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Accounting Articles
Page 2 of 9
What are reserves in financial statements?
The amount which is kept aside from profits to strengthen financial position of a firm. It is also called retained earnings. Reserves are used buy new assets, pay bonuses, spent for repairs and maintenance, pay off debt etc.They can also use for dividend payments, to meet contingencies, legal requirements, investing etc.Types of reserves are as follows −Capital reserves − Capital revenue created from capital profits. It has no effect on net profit and they are not available for distribution.Profit on sale of fixed asset.Premium charged on issue of debenture/capital share capital.Increase value of asset by revaluation.Gain on redemption of debenture.Revenue ...
Read MoreWhat are provision in financial statements?
Provision is the amount which kept aside to cover future expenses. A provision is a separated fund which kept aside to cover certain expense. A provision is not a reserve. The main purpose is make balance sheet more accurate in accounting period or financial year.A provision can recognised if it meets criteriaAn entity which has present obligation due to past events.It may be cash outflow to settle obligation.Objectives of provisions are as follows −Correct financial statements.Predict losses and liabilities.Meet known losses and liabilities.Examples are as follows −Guarantees.Losses.Deferred tax.Restructuring liabilities.Depreciation.Bad debts.Sales allowances.The amount which is kept aside to pay for firm ...
Read MoreExplain about derivatives in finance.
A derivative is a financial instrument which measures the value of an underlying assets. The value is depending on market conditions. Most common derivatives are forwards, futures, options and swaps.Derivatives provide leverages.Derivatives makes profit.Derivatives mitigate risk.Derivatives create option ability.Hedgers, speculators, margin traders and arbitrageurs participates in derivatives market.Derivative categories are as follows −Forward commitments.Contingent claims.Some of the advantages of derivatives are as follows −Decrease the risk.Market efficiency.Diversification of portfolio.Price lock.Choice of leverage.Some of the disadvantages of derivatives are as follows −High risks.More speculations.More complicated.Hard to value.Sensitive to supply and demand factors.Derivatives used in India are as follows −Forward contracts − ...
Read MoreDescribe the types of factoring.
The types of factoring are explained below −Recourse factoring − In this, client had to buy back unpaid bills receivables from factor.Non – recourse factoring − In this, client in which there is no absorb for unpaid invoices.Domestic factoring − When the customer, the client and the factor are in same country.Export factoring − It involves four parties, the exporter, the export factor, the import factor and the importer. It is also called as cross border factoring.Disclosed factoring − If factor name is represented on the invoice of the goods or services and asks customer to pay the factor.Undisclosed factoring ...
Read MoreExplain about recourse factoring in financial management.
Recourse factoring is an agreement between client and factor in which, client had to buy back unpaid bills receivables from factor. In case of default payers factor can claim their money, agreement will specify in how many days the payment should refund in advance. Whether money will refund or not, we have to still pay interest and fee.Replace with goods invoice with same value as of unpaid invoice.Pay with the help of withheld fees.Pay in instalments.Uses of recourse factoring are as follows −Creditworthy invoice clients.Need not pay high fees.Access to capital.Access to capital.Regular cash flows.Improves payment flows.Improves competitiveness.Some of the ...
Read MoreExplain about factoring in financial management.
Factoring is a financial arrangement between the company and financial institute, in which company get money in form of advance in return for receivables from financial institution. In this, company is called client and financial institution is called factor. Factoring agreements involves the factor, the client and a customer.Functions of a factor are as follows −Maintain accounts.Providing advisory services.Providing short-term finance.Providing credit protection.Providing collection facilities.Features of factoring are as follows −Clients credit is covered through advances.Cash advances.Collection services.Provide advice.Steps involved in factoring are as follows −Customer places an order to seller.Agreement is made between the factor and seller.Sale contract is ...
Read MoreExplain about venture capital in financial management.
Venture capital is the capital supplied to start ups or any small business by the investors in the form of share capital believing they have long term growth in their business.Though, it involves risk in investing to the investors, they invest by seeing attractive payoff. The investors are capitalists. In venture capital, ownership is distributed to limited partners.Methods of venture capital financing are as follows −Equity financing − Equity financing is important for new companies, as they are not able to give returns on time to its investors.Conditional loan − Lender will only charge royalty instead of interest.Income note − ...
Read MoreWhat is operating leverage in special financing?
Operating leverage is ratio between company’s fixed costs to its variable cost. It tells about how company is using its fixed cost to regenerates its revenue. If the fixed costs are high, company generates high leverage ratio which leads to high profits.If the fixed costs are low, company will generate low leverage ratio and leads to low profits. Operating leverage calculates company’s breakeven point and tells about the effectiveness of pricing structure.Scenarios of leverage ratio are as follows −High operating cost − Company will earn larger profit, when it attains sufficient sale volume to cover its fixed cost.Low operating cost ...
Read MoreWhat is leverage financing in special financing?
The main objective of leverage is the maximisation of wealth of the shareholders. Financial leverage refers to buying the additional assets which company uses as its debt. The more the debt, more the leverage of that company.However, more leverage will increase risk of failure. It is also called as trading on equity. Financial leverage represents left hand side of balance sheet.Increase value of asset shows gain in owner’s cash.Decrease value of asset shows loss in owner’s cash.Measure of financial ratios are as follows −Debt ratio = (debt/total assets)Debt ratio = (debt/total assets)Interest coverage ratio = (profits/interest)Degree of financial leverageDegree of ...
Read MoreWhat is lease financing in special financing?
In leasing, the company which leases is called lessor and the user is called lessee. The agreement made between lessor and lessee is called leasing. Different types of leasing are operating lease, financial lease, sale and lease back and leverage lease.Financial lease is an agreement in which lessor receives lease payments. In this lessor is responsible for maintenance, taxes and insurance. In this there will be substantial transfer of risk and rewards to lessee.Main features of financial lease are as follows −Lessee selects an asset.Lessor purchases that asset.Lessee uses that asset during the time.Lessee pays rentals for using the asset.Lessee ...
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