Agency theory refers to a contract whereby principals engage with agents to perform some act on their behalf. The act involved giving power to an agent for some decision-making. Everyone work on the feet of benefit that can be gained for oneself. That’s why it is strongly agreed that the agent, as a utility maximizer will not act in the best interest of the principal. Therefore, agents may cheat if they were not monitored by the principal, and the principal, on the other hand, must bear agency costs to avoid suffering loss. These agency costs include monitoring costs of an agent, bonding costs whereby the agent will try to show that they are not self-serving, and residual losses that are too costly to monitor. In general, agency cost is one of a type of internal cost incurred from or must be paid to, an agent acting on behalf of a Continue reading
Financial Accounting Concepts
Sensitivity Analysis and Scenario Analysis in Capital Budgeting
Capital Budgeting is the process by which a Business makes decision on whether to take up a project or not. This involves analysis of the amount of money which is required to invest in the project and the revenue that the project will generate. A business uses various techniques and analysis tools to determine the effects of the various projects. This may involve the calculation of the time taken for the undertaking to produce return to cover the initial contribution, or the amount of cash flow that will be produced from the undertaking totally in its entire span of period along with the amount of profit or loss generated from the same or the break even of the project can be calculated using the discount rate of the project. All the techniques and methods involve making assumptions and making estimations about the future performance of the project. The results derived Continue reading
Accounting Errors – Meaning, Causes and Types
The errors or mistakes which are committed in the journal, ledger and any other financial statements are known as accounting errors. Accounting errors may be defined as those mistakes which are generally committed while recording the financial transactions in the book of accounts. These errors may be committed while recording the transactions in the journal and posting them in the ledger accounts. Such errors may be technically committed or committed due to lack of the knowledge of accounting principles and rules. Generally, accounting errors are unintentional. However, it may intentionally be committed so as to take some undue advantage. Accounting errors distort the true business results. Therefore, these errors must be properly located and rectified for ascertaining the true profit or loss and financial position of the business. Major Causes of Accounting Errors There can be several causes of accounting errors. The following are the important ones: Lack of Knowledge: Continue reading
Advantages and Disadvantages of Different Sources of Finance
Finance is essential for a business’s operation, development and expansion. Finance is the core limiting factor for most businesses and therefore it is crucial for businesses to manage their financial resources properly. Finance is available to a business from a variety of sources both internal and external. It is also crucial for businesses to choose the most appropriate source of finance for its several needs as different sources have its own benefits and costs. 1. Personal Savings This is the amount of personal money an owner, partner or shareholder of a business has at his disposal to do whatever he wants.When a business seeks to borrow the personal money of a shareholder, partner or owner for a business’s financial needs the source of finance is known as personal savings. Advantages; The owner would not want collateral to lend money to the business. There is no paperwork required. The money need Continue reading
Accounting Basics : The Accounting Cycle Explained
The accounting cycle is a sequence of steps starting with recording transactions and takes it to the preparation of financial statements. The main purpose of recording transactions and keeping track of expenses and revenues. The accounting cycle is a set of steps that are repeated in the same order every period. The highest of these steps is the preparation of financial statements. Some companies prepare financial statements every three months while some complete twelve months. 10 Steps of Accounting Cycle Explained The first step is to analyze and record transactions in the journal. This step is where information must be carefully read to determine if a transaction is an asset, liability, common stock, retained earnings, revenue, dividend, or expense. In this step, each account must be determined to see if the amount increases or decreases. Those increases and decreases should be recorded as a credit or debit before entering the Continue reading
Exit Price Accounting – Definition and Criticisms
Exit Price Accounting (EPA) also known as Continuously Contemporary Accounting (CoCoA) has been proposed by researchers such as McNeal, Sterling, and especially Raymond Chambers. It’s an accounting theory that prescribes that assets should be valued at exit prices and that financial statements should function to inform about an organization’s capacity to adapt. Chambers described the entity’s capacity to adapt as the cash that could be obtained if the entity sold its assets. Chambers believed that economic survival of the entity depends on the amount of cash it can command and the balance sheet is crucial to these decisions. Chambers used the term ‘current cash equivalents’ to refer to the amount that was expected to be generated through the orderly sale of assets. He believe that the information about current cash equivalent were fundamental to effective decision making. Chambers stated that ‘the accounting rules used were so different in effect that Continue reading