Download - Accounting for manager
ACCOUNTING FOR MANAGERBOOK KEEPING
• Recording of business transactions which take place during
Accounting Period
• Accounting Period-Commences on 1st April and Ends
on 31st March every year unless otherwise specifically mentioned
• Guiding and controlling the business activities
• To analyze and interpret the financial results to the management,
so that management can understand what is happening to the
business and what is going to happen in future
•What must happen in the interest of the business concern
• Accounting to furnish information to the needy that is to the
management, investors, government agencies etc
• Accounting consists of financial accounting, cost accounting
managerial accounting
• Financial accounting provides information to external users
• External parties are investors, prospective investors, creditors
bankers, government agencies etc
• Accounting is basically an information system
• It is involved in the process of converting inputs into outputs
• It processes business transactions (inputs) to produce the desired
reports, statements etc (outputs)
• Business transaction- dealing between two or more parties
that is seller and buyer
• Transaction means business transaction expressed in monetary
terms or capable of expressing in monetary terms
• Internal users means proprietor or partners or board of directors
• Functional Managers such as
Purchase Manager
Production Manager
Marketing Manager or Sales Manager
Finance Manager/Financial controller
• External parties are two types
1. Users with direct financial stake or interest
2. Users with indirect financial stake or interest
1. users with direct financial stake or interest are:
• Shareholders present or prospective
•Debenture holders present or prospective
• Suppliers of input
• Lending financial institutions
• Employees
2. Users with indirect financial stake or interest:
• Customers and consumer groups
•Tax authorities
•Regulatory bodies
• Financial analysts and advisors
• Brokers and other financial intermediaries
•Trade unions
•Press
• General public
Above persons/institutions/tax authorities/regulatory bodies need
accounting information from their business concerns for various
reasons and purposes
• Basically they need information to take appropriate decisions
• both individual and institutional investors consists of shareholders
• debenture holders etc need information
1. To asses the risk involved and return expected in relation to their
investment
2. Whether they should continue to invest in the business or dispose of or
3. Invest in financial instruments which promise higher return with lower risk
4. Whether the business is capable of paying dividends/interest regularly
5. Whether there is any scope of capital appreciation
The above said groups needs detailed information such as
1) Rate of growth in sales, volumes, etc
2) Profit-gross profit margin, operating profit, net profit, contribution,
divisible
profits etc
3) Investment –amount of capital invested, cost price of assets owned
4) return on investment (ROI)
5) Earnings per share
6) Market price of the equity (Ordinary shares )
7) Financial institution (which lend money to the business organizations
(banks and other institutions)
require information from the borrowing organization to know
-whether it is capable of paying the interest regularly
- whether it is capable of paying installment principal regularly
So they need relevant accounting information to know liquidity position
of the borrowing unit that is short term liquidity and long term liquidity
• Suppliers of the different inputs who supply inputs on credit information from buying organization to evaluate short term liquidity of the organization so that the business is able to pay their dues when it falls dues • Employees and trade unions require information from their organization to evaluate the stability and continuing profitability of the organization interested in assessing the ability of the employer organization
pay them periodically (like salaries, bonus, etc promotional prospects capable of maintaining pension fund and retirement benefits
• Government is providing number of facilities to the business units (such as subsidy concessions of power, water, etc), hence it is the responsibility of the government to protest the interest of all sections of the society• Government wants to know whether business enterprises are remitting various taxes duties etc to the exchequer For the above said reasons government and its agencies require accounting information
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP)• Accounting principles are in the form of guidelines and or rules which are used as standards for recording business transactions in the books of accounts and their fair presentation in the Financial statements.
• Financial Statement means:1. Trading and Profit and Loss Account for the accounting period ended on (in case of trading organizations –buying and selling Manufacturing and profit and loss account (in case of manufacturing units2. Balance Sheet as at 31/03/20113. Cash flow statements for the period4. Accounting policies5. Accounting Standards6. Notes forming part of accounts
• ACCOUNTING ASSUMPTIONS
1. Money Measurement : Record of transaction is made only those events which can be measured and expressed in terms of money . Transactions are recorded value of money (at the time the transactions are recorded)2. Going Concern : Going concern concept means that a business concern that a business concern will continue to operate for a fairly long period, from this point of view its business transactions are recorded in the books of accounts
3. : The Business Entity: Every business undertaking whether it is a sole trading concern or a partnership firm or a limited company is considered as different entity from the person who owns it , hence all the transactions are recorded in the
business concerns and not in the books of owners.
• ACCOUNTING CONCEPTS
1. Accounting Period Concept: According to going concern assumption a business concern likely to continue for an indefinitely long period of time, for the purpose of
reporting to outsiders like creditors, investors, banks, financial institutions, etc financial performance and financial position is required to be ascertained yearly.
2. Objectivity Concept: This concept specifies that all entries of business transactions which take place during accounting period should be supported by the evidences
such as invoices (for sales), bills/invoices (for purchases), documents, deeds, vouchers, which are objective and subject to verification.
3. Dual-Aspect Concept: For each transactions there are two effects one Debit the other is credit. Evert business transaction involves dual or double aspects of equal value for example if an asset is increased corresponding increase in liability or capital
In the books of any business concern at any moment of time , the following equation holds good
ASSETS=LIABILITIES+CAPITAL ORASSETS-CAPITAL=LIABILITIES
• ACCOUNTING PRINCIPLES
1. Cost Principle : An asset acquired by a business concern is recorded in the books of accounts at cost(Historical Cost) that is the value actually paid for acquiring the asset.
2. Accrual Principle: The accrual principle suggests that when a transaction has been entered into its consequences will certainly follow. So all transactions must be recorded in the books of accounts whether paid or not. It implies that “revenues accrue in that year in which they are earned, and not in the year in which year they are actually received. Similarly expenses will accrue in the year in which they are incurred and not in the year in which they are actually paid.
3. Matching Principle: Matching principle has been evolved to help a concern to know its net profit or net loss and the details of all revenues and expenses. To know the net profit or net loss and details of all revenues and expenses every business concern prepares and presents a statement or an account known as Income statement or Profit and Loss Account for the account period. Profit is the result of two factors namely i) revenues and ii) expenses and losses The revenues increases the profit and the expenses and losses decreases the profit. For the determination of profit or loss the two factors are matched and result balance is taken as the net profit or net loss. Matching concept provides a sound basis namely accrual basis for the ascertainment of the correct profit or loss of the business for the accounting period.
4. Realization Principle: According to the realization principle, is considered as being earned on the date on which it is realized ( it is not relevant whether cash is received or not) Revenue is considered as being realized:
• Not when goods are manufactured • Or order is received • But on the date on which goods or services are transferred to the
customer and the customer is legally liable to pay for them
Advantages of this principle • Revenue recognition principle is much of significance for the preparation of Income Statement or Profit and Loss Account • This principle has contributed to the accrual basis of accounting (that means income or expense is to be recorded on the date on which goods or services are transferred/expense is incurred, whether the amount is received or not in the case of income, similarly whether expense is paid or not).• This principle gives objectivity and definiteness to revenue recognition.
ACCOUNTING CONVENTIONS
1.Conservatism: In accounting records and in the financial statements of a business concern all the anticipated losses (example few debts may become bad), risks and uncertainties should be provided but expected incomes should be ignored even the income sure to arise, to put in simple words
Anticipate losses but don’t anticipate losses Based on this convention that provision for doubtful debts, provision for discount on debtors, provision for fluctuation in the prices of investment etc are provided in the books of accounts of a business concern.IT SHOULD NEITHER SHOW ROSY PICTURE BY WINDOW DRESSING NOR WORSEPICTURE BY CREATING SECRET RESERVES
ACCOUNTING RULES1. Materiality Rule: • In accounting a detailed record is made record of business transactions only those business transactions which are Material• No detailed record is made of transactions which are trivial (not important)• In the case of such trivial transactions only a broad view is taken • Minute(small) details of such transactions is not justified by the usefulness of the results• Pencil is required for office, someone will be using the pencil in fact pencil is an asset by using the pencil it will depreciate day by day, we can calculate such depreciation but the cost of such an effort is will be very high hence pencil is taken as used at the time it purchased• The logic behind the materiality rule is that only material and significant transactions are recorded • Materiality is a relative term because what is material to one the same may not be material to other.
For example an employee getting a salary of Rs 5,000/- per month if loses Rs 100 it is a material amount lost for him the same is not for a millionaire because it is not material amount for him.
For instance cost of small items of tools are material(important) for a small repair workshop but they are not material for a ship builder
2. Disclosure Rule:
• Disclosure means all material facts must be disclosed in the financial statements• For example in the case of sundry debtors (or receivables) the disclosure is as below: Total Sundry Debtors Rs 5,000 Debtors considered to be good 4,500 Debtors considered to be doubtful 500
Debtors outstanding less than six months Rs 3,000 Debtors outstanding for more than six months 2,000
• The idea behind this rule is that the financial statements are essentially meant for for external users, on the basis of information external users make take decisions
Classification of Commonly used
Accounts
Assets Accounts
Liability Accounts
Owners’ Accounts
Expenses Accounts
Revenue Accounts
Land, Building, Machinery, Trade Debtors, cash, Pre-paid expensesBills Receivables
Long term liabilities, trade creditors, receipts in advance, bills payable
Capital/share capital, reserves & surplus, unpaid dividends, drawings
Wages, salaries, rent, telephone expenses, interest on loans, etc
Sales, interest on investment, profit on sale of asset, other income, etc
KINDS OF ACCOUNTS
KINDS OR
TYPES OF ACCOUNTS
PERSONAL ACCOUNTS
IMPERSONAL ACCOUNTS
PERSONAL ACCOUNTS
IMPERSONAL ACCOUNTS
Natural Personal Accounts
Artificial Personal Accounts
Representative Personal Accounts
REAL ASSET OR PROPERTY ACCOUNT
NOMINAL OR FICTICIOUS ACCOUNTS
Rama’s A/c Krishna’s A/c
HMT’s A/c KSFC’s A/c
Outstanding Expenses A/c
Pre-paid Expenses A/c
Cash A/c Goods A/c Machinery A/c
Wages A/c Rent A/c Sales A/c
Discount Received A/c
Sl.No. KIND OF ACCOUNT
DEBIT /”Dr” CREDIT/”Cr”
1 PERSONAL ACCOUNTS
Receiver of the benefit
Giver of the benefit
2 REAL ACCOUNTS
What comes in What goes out
3 NOMINAL ACCOUNTS
Expenses & Losses
Incomes & Gains
• NATURAL PERSONAL ACCOUNTS: These accounts are relating to natural persons natural person means a person who is having head, ears, nose, hands etc
• ARTIFICIAL PERSONAL ACCOUNTS: Accounts of business concerns and institutions which are recognized as persons in business society or by law example Bank A/c Co-operative Society A/c, Veerasaiva College A/c
• REPRESENTATIVE PERSONAL ACCOUNTS: They represent the amount owed to, or by certain persons (that is the persons behind these transactions)
• REAL ACCOUNTS: Real accounts are those accounts which we can touch, see, sense or feel
• NOMINAL ACCOUNTS: Nominal accounts are those accounts which we can not touch, see, sense or feel
• ACCOUNT It is summarized transactions which have taken place during a particular period
• FORMAT OF ACCOUNT An account may be horizontal or vertical
• EXAMPLE OF HORIZONTAL ACCOUNT
Dr RAMA’S A/c Cr
• DEBIT Means debit side of the account or left hand side of the account
• CREDIT Means credit side of the account or right hand side of the account
• JOURNAL Journal is derived from a French word Jour which denotes a day, it is also called Day Book where business transactions of a particular day are recorded in this book• This is also called Book of Original Entry or Prime Entry
• Dr Means an account is debited
• Cr Means an account is credited
FOR EVERY BUSINESS TRANSACTION HAS TWO EFFECTS ONE IS “DEBIT” THE OTHER IS “CREDIT”
FOR EVERY BUSINESS TRANSACTIONS TWO ACCOUTS ARE INVOLVED ONE ACCOUNT IS DEBITED AND THE OTHER ACCOUNT IS CREDITED WITH THE SAME AMOUNT
• Dr denotes an Account is debited• Cr denotes an Account is credited For example Rama’s Account is debited and Cash Account is credited
• By denotes an Account is debited
• To denotes an Account is credited
Rama’s A/c
To Cash A/c
Cash A/c
By Rama’s A/c
• EXAMPLE OF VERTICLE FORM OF ACCOUNT
• Paid cash to Rama Rs 2,00,000 on 01/03/2012
RAMA’S A/c
• L.F. Means ledger folio where the debit and credit are posted in their respective ledgers
DATE PARTICULARS L.F. DEBIT (Rs) CREDIT (Rs)
01/03/2012 To Cash A/c 15 2,00,000
JOURNALISATION OF TRANSACTIONS• An attempt is made to analyze few business transactions
• Rama commenced business with Rs 2 lacs cash
• The two accounts involved are 1. Rama’s Capital A/c and 2. Cash A/c
Dr Cash A/c Cr
To Rama’s Capital A/c 2,00,000
Rama’s Capital A/c
By Cash A/c 2,00,000
Date L.F. PARTICULARS DEBIT(Rs) CREDIT(Rs)
01/03/2012 1 By Cash A/c 2,00,000
2 To Rama’s Capital A/c 2,00,000
(Capital introduced by Rama)
JOURNAL
• To/By are irrelevant now a days they need not be written
• If left hand side of the account is written means the account is debited
• Similarly if right hand side of the account is written means the account is credited
NARRATION Means brief description of the transaction
1) Journalize the following transactions in the books of Mr. Anwar 20121. January 1 Anwar commenced business with cash Rs 5,0002. 3 Paid into Bank Rs 1,0003. 4 Bought goods for cash Rs 1,0004. 5 Bought office furniture for cash Rs 5005. 6 Sold goods for cash Rs 6006. 7 Sold goods to Murthy on credit Rs 4007. 8 Bought goods from Narayan on credit Rs 5008. 10 Paid rent to land lord Rs 3009. 12 Paid salary to manager Rs 10010. 15 Sold furniture for cash Rs 20011. 16 Received commission from Suresh Rs 2012. 18 Bought goods Rs 40013. 20 Sold goods Rs 50014. 22 Sold goods to Shenoy Rs 30015. 23 Bought goods from Ramesh Rs 20016. 24 Bought goods from Kamath for cash Rs 50017. 25 Paid carriage Rs 5018. 26 Sold goods to Rajesh for cash Rs 60019. 27 Paid postage Rs 3020. 31 Withdrew cash from office for personal use Rs 200
Date Particulars Debit (Rs) Credit (Rs)01/01/2012 Cash Account 5,000
Anwar’s Capital Account 5,000
(Cash introduced by the proprietor)
03/01/2012 Bank Account 1,000
Cash Account 1,000
(Cash paid into Bank)
04/01/2012 Purchase Account 1,000
Cash Account 1,000
(Goods purchased for cash)
05/01/2012 Office Furniture Account 500
Cash Account 500
(Office furniture bought for cash)
Date Particulars Debit (Rs) Credit (Rs)
06/01/2012 Murthy’s Account 400
Sales Account 400
(Goods sold to Murthy on credit)
08/01/201 Purchases Account 500
Narayan’s Account 500
(Goods purchased from Narayan on credit)
10/01/2012 Rent Account 300
Cash Account 300
(Rent paid)
Date Particulars Debit (Rs) Credit (Rs)
12/01/2012 Salaries Account 100
Cash Account 100
(Salary paid)
15/01/2012 Cash Account 200
Furniture Account 200
(Furniture sold for cash)
16/01/2012 Cash Account 20
Commission Account 20
(Commission received)
18/01/2012 Purchase Account 400
Cash Account 400
(Goods purchased for cash)
20/01/2012 Cash Account 500
Sales Account 500
(Goods sold for cash)
Date Particulars Debit (Rs) Credit (Rs)
22/01/2012 Shenoy’s Account 300
Sales Account 300
(Goods sold Shenoy on credit)
23/01/2012 Purchases Account 200
Ramesh’s Account 200
(Goods purchased from Ramesh on credit)
24/01/2012 Purchases Account 500
Cash Account 500
(Goods purchased for cash)
25/01/2012 Carriage Account 50
Cash Account 50
(Cash paid for carriage)
Date Particulars Debit (Rs) Credit (Rs)
26/01/2012 Cash Account 600
Sales Account 600
(Goods sold for cash)
27/01/2012 Postage Account 30
Cash Account 30
(Cash paid for postage)
31/01/2012 Anwar’s Drawings Account 200
Cash Account 200
(Cash withdrawn for personal use of proprietor)
Journalize the following transactions and post them to the various ledgerAccounts and prepare the trial balance as on 31st January 20122012, January. 1 Rao commence business with 5,000 2 Purchased goods for cash 2,500 3 Bought office furniture for cash 500 4 Paid for postages 10 5 Purchased goods from Rajkumar 2,000 7 Sold goods for cash 150 8 Purchased goods from Rahim 400 9 Sold goods to Suresh 40010 Sold goods to Nayak 30011 Purchased goods for cash 35013 Received cash from Nayak 25015 Paid cash to Rahim 40017 Returned goods to Rajkumar 20020 Suresh returned goods 5020 Paid salaries 15025 Sold goods for cash 50026 Rao withdrew for personal use 80027 Paid for stationery 10028 Paid rent 22531 Received commission 50
Date Particulars Debit (Rs) Credit (Rs)
01/01/2012 Cash Account 5,000
Rao’s Capital Account 5,000
(Capital brought in by Rao)
02/01/2012 Purchases Account 2,500
Cash Account 2500
(Goods purchased for cash)
03/01/2012 Office furniture Account 500
Cash Account 500
04/01/2012 Postage Account 10
Cash Account 10
(Cash paid for postage)
05/01/2012 Purchases Account 2,000
Rajkumar’s Account 2,000
(Goods purchased from Rajkumar on credit)
Date Particulars Debit (Rs) Credit (Rs)
07/01/2012 Cash Account 150
Sales Account 150
(Goods sold for cash)
08/01/2012 Purchases Account 400
Rahim’s Account 400
(Goods purchased from Rahim on credit)
09/01/2012 Suresh’s Account 400
Sales Account 400
(Goods sold to Suresh on credit)
10/01/2012 Nayak’s Account 300
Sales Account 300
(Goods sold to Nayak on credit)
Date Particulars Debit (Rs) Credit (Rs)
11/01/2012 Purchases Account 350
Cash Account 350
(Goods purchased for cash)
13/01/2012 Cash Account 250
Nayak’s Account 250
(Cash received from Nayak on account)
15/01/2012 Rahim’s Account 400
Cash Account 400
(Cash paid to Rahim)
17/01/2012 Rajkumar’s Account 200
Purchase Returns Account 200
(Goods returned to Rajkumar)
Date Particulars Debit (Rs) Credit (Rs)
20/01/2012 Sales Returns Account 50
Suresh’s Account 50
(Goods returned by Suresh)
22/01/2012 Salaries Account 150
Cash Account 150
(Cash paid for salaries)
25/01/2012 Cash Account 500
Sales Account 500
(Goods sold for cash)
26/01/2012 Rao’s Drawings Account 800
Cash Account 800
(Cash withdrawn by Rao for his personal use)
Date Particulars Debit (Rs) Credit (Rs)
27/01/2012 Stationery Account 100
Cash Account 150
(Cash paid for stationery)
28/01/2012 Rent Account 225
Cash Account 225
(Cash paid for rent)
31/01/2012 Cash Account 50
Commission Account 50
(Cash received for commission)
LEDGER: It is the book where transactions of the same nature that is pertaining to a particular person, thing or service. They are classified and grouped together in one
place in the form of an account, through a process called POSTING
This is a process transferring of entries from the journal to the ledger
BALANCING OF A LEDGER ACCOUNT OR STRIKING THE BALANCE PF A LEDGER
ACCOUNT: It is a process of ascertaining whether a particular account has received
more benefits than it has given or has given more benefits than it has received on
a particular date
In other words it is a process of finding out the difference between the total of the
Debit side and the total of Credit side of an account . In short it is the act of ascertaining
The difference between two sides of a ledger account
In ledger account is ascertaining difference between two sides, such difference is added
to the side which has lesser amount by calling it as TO BALANCE CARRIED DOWN
(TO BALANCE C/d ) OR BY BALANCE BROUGHT DOWN (BY BALANCE B/d )
Beginning of the next(month) balancing period is written on the opposite side of the
account TO BALANCE BROUGHT DOWN (FORWARD) OR BY BALANCE BROUGHT DOWN
Or To balance b/d or by balance b/d
DEBIT BALANCE Debit side of an account exceeds credit side of an account
CREDIT BALANCE Credit side of an account exceeds debit side
TRIAL BALANCE it is a statement where debit balances and credit balances are of various
accounts are jotted down. The purpose of preparing trial balance is to find out arithmetical
accuracy while posting transactions from journal to ledger
Trial balance was very essential in case of preparation of books of accounts under
manual system. After advent of different types of computer accounting packages
there is no scope for arithmetical errors. In computer environment it is relevant to
know what are the types of accounts, number of accounts and their balances for a
particular period
Date Particulars Debit (Rs) Credit (Rs) Balance Dr/Cr
01/01/2012 Cash Account 5,000
31/01/2012 Balance C/d 5,000
Total 5,000 5,000 5,000 Cr
01/02/2012 Balance B/d 5,000
RAO’S CAPITAL ACCOUNT
Date Particulars Debit (Rs) Credit (Rs) Balance Dr/Cr
31/01/2012 Cash Account 800
Balance C/d 800
Total 800 800 800 Dr
01/02/2012 Balance B/d 800
RAO’S DRAWINGS ACCOUNT
Date Particulars Debit (Rs) Credit (Rs) Balance Dr/Cr
02/01/2012 Cash Account 800
31/02/2012 Balance C/d 800
Total 800 800 800 Dr
01/02/2012 Balance B/d 800
RAO’S DRAWINGS ACCOUNT
Date Particulars Debit (Rs) Credit (Rs) Balance Dr/Cr
02/01/2012 Cash Account 2,500
Rajkumar’s Account 2,000
Rahim’s Account 400
Cash Account 350
Balance C/d 5,250
Total 5,250 5,250 5,250 Dr
01/02/2012 Balance B/d 5,250
PURCHASE ACCOUNT
Date Particulars Debit (Rs) Credit (Rs) Balance Dr/Cr
02/01/2012 Rajkumar’s Account 200
31/01/2012 Balance C/d 200
200 200 200 Cr
01/02/2012 200
PURCHASE RETUNS ACCOUNT
Date Particulars Debit (Rs) Credit (Rs) Balance Dr/Cr
31/01/2012 Cash Account 150
Suresh’s Account 400
Nayak’s Account 300
Cash Account 500
Balance C/d 1,350
Total 1,350 1,350 1,350 Cr
01/02/2012 Balance B/d 1,350
SALES ACCOUNT
Date Particulars Debit (Rs) Credit (Rs) Balance Dr/Cr
31/01/2012 Suresh’s Account 50
Balance C/d 50
Total 50 50 50 Dr
01/02/2012 Balance B/d 50
SALES RETURN ACCOUNT
Date Particulars Debit (Rs) Credit (Rs) Balance Dr/Cr
31/01/2012 Cash Account 500
Balance C/d 500
Total 500 500 500 Dr
01/02/2012 Balance B/d 500
OFFICE FURNITURE ACCOUNT
Date Particulars Debit (Rs) Credit (Rs) Balance Dr/Cr
31/01/2012 Cash Account 400
Purchases Account 400
Total 400 400
RAHIM’S ACCOUNT
Date Particulars Debit (Rs) Credit (Rs) Balance Dr/Cr
31/01/2012 Purcases Account 2,000
Purchase Returns Account 200
Balance C/d 1800
Total 2000 2000
01/02/2012 Balance B/d 1800 Cr
RAJKUMAR’S ACCOUNT
Date Particulars Debit (Rs)
Credit (Rs) Balance Dr/Cr
31/01/2012 Sales Account 400
Sales Returns Account 50
Balance C/d 350
Total 400 400
01/02/2012 Balance B/d 350 Dr
SURESH’S ACCOUNT
Date Particulars Debit (Rs)
Credit (Rs) Balance Dr/Cr
31/01/2012 Sales Account 300
Cash Account 250
Balance C/d 50
Total 300 300 50 Dr
01/02/2012 Balance B/d 50
NAYAK’S ACCOUNT
Date Particulars Debit (Rs) Credit (Rs) Balance Dr/Cr
31/01/2012 Cash Account 10
Balance C/d 10
Total 10 10 10 Dr
01/02/2012 Balance B/d 10
POSTAGE ACCOUNT
Date Particulars Debit (Rs) Credit (Rs) Balance Dr/Cr
31/01/2012 Cash Account 150
Balance C/d 150
Total 150 150 150 Dr
01/02/2012 Balance B/d 150
SALARIES ACCOUNT
Date Particulars Debit (Rs) Credit (Rs) Balance Dr/Cr
31/01/2012 Cash Account 100
Balance C/d 100
Total 100 100 100 Dr
01/02/2012 Balance B/d 100
STATIONERY ACCOUNT
Date Particulars Debit (Rs) Credit (Rs) Balance Dr/Cr
31/01/2012 Cash Account 225
Balance C/d 225
Total 225 225 225 Dr
01/02/2012 Balance B/d 225
RENT ACCOUNT
Date Particulars Debit (Rs) Credit (Rs) Balance Dr/Cr
31/01/2012 Cash Account 50
Balance C/d 50
Total 50 50 50 Cr
01/02/2012 Balance B/d 50
COMMISSION ACCOUNT
Date Particulars Debit (Rs) Credit (Rs) Balance Dr/Cr
01/01/2012 Rao’s Capital Account 5,000
02/01/2012 Rao’s Drawings Account 800
02/01/2012 Purchase Account 2,500
11/01/2012 Purchase Account 350
07/01/2012 Sales Account 150
25/01/2012 Sales Account 500
03/01/2012 Office Furniture Account 500
15/01/2012 Rahim’s Account 400
13/01/2012 Nayak’s Account 250
04/01/2012 Postage Account 10
22/01/2012 Salaries Account 150
27/01/2012 Stationery Account 100
28/01/2012 Rent Account 225
31/01/2012 Commission Account 50
31/01/2012 Balance C/d 915
Total 5,950 5950 915 Dr
01/02/2012 Balance B/d 915
CSH ACCOUNT
Name of the Account Debit Balance (Rs) Credit Balance (Rs)
Rao’s Capital Account 5,000
Rao.s Drawings Account 800
Purchases Account 5,250
Purchase Returns Account 200
Sales Account 1,350
Sales Return Account 50
Office Furniture 500
Cash Account 915
Rajkumar’s Account 1800
Suresh’s Account 350
Nayak’s Account 50
Postage Account 10
Salaries Account 150
Stationery Account 100
Rent Account 225
Commission Account 50
8,400 8,400
Journalize the following transactions in the books of Viswanath and post them into ledgerand prepare Trial Balance2011, December. Rs1 Viswanath commenced his business with the following Cash in hand 1,500 Cash at Bank 3,500 Goods in hand 3,000 Furniture 2,000 Buildings 10,0002 Gave charity 205 Loan taken from the Bank 5,0006 Purchased Motor Car in exchange for goods Rs2,000 and cheque Rs 3,000 8 Cash sales paid into Bank 2,0009 Withdrew cash for petty cash 10010 Introduced further capital 2,00012 Bought shares in the Mangalore Fertilizers Ltd 80013 Paid proprietors life insurance premium 10015 Paid Chitra cash in lieu of cheque 50016 Cash received on sale of shares 30017 Received from Kishen one hundred rupees note and gave him change for it18 Invested in National Savings Certificate 20019 Bought goods from Lakshman on account 2,00020 Sold goods to Bharath on account 1,500
21 Received from Rao Rs 100 advance for goods 23 Received a cheque from Ram to be credited to Bharath 50024 Paid tax to the Mangalore Corporation 5025 Commission charged to Raghav for a getting a house for him 10026 Furniture costing Rs 300 was destroyed by fire27 Bank Charges 1028 Bank allowed interest on Deposits 2029 Bank collect interest on investment 1031 Closing stock on hand 1,00031 Interest on loan taken from the Bank 100 31 Interest on capital 100
Date Particulars Debit Amount (Rs)
Credit Amount (Rs)
01 Cash in A/c 1500
Bank A/c 3500
Stock A/c 3000
Furniture A/c 2000
Buildings A/c 10000
Viswanath’s Capital A/c 20000
02 Charity A/c 20
Cash A/c 20
05 Bank A/c 5000
Bank Loan A/c 5000
06 Motor Car A/c 5000
Sales A/c 2000
Bank A/c 3000
Date Particulars Debit Amount (Rs)
Credit Amount (Rs)
08 Bank A/c 2000
Sales A/c 2000
09 Petty Cash A/c 100
Bank A/c 100
10 Cash A/c 2000
Viswanath’s Capital A/c 2000
12 Investment A/c 300
Cash A/c 300
13 Viswanath’s Drawings A/c 100
Cash A/c 100
15 Cash A/c 500
Chitra’s A/c 500
Chitra’s A/c 500
Cash A/c 500
Date Particulars Debit Amount (Rs) Credit Amount (Rs)
16 Cash A/c 3000
Investment A/c 3000
18 NSC A/c 100
Cash A/c 100
19 Purchase A/c 2000
Lakshman’s A/c 2000
20 Bharath’s A/c 1500
Sales A/c 1500
21 Cash A/c 100
Advance from Rao 100
23 Cash A/c 500
Bharath’s A/c 500
24 Municipal Tax A/c 50
Cash A/c 50
Date Particulars Debit Amount (Rs)
Credit Amount (Rs)
25 Raghav’s A/c 100
Commission A/c 100
26 Loss by Fire A/c 300
Furniture A/c 300
27 Bank Charges A/c 10
Bank A/c 10
28 Bank A/c 20
Int. on Bank Depost A/c 20
29 Bank A/c 10
Interest on Invest. A/c 10
31 Closing Stock A/c 1000
Trading A/c 1000
31 Interest on Bank Loan A/c 100
100
Date Particulars Debit Amount (Rs) Credit Amount (Rs)
31 Interest on Capital 100
Vishwanath’s Capital A/c 100
Date Particulars Amount(Rs)
Date Particulars Amount(Rs)
31 Balance C/d 20100 01 Cash A/c 1500
01 Bank A/c 3500
01 Stock A/c 3000
01 Furniture A/c
2000
01 Building A/c 10000
31 Int.Cap A/c 100
20100 20100
01 Balance B/d 20100
Vishwanaths’s Capital A/c
Date Particulars Amount(Rs)
Date Particulars Amount(Rs)
01 Vishwanaths capital A/c 3500 06 Motor Car A/c
3000
08 Sales A/c 2000 09 Petty Cash A/c
100
28 Int.on.Bnk.Dep.A/c 20 27 Bnk.Ch.A/c 10
29 Int.On.Inv.A/c 10 31 Int.Bnk.L.A/c 100
31 Balance C/d 2320
5530 5530
01 Balance B/d 2320
Bank A/c
Date Particulars Amount(Rs)
Date Particulars Amount(Rs)
01 Vishwanaths capital A/c
1500 02 Charity A/c 20
10 V.Capital A/c 2000 12 Invest. A/c 300
15 Chitra’s A/c 500 13 V.Draw A/c 100
16 Invest. A/c 300 15 Chitra’s A/c 500
21 Av.For. G.Rao A/c 100 18 NSC A/c 200
23 Bharat’s A/c 500 24 Mun.Tax A/c 50
31 Balance C/d 3775
4900 4900
01 Balance B/d 3775
Cash A/c
Date Particulars Amount(Rs)
Date Particulars Amount(Rs)
01 Vishwanaths capital A/c
3000 31 Balance C/d 3000
3000 3000
01 Balance B/d 3000
01 Vishwanaths capital A/c
2000 26 L. by Fir A/c 300
31 Balance C/d 2700
3000 3000
01 Balance B/d 2700
01 Vishwanaths capital A/c
10000 31 Balance C/d 10000
10000 10000
01 Balance B/d 10000
Stock A/c
Furniture A/c
Buildings A/c
Date Particulars Amount(Rs)
Date Particulars Amount(Rs)
02 Cash A/c 20 31 Balance C/d 20
20 20
01 Balance B/d 20
Petty Cash A/c
09 Bank A/c 100 31 Balance C/d 100
100 100
01 Balance B/d 100
V.Drawings A/c
13 Cash A/c 100 31 Balance C/d 100
100 100
01 Balance B/d 100
Mun.Tax. A/c
24 Cash A/c 50 31 Balance C/d 50
50 50
01 Balance B/d 50
Charity A/c
Date Particulars Amount(Rs)
Date Particulars Amount(Rs)
31 Balance C/d 5000 05 Bank Loan A/c 5000
5000 5000
01 Balance C/d 5000
Motor A/c
06 Sales A/c 2000 31 Balance C/d 5000
06 Bank A/c 3000
5000 5000
01 Balance B/d 5000
Chitras’s A/c
15 Cash A/c 500 15 Cash A/c 500
500 500
Bank Loan A/c
Date Particulars Amount(Rs)
Date Particulars Amount(Rs)
06 Motor car A/c 2000
20 Bharats A/c 1500
31 Balance C/d 3500 31 3500
01 Balance B/d 3500
Investment A/c
12 Cash A/c 300 16 Invest. A/c 300
300 300
NSC A/c
18 Cash A/c 200 31 By Balance C/d 200
200 200
01 Balance B/d 200
Sales A/c
Date Particulars Amount(Rs)
Date Particulars Amount(Rs)
19 Lakshman’s A/c 2000 31 Balance C/d 2000
2000 2000
01 Balance B/d 2000
Raghav’s A/c
25 Commission A/c 100 31 Balance C/d 100
100 100
01 Balance B/d 100
Lakshma N A/c
31 Balance C/d 2000 19 Purch. A/c 2000
2000 2000
01 Balance B/d 2000
Commis. A/c
31 Balance C/d 100 25 Raghav’sA/c 100
100 100
01 Balance B/d 100
Purchases A/c
Date Particulars Amount(Rs)
Date Particulars Amount(Rs)
20 Sales A/c 1500 23 Cash A/c 500
31 Balance C/d 1000
1500 1500
01 Balance B/d 1000
Ad.For.G. R.A/c
31 Balance C/d 100 21 Cash A/c 100
100 100
01 Balance B/d 100
Los.Fir A/c
26 Furniture A/c 300 31 Balance C/d 300
300 300
01 Balance B/d 300
Bnk.Ch A/c
27 Bank A/c 10 31 Balance C/d 10
10 10
01 Balance B/d 10
Bharat’s A/c
Date Particulars Amount(Rs)
Date Particulars Amount(Rs)
31 Balance C/d 20 28 Bank A/c 20
20 20
01 Balance B/d 20
Int.on.Inv A/c
31 To Balance C/d 10 29 Bank A/c 10
10 10
01 Balance B/d 10
Cl.Stock A/c
31 Trading A/c 1000 31 Balance C/d 1000
1000 1000
01 Balance B/d 1000
Trading A/c
31 Balance C/d 1000 31 Balance C/d 1000
1000 1000
01 Balance B/d 1000
Int.on.Bnk.Dep.A/c
Date Particulars Amount(Rs)
Date Particulars Amount(Rs)
31 Bank A/c 100 31 Balance C/d 100
100 100
01 Balance B/d 100
Int.on.C. A/c
31 V.Capital A/c 100 31 Balance C/d 100
100 100
01 Balance B/d 100
Int.on.Bnk.Loan.A/c
Particulars Debit (Rs) Credit (Rs)
Vishwanath’s Capitla A/c 20100
Bank A/c 2320
Cash A/c 3775
Stock A/c 3000
Furniture A/c 2700
Building A/c 10000
Charity A/c 20
Petty Cash A/c 100
Vishwanath’s Drawing A/c 100
Municipal Taxes A/c 50
Bank Loan A/c 5000
Motor Car A/c 5000
Sales A/c 3500
NSC A/c 200
Purchases A/c 2000
Raghav’s A/c 100
TRIAL BALANCE
Particulars Debit (Rs) Credit (Rs)
Lakshman’s A/c 2000
Commission A/c 100
Bharath’s A/c 1000
Rao’s Advance A/c 100
Loss by Fire A/c 300
Bank Charges A/c 10
Int.on Bank Deposit A/c 20
Int.On.Investment A/c 10
Closing Stock A/c 1000
Trading A/c 1000
Interest on Bank Loan A/c 100
Interest on V.Capital A/c 100
31875 31830
TRIAL BALANCE
Question: On which side, the increase in the following Accounts will be recorded ? Also mention the nature of account
1) Surendra A/c (Proprietor)
2) Cartage A/c
3) Debtors A/c
4) Building A/c
5) Bank Account (Overdraft)
6) Machinery A/c
1. Surendra A/c--Credit Side---- Personal A/c
2. Cartage A/c--- Debit Side---- Nominal A/c
3. Debtors A/c--- Debit Side---- Personal A/c
4. Building A/c--- Debit Side--- Real A/c
5. Bank A/c(Overdraft)--- Credit Side---- Personal A/c
Amortization • Process of writing off the value of intangible assets of a business• Amortization of intangible assets takes place periodically covering the estimated useful economic life of the intangible assets • Intangible assets include intellectual property (Technical Know Ho, copy rights ), incorporation costs in case of a limited company such as preliminary expenses
Depletion• Depletion is the process of allocating the depletion cost of natural resources to expense as individual units of the resource are extracted • Depletion costs equals the total cost of natural resource less salvage value after extracting• Depletion expense is calculated using the units-of-activity method
The actual number of units extracted and sold in one year equals the amount of depletion expense recorded for the asset during the year
• Iron ore deposits in Sandur taken on lease from the Government
.
Profit and loss appropriation account is prepared after profit and loss account..It s a account where the profits earned by the company is brought in from profit and loss account and it s distributed to various accounts like interim dividend account, provision for taxation account, general reserve account etc.....it s a account which shows how the profits are distributed in an organization
The purpose of the balance sheet is to show a
company's Assets, Liabilities and Equity at a given
point in time, usually the company's fiscal year
end. This is as opposed to an Income Statement,
for example, which shows earnings throughout
the year. A balance sheet is as of a given day. it
does not show activity for a whole year, although
you can compare year-to-year balance sheets to
deduce some information.
A balance sheet is divided into two sides. On one side is the total assets of the Company, such as cash, working capital, fixed assets (machinery, land, equipment, autos, etc), and other assets. On the other side is the Liabilities, such as accounts payable, debt, and other liabilities. Assets minus liabilitiese equals equity, which is the remaining ownership in the company - that accorded to shareholders.
What is mercantile basis of accounting Under accrual or mercantile basis accounting,
revenues are recognized and earned when they are realized or realizable
irrespective of when the cash is received.
To put it in different terms, the accrual basis of accounting asks you to take into
consideration all those incomes/gains and expenses/losses pertaining to the
accounting period for which you are trying to ascertain the profits and losses
irrespective of whether the incomes are received in cash or not and the expenses
are paid out in cash or not.
Work in Progress (WIP)Construction Work in Progress is a long-term asset account in which the costs of constructing long-term assets are recorded. The account Construction Work in Progress will have a debit balance and will be reported on the balance sheet as part of a company’s Property, Plant and Equipment.The costs of a constructed asset are accumulated in the account Construction Work in Progress until the asset is placed into service. When the asset is completed and placed into service, the account Construction Work in Progress will be credited for the accumulated costs of the asset and will be debited to the appropriate Property, Plant and Equipment account.Depreciation begins after the asset has been placed into service
DepreciationBuildings, machinery, equipment, furniture, fixtures, computers, outdoor lighting, parking lots, cars, and trucks are examples of assets that will last for more than one year, but will not last indefinitely. During each accounting period (year, quarter, month, etc.) a portion of the cost of these assets is being used up. The portion being used up is reported as Depreciation Expense on the income statement. In effect depreciation is the transfer of a portion of the asset's cost from the balance sheet to the income statement during each year of the asset's life
The calculation and reporting of depreciation is based upon two accounting principles:Cost principle. This principle requires that the Depreciation Expense reported on the income statement, and the asset amount that is reported on the balance sheet, should be based on the historical (original) cost of the asset. (The amounts should not be based on the cost to replace the asset, or on the current market value of the asset, etc.)Matching principle. This principle requires that the asset's cost be allocated to Depreciation Expense over the life of the asset. In effect the cost of the asset is divided up with some of the cost being reported on each of the income statements issued during the life of the asset. By assigning a portion of the asset's cost to various income statements, the accountant is matching a portion of the asset's cost with each period in which the asset is used. Hopefully this also means that the asset's cost is being matched with the revenues earned by using the asset.
Contingent liabilities are liabilities that may or may not be
incurred by an entity depending on the outcome of a future
event such as a court case. These liabilities are recorded in a
company's accounts and shown in the balance sheet when both
probable and reasonably estimable. A footnote to the balance
sheet describes the nature and extent of the contingent
liabilities. The likelihood of loss is described as probable,
reasonably possible, or remote. The ability to estimate a loss is
described as known, reasonably estimable, or not reasonably
estimable.
Examplesoutstanding lawsuitsLegal liabilityLiquidated damagesTortBills Discounted with bankUnliquidated damagesDestruction by Floodproduct warrantyIncome Tax DisputedSales Tax Disputed
Deferred Revenue Expenditure:- In some cases, the benefit of a revenue expenditure may be available for period of two or three or even more years. Such expenditure is then known as "Deferred Revenue Expenditure" and is written off over a period of a few years and not wholly in the year in which it is incurred. For example, a new firm may advertise very heavily in the beginning to capture a position in the market. The benefit of this advertising campaign will last quite a few years. It will be better to write off the expenditure in there or four and not in the first year.When loss of a specially heavy and exceptional nature is sustained, it can also treated as deferred revenue expenditure.But,it should be noted, loss resulting from transactions enterd into, such as speculative purchase or sale of a large quantity of a commodity, cannot be treated as a deferred revenue expenditure. Only loss arising from circumstances beyond one's control can be so treated.
Straight Line Depreciation Method The simplest and most commonly used depreciation method, straight line depreciation is calculated by taking the purchase or acquisition price of an asset subtracted by the salvage value divided by the total productive years the asset can be reasonably expected to benefit the company (called "useful life" in accounting jargon).
Reducing Balance Depreciation Method or Declining Balance Method
Under the declining balance method also known as reducing or diminishing balance or written down value method, a depreciation percentage rate is applied to the acquisition or construction cost at the beginning of the accounting period rather than the original cost. Under this system, a fixed percentage of the diminishing value of the asset is written off each year so as to reduce the asset to its break-up or scrap value at the end of its life. Under this method, the annual charge for depreciation decreases from year to year. The effect is that the initial years take a higher hit of depreciation charge as compared to the later years. Unlike the straight-line method where the cost of asset is completely written-off, this never happens in the reducing balance method. It must be noted that salvage value is not considered in the calculation of depreciation. However, the book value of the asset is never brought below its salvage value.
Unit of Production MethodThis method refers to an association between the asset’s ability to do work during its useful life and the decline in the worth of the asset. Unfortunately, this depreciation method does not take into account the expected years of the asset but takes into account the measurable units of use. The units could be anything, including number of items produced or hours used for machinery, number of miles traveled by vehicles, etc. Thus, it is calculated by the actual usage of the asset.
Voucher1. A piece of substantiating evidence; a proof.(Invoice/Bill)2.A written record of expenditure, disbursement, or completedtransaction.(Voucher of Concern) 3.A written authorization or certificate, especially one exchangeable for cash or representing a credit against future expenditures.(Advance payment)
Definition of 'Journal'In accounting, a first recording of financial transactions as they occur in time, so that they can then be used for future reconciling and transfer to other official accounting records such as the general ledger. A journal will state the date of the transaction, which account(s) were affected and the amounts, usually in a double-entry bookkeeping method.
A ledger is the principal book or computer file for recording and totaling monetary transactions by account, with debits and credits in separate columns and a beginning balance and ending balance for each account. The ledger is a permanent summary of all amounts entered in supporting journals which list individual transactions by date. Every transaction flows from a journal to one or more ledgers. A company's financial statements are generated from summary totals in the ledgers.
Ledgers include:Sales ledger, records accounts receivable. This ledger consists of the financial transactions made by customers to the company.Purchase ledger records money spent for purchasing by the company.General ledger representing the 5 main account types: assets, liabilities, income, expenses, and equity.
TRIAL BALANCE• DEFINITION
• IT IS A STATEMENT SHOWING CREDIT AND DEBIT BALANCES FROM THE LEDGER.
• DEBIT BALANCES ARE ENTERED IN DEBIT COLUMN.
• CREDIT BALANCES ARE ENTERED IN CREDIT COLUMN.
• HELPS ARITHMETICAL ACCURACY AND FACILITATES FINAL ACCOUNTS.
TRIAL BALANCE
• BASIC PRINCIPLE :
• SINCE IT IS DOUBLE ENTRY BOOK-KEEPING, HENCE,
ASSETS AND EXPENSES ARE DEBIT BALANCES
LIABILITIES AND INCOMES ARE CREDIT BALANCES
. IN CASE OF ARITHMETICAL INACCURACY IDENTIFY
CLERICAL/PRINCIPLE ERRORS AND RECTIFY
Final AccountsMr.Vishal a retail storekeeper had prepared the following trial balance from his ledger as on 31st March, 2011
Particulars Rs RsPurchase and Sales 310000 400000Sock of Goods 50000 Cash in hand 2000Cash at bank 25000Mr.Vishal’s Capital 200000Drawings 4000Rates and Taxes 50000Salaries 32000Postage and Telegram 11000Salesmen Commission 20000Insurance 8000Advertising 20000Furniture and Fittings 25000Printing and Stationery 12000
Bad debts 2000Cash discount 4000Carriage Inward 5000Carriage Outward 6000Outstanding Expenses 2000Sundry Creditors 15000Sundry Debtors 22000 615000 615000
Prepare Trading and Profit and Loss Account and Balance Sheet
The following is the T/B of King of Kings Ltd., as on 31st March 2009
Accounts Rs Rs
Stock on 1St April 2008 675000Sales 3060000Wages 300000Share Capital 1000000Discount 40000 27000Purchases 2400000Carriage 8550Purchase returns 90000Patents and trade marks 50000Salaries 67500Bills payable 73000Mis.Expenses 60000Rent and Taxes 34000Debtors and Creditors 300000 400000
Plant and Machinery 261000Furniture and Fixtures 200000Bank 600000
Further Information:
1.Outstanding rent amounted Rs 7200 while O/S Salaries Rs 8100 at the end of the year2.Make a provision for doubtful debts amounting to Rs 49503.Stock on 31St March 2009 was valued at Rs 7000004.Provide depreciation on Plant and machinery @ 14% and furniture and fixtures at 18%5.Provide for managerial remuneration @ 10% of PBT6.Provide provision for Income tax @ 33%7.Amortise patents and trademarks @ 5%Required: 1.Findout net profit as on 31-03-2009 2.Profit and Loss Appropriation A/c (31.03.09) 3.Balance Sheet as on 31-03-2009 4.comment the performance of the company
Fixed CostsFixed costs are the ball and chain of the business world. You will pay these costs week to week, month to month, year to year. They do not change based on your level of activity.One of the most traditional examples of a fixed cost is rent of your office space. You will pay that cost according to your lease even if you have no business operations that month. Conversely, you’ll generally pay that same amount if you are running at 200% capacity.
Variable CostsThese are costs that will change based on your level of activity (or some other business variable).In the manufacturing world, variable costs are often tied to the number of SS Steel Scale produced. If your factory is creating a physical product, there is some level of raw material used. If we assume Rs 10 of SS steel is needed to make a 1 Steel Scale, then we need Rs1000 of material for 100 Scales, Rs2000 for 200 Scales, and so on. Your cost will vary based on activity level, but is still predictable based on your business plans.
Contribution margin is the amount remaining from sales revenue after variable expenses have been deducted. Thus it is the amount available to cover fixed expenses and then to provide profits for the period. Contribution margin is first used to cover the fixed expenses and then whatever remains go towards profits. If the contribution margin is not sufficient to cover the fixed expenses, then a loss occurs for the period. This concept is explained in the following equations:Sales revenue − Variable cost* = Contribution Margin
P/V Ratio:P/V Ratio (Profit Volume Ratio) is the ratio of contribution to sales which indicates the contribution earned with respect to one rupee of sales. It also measures the rate of change of profit due to change in volume of sales. Its fundamental property is that if per unit sales price and variable cost are constant then P/V Ratio will be constant at all the levels of activities. A change is fixed cost does not affect P/V Ratio. It is calculated as under:
P/V Ratio (or C/S Ratio) = Contribution (c) Sales (s)
Important Formulae of Marginal Costing
1. Contribution=Sales x P/V Ratio2. S-V=F+P3. P/V Ratio=Change in Contribution4. P/V Ratio=Change in Profit/Loss Change in Sales5. P/V Ratio=Fixed Cost BEP Sales6. BEP(Sales in Value)=Fixed Cost P/V Ratio
7. BEP (Sales in Value)=Fixed Costs x Total Sales Total Contribution8. BEP (Sales in Value)=Fixed Costs x Selling Price Per Unit Contribution Per Unit9. BEP in Units= Fixed Cost Contribution Per Unit10. Margin of Safety= Profit P/V Ratio11. Margin of Safety= Total Sales-BEP Sales12. Margin of Safety= Profit Contribution13. Margin of Safety (%)= Margin of Safety x 100 Total Sales S= Sales F= Fixed Cost V= Variable Cost C= Contribution P= Profit M/S= Margin of Safety BEP= Break Even Point
Breakeven Analysis is the process of categorizing costs of production between variable and fixed components and deriving the level of output at which the sum of these costs, referred to as total costs per unit become equal to sales revenue. The analysis helps to determine the 'Breakeven Point' from this point of equality of sales revenue with total costs. At the breakeven point, the production activity neither generates a profit nor a loss. Breakeven analysis is used in production management and Management Accounting.
Cost-volume-profit analysis (CVP), or break-even analysis, is used to compute the volume level at which total revenues are equal to total costs. When total costs and total revenues are equal, the business organization is said to be "breaking even." The analysis is based on a set of linear equations for a straight line and the separation of variable and fixed costs.
Accounting: An excess of a company's actual sales revenue over the breakeven sales revenue, expressed usually as a percentage. The greater this margin, the less sensitive the company to any abrupt fall in revenue.