The historical cost accounting values an asset for balance sheet purposes at the price paid for the asset at the time of its acquisition. The historical cost accounting is the situation in which accountants record revenue, expenditure and asset acquisition and disposal at historical cost: that is, the actual amounts of money, or money’s worth, received or paid to complete the transaction. Historical cost is based on actual transaction rather than forecasts. There are supporting records for all the figures provided in the financial statements. It is also relevant in making economic decisions, as past data transactions are needed for making future decisions. Another defense of historical cost is that ‘historical cost’ has been used throughout history as financial statements which use historical cost are found to be useful. Profit is the excess of selling price over historical cost. Profit is a very well accepted concept of measure of performance. Continue reading
Accounting Basics
Differences Between Value Chain Analysis and Traditional Management Accounting
The Limitations of Traditional Management Accounting There exist five major limitation for traditional management accounting. The first one is the traditional management accounting may treat the firm as a single part. It only provided information for a single enterprise management decision and control, ignoring the external environment and other relevant information also can reflect the firm’s position in the market. Second, the traditional management accounting limited to the collection and analysis of internal financial information, the information break away from the requirements of corporate strategic management and weakened the role of management accounting. Third, the concept of traditional management accounting just focus on solving the relevant and individual internal issues. It can not form a sound management system with the market and long-term interests, so that the composition of the budget system just only concentrate on the enterprise’s internal planning and operations. The forth is the traditional management accounting adopted Continue reading
Parts of a Cost Accounting System
Cost accounting is linked to tax accounting, financial accounting and managerial accounting because it is an important component of each discipline as cost accounting involves determining the cost of something, such as a product, a service, an activity, a project, or some other cost object. These costs are needed for several purposes. For example, the costs of products and services produced and sold are needed for both tax and external financial statements. In other words, tax and financial accounting depend on cost accounting to provide cost information. Information about costs is also needed for a variety of management decisions. For example, cost estimates are needed to determine whether or not a product or service can be produced and sold at a profit. Unit costs of a product (or service) are also needed for product pricing and product discontinuance decisions. In addition, accurate cost information is required to determine whether or Continue reading
Critical Evaluation of IAS 37
The International Accounting Standards Committee (IASC) issued IAS37 Provisions, Contingent Liabilities and Contingent Assets in September 1998. It replaced parts of IAS10 Contingencies and became operative for annual financial statements covering periods beginning on or after 1 July 1999. The objective of this standard is to ensure that appropriate recognition criteria and measurement bases are applied to provisions, contingent liabilities and contingent assets and that sufficient information is disclosed in the notes to enable users to understand their nature, timing and amount. The key principle of IAS37 is that a provision should be recognized only when a liability exists. Planned future expenditures are not recognized as provisions or contingencies, even if the board of directors has authorized them. IAS37 prescribes the accounting and disclosure for all provisions, contingent liabilities and contingent assets, except those resulting from executory contracts, except where the contract is onerous. Executory contracts are contracts under which Continue reading
By-Product – Meaning and Accounting Treatment
Salable or usable products having a relatively low value incidentally realized in the course of manufacturing the main product is called by-product. In many instances, there may be several joint products and several by-products depending upon the nature of the input raw materials being processed. A by-product is an outcome that does not make tangible contribution to the sales revenue. The economic value of by-product, comparing it with the main product, is comparatively low. By-product in the course of sugar production are Bagasse of solid waste and molasses of sweet semi-liquid product. Poultry farm in delivering chicken meat to the market gets poultry leftover parts such as poultry fathers, bones, beaks, feet and poultry fat as by-product. The fibers and outer shell of coconut are the by-products residue of coconut oil and product. Accounting Treatment of By-Product By-product accounting depends on the circumstances under which it is realized. The following could be Continue reading
Strategies to Resolve the Principal Agent Problem
The principal agent problem refers to difficulties of motivating one party the agent to act for the best interest of the other party the principal. In a company, the owners of the assets (the stockholder) are the principals and the managers of the company are the agents. The stockholders of the company authorize the managers to manage and use their resources to make profit for the stockholders. The cause of the principal agent problem is that the information asymmetry between the principal and the agent and the principal and agent have different interests. Generally, the Agents are the managers of the resources and have more information than the principals. In a company, the managers of the company will have more information about the company than the stockholders of the company. The agents may use this asymmetric information to get interest for themselves rather than the principals. In general, the principal Continue reading