A budget is a comprehensive, formal, coordinated, detailed, quantitative plan that estimates the probable expenditures for acquiring and using financial and other resource for an organization over a specific time period. Budgeting describes the overall process from preparing budget, using budgets during the business operation, and later performance evaluation. It provides us the valuable tools for planning and control of finances and affects nearly every type of organization-from governments and large corporations to small businesses-as well as families and individuals. A small business generally engages in budgeting to determine the most efficient and effective strategies for making money and expanding its asset base. Budgeting can help a company use its limited financial and human resources in a manner which best exploit existing business opportunities such production expansion and acquisition that might otherwise miss. A good and through understanding of how budgeting works is a must for ambitious business executive if Continue reading
Financial Accounting Concepts
The Objective of Shareholder Wealth Maximization
In old times, the traditional approach of companies was to maximize the owner’s profit. Modern approach puts more emphasis on Shareholder Wealth Maximization rather than owner profit maximization. This includes increasing the earnings per share (EPS) of every shareholder so that their net worth is maximized. Wealth increase is equal to what gross present worth in needed for raising profits in the future. This value needs to be discounted as per the time frame to found out the annualized rate of return for the shareholder. In Shareholder Wealth Maximization, it places priority before any other objective for the organization. Any action which has positive effective on Shareholder Wealth Maximization needs to be given priority. In any capitalistic society, the goal of business should be Shareholder Wealth Maximization as mostly the ownership of goods and services is by individuals, since, they own all the means so that they can make money. 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
Features of a Sound Capital Structure
Capital structure is a business finance term that describes ‘the proportion of a company’s capital, or operating money, which is obtained through debt and equity or hybrid securities’. Debt consists of loans and other types of credit that is to be repaid in the future, usually with interest. Equity involves ownership interest in a corporation in the form of common stock or preferred stock. Equity financing does not involve a direct obligation to repay the funds which is in contrast to debt financing. Instead, equity investors are able to exercise some degree of control over the company as they become part-owners and partners in the business. The goal of a company’s capital structure decision is to maximize the gains for the equity shareholders. The optimal capital structure is the one that maximizes the price of the stock and simultaneously minimizes the cost of capital thus striking a balance between risk Continue reading
Double Entry Bookkeeping System
Bookkeeping is an act of keeping permanent records of the financial transactions of a business in a systematic and orderly manner. The financial transactions of the business are identified, recorded and classified in different books. In modern entities, records of financial transactions are maintained under a double entry system. The double entry system has been recognized as a systematic and complete system for recording financial transactions. Double entry system recognizes that every financial transactions has two aspects. It then records two aspects of a transaction simultaneously in two separate accounts with equal amounts. It provides the aspects of a transaction with their names of debit and credit. Thereafter, with the help of ledger accounts, profit and loss account and the balance sheet are prepared to ascertain the profit and loss and the financial position of the business. Thus, the double entry system is the most systematic and complete system of Continue reading
Evaluate a Businesses Overall Financial Performance Using Profitability Ratios
An accounting ratio is made by dividing one account’s transactions into another. The aim is to achieve a comparison that is easy as well as beneficial to clarify. Evaluate ratios for one Industry enterprise over several years. A graph of the ratio may allow a long-term trend. The same ratio is from many firms of similar size in the same industry. These ratios are used to assess performance and, with other data, forecast prospect profitability. Along with that is the future viability in addition to the soundness, which will repay loans as well as credit, additionally pay the interest along with dividends. Since profits are divided amongst shares, the profit per share indicates a possible dividend. While profitability ratios “evaluate a business’ overall financial performance through appraising its capability to produce revenues in surplus of service costs as well as other expenses. There are at least four profitability ratios, which Continue reading