Depreciation is a cost estimation method for accounting for the worth of a long-term asset over its useful life. Depreciation is used to spread the cost of a tangible asset over the accounting periods in which the asset is used. There are some questions surrounding this topic that are essential to explore. For instance, what are the tax implications of depreciation? What are the different depreciation methods, and how can they be used to calculate the amount? What are the best practices for managing depreciation? How does depreciation help to ensure a company’s financial health? Each of these questions will be explored in more detail to understand the concept of depreciation fully. Since antiquity, depreciation has been utilized for cost apportionment. Initially, the idea was developed by the Greek philosopher Aristotle, who believed that the value of an asset declined over time. By the 19th century, Italian economist Vilfredo Pareto Continue reading
Business Finance Terms
What is Profit Center?
When financial performance of a responsibility center is measured in terms of the organization’s profit, then it is called a profit center. In a profit center, performance is measured in terms of the numerical difference between revenues (outputs) and expenditure (inputs). A profit center is given the responsibility of earning profits. It is involved in the manufacture and sale of outputs, and it measures how well the center is doing economically. The profit center also determines the efficiency of the manager in charge of the center. Profit as a measure of performance is especially useful since it enables senior management to use one comprehensive measure instead of several measures that often point to different directions. A profit center helps in motivating managers to perform well in areas they control and also encourages managers to take initiatives. The profit center helps the organization to make the best use of specialized market Continue reading
Installment Purchase System – Meaning and Concept
An installment purchase system is just like a credit purchase and hire purchase system of selling and buying goods. Like hire purchase, in installment purchase system an agreement is made between buyer and seller to purchase and sell of goods. The buyer makes certain down payment at the time of signing agreement and the balance is paying in installment over a period of time. An installment purchase system is a credit sale in which payments are made in installments over a period of time. In this system, the buyer gets the possession as well as ownership of the goods right at the time of signing the agreement. During the course of paying the installment, if the buyer makes default in paying the installment, the vendor cannot responses the goods. In that case, the vendor can sue the buyer for recovery of dues. Like in hire purchase even the paid installments Continue reading
Indian Depository Receipts (IDRs)
Indian Depository Receipts (IDRs) are transferable securities to be listed on Indian stock exchanges in the form of depository receipts created by a Domestic Depository in India against the underlying equity shares of the issuing company which is incorporated outside India. As per the definition given in the Companies (Issue of Indian Depository Receipts) Rules, 2004, Indian Depository Receipt is an instrument in the form of a Depository Receipt created by the Indian depository in India against the underlying equity shares of the issuing company. In an IDR, foreign companies would issue shares, to an Indian Depository (say National Security Depository Limited — NSDL), which would in turn issue depository receipts to investors in India. The actual shares underlying the IDRs would be held by an Overseas Custodian, which shall authorize the Indian Depository to issue the IDRs. The Indian Depository Receipts would have following features: Overseas Custodian: Foreign bank Continue reading
Performance-Based Budgeting – Meaning, Working, Pros, and Cons
Performance-based budgeting has been the center of reforms in both the private and the public sectors. However, a substantial ambiguity still remains on how to define and implement performance-based budgeting. A somewhat close definition is that performance-based budgeting apportions resources in accordance with specific achievement or quantifiable results. Performance budgeting can also be defined as systems of planning, budgeting, and appraisal that focuses the link between budgeted funds and the expected outcome. Therefore, performance-based budgeting links measurable performance and allocation of resources, with the capacity to state the level of achievable output with the injection of additional resources. Nevertheless, the output can never be measured accurately. Performance budgeting is result oriented in that it holds different divisions accountable to specific performance standards. This form of budgeting enhances awareness of the kind of services expected by the taxpayer. This type of budgeting is flexible since it allocates resources in a lump sum Continue reading
Economic Value Added (EVA) Vs. Return on Investment (ROI)
Most of the companies employing investment centers evaluate business units on the basis of Return on Investment (ROI) rather than Economic Value Added (EVA). There are three apparent benefits of an ROI measure. First, it is, a comprehensive measure in that anything that affects financial statements is reflected in this ratio. Second, Return on Investment (ROI) is simple to calculate, easy to understand, and meaningful in an absolute sense. For example, an ROI of less than 5 percent is considered low on an absolute scale, and an ROI of over 25 percent is considered high. Finally, it is a common denominator that may be applied to any organizational unit responsible for profitability, regardless of size or type of business. The performance of different units may be compared directly to one another. Also, ROI data are available for competitors and can be used as a basis for comparison. The collar amount Continue reading