Cash based accounting means, it records only those transactions relates to cash. That means transactions of revenue and expenses are recorded when payments are made or received through cash only. It is a single entry accounting.It is useful for simple accounting system.It is used, if inventory is to be valued.It is useful, when audit is not necessary.It is useful in services business.Reasons why companies prefer cash based accounting are given below −Single entry accounting.Few financial transactions.Very few employees.Few valuable physical assets.Very few inventory, supplies and cash in bank.Sole proprietorship.Privately held.Legal reporting includes −Supports company’s income tax reporting.Paid government taxes.Forecast future ... Read More

Bookkeeping is keeping the record of business transactions on day to day basis. It includes identifying, measuring and recording of transactions. Bookkeeping is basis of preparing accounting statements. It records below transactions, but not limited to, Payments to suppliers.Loan payments.Invoice payments.Asset depreciation.Generating financial reports.In olden days, that means days before digitalisation. Bookkeeping starts with entries in general ledgers, later in place of general ledgers special ledgers and day books were introduced. Special ledgers are separated ledgers for sales, purchases, cash receipts, cash payments etc. these entries were made on day wise.Likewise, ledgers for sales, rent, wages, loans etc. are maintained ... Read More

Accounting is process of recording financial transactions of a firm. These recordings are classified into assets, liabilities, revenue, expenses, transactions and reporting. Recording the transactions can be done into −System of book keeping.Tracking transactions.Making financial reports.Objectives of accounting are as follows −Maintain records.Utility resources.Profit and loss.Financial position.Decision making.Different types of accounting are as follows −Managerial accounting.Tax accounting.Financial accounting.Auditing.Forensic accounting.Some of the advantages of accounting are as follows −Maintains business records.Decision making.Comparison of results.Valuation of business.Financial statements preparation.Taxation issues.Some of disadvantages are given below −Manipulation of accounts.Based on estimation.May be biased.Only financial nature is measurable.Change in price is not considered.Accounting equation ... Read More

Profit and loss statement tells about company’s revenues and expenses in a particular period. It tells whether, company gets profit or loss through cash flows. To invest in company investors will look for financial strength of the company. Profit and loss statement serve as one of the instrument to check financial strength of the company.Information required to prepare profit and loss statements is given below −All business transactions.Petty cash & cash receipts.Source of income.Discounts or returns (if any).Common terms in profit and loss statements are mentioned below −Revenue − It includes total sales, cash from property/ equipment sales and refund ... Read More

Trading account is the account which maintains trading activities of the firm. The entries mainly include net sales, cost of goods sold. This tells whether final result is loss or profit.DebitCreditParticularsAmountParticularsAmountTo opening stockXXXXBy sales XXXXTo purchases XXXXLess: return inwards (XXX)XXXXLess: Return outwards (XXX)XXXXBy closing stockXXXXTo wagesXXXBy Gross LossXXXTo Carriage inwardsXXXTo freight inwards/cartageXXXTo Gross profit c/dXXXXXXXXXXXFeatures of trading account are as follows −Preparation of accounting statements of trading activities.Records net sales and cost of goods sold.Balance these accounts to find whether it profit or loss.Transfer balance to profit and loss account.Contents of a trading accounting are as follows −Opening stock − ... Read More

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 More

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 More

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 More

Foreign direct investment (FDI) is the investment made by a company (one country) with another company/corporation in another country, either to buy a company in specified country or to expand business in the specified country.If an investor obtains a 10 voting power in a firm is called lasting interest. If a firm has to be considered, its investment as FDI is established its lasting interest. FDI is important for developing countries and emerging markets, as they need funding and expand their sales internationally.Methods of FDI are as follows −Mergers and acquisitions.Joint ventures.Types of FDIs are mentioned below −Horizontal − A ... Read More

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 More