reporting involves certain specialized judgments’ by skilled accountants and these principles and concepts make sure that the users are not deluded by the acceptance of accounting policies and performance which go against the will of the accountancy profession. Therefore, the accountants must consider whether the accounting treatments are reliable with the accounting concepts and principles or not.

Accounting Concepts
Following are the concepts and principles of Accounting

  • Reliability
The information is reliable when the accountant or the user depends upon it to be perfect only if it loyally represents information that it claims to present. Well, certain omissions reduce the dependability of information in the financial statements.

  • Relevance
Information need to be appropriate to the decision making needs of the accountant as it helps the users in forecasting the future trends of the business or to confirm or correct any of the past predictions. 

  • Neutrality
Information contained in the financial reports need to be free from partiality and should reflect a balanced view of the affairs of the organization without challenging to present them in a preferential or special way. It must be neutral without any partiality. 
 
  • Faithful Representation
There needs to be trustworthy in presenting the financial statements with honest transactions which occur all during the period. This accounting concept is known as Farm or Substance over.

  • Prudence
Here there is need of financial statement preparation with the use of professional help in the adoption of accountancy estimates and policies. It requires that the financial accountants must work out a degree of caution in the acceptance of policies and certain approximation of income and assets.

  • Completeness
Depending on the information present in the financial report is achieved only when complete financial information is presented to the concerned business and other financial decisions making needs of the accountant. 

Consequently, information needs to be complete in all respects without any partial view.


See also:
Accounting Basics
About Accounting
Accounting assumptions and characteristics
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