Tuesday, September 27, 2011



Review of: FINANCIAL ACCOUNTING -An introduction of concepts, methods and uses


The book covers all the basic topics of the financial accounting very comprehensively. Analysis and interpretation of the financial statements have been given due importance in the book. The topics have been explained in a very simple language so easy to grasp the concepts behind it. It is a must read book for MBA Graduates, accounting degree students and basic accounting learners.

Questions and Answers on Management accounting

Question # 1

What is the difference between financial accounting and management accounting?
  • Financial accounting is the legal and regulatory requirement, whereas management accounting is based on the sole discretion of management.
  • Financial accounting is done in accordance with the generally accepted principles or international accounting standards. In contrast, management accounting does not need to be adhered to these principles.
  • Financial accounting is concerned with historical data whereas management accounting is related to future decision making.
  • Financial accounts are prepared monthly, quarterly, semi annually or annually. On the other hand, management reports may be prepared on daily basis depending on the needs of the company.
Question # 2

What is meant by cost object?

A cost object is any activity for which a separate measurement of costs is desired.(Collin drury). A cost object is generally a separated activity for which a cost is computed. Examples include cost of operating a particular unit and cost rendering services to a particular customer. You can grasp this concept by thinking cost object.

5 Questions and Answers on Management Accounting

Question # 1
What is the difference between financial accounting and management accounting?
  • Financial accounting is the legal and regulatory requirement, whereas management accounting is based on the sole discretion of management.
  • Financial accounting is done in accordance with the generally accepted principles or international accounting standards. In contrast, management accounting does not need to be adhered to these principles.
  • Financial accounting is concerned with historical data whereas management accounting is related to future decision making.
  • Financial accounts are prepared monthly, quarterly, semi annually or annually. On the other hand, management reports may be prepared on daily basis depending on the needs of the company.
Question # 2
What is meant by cost object?

A cost object is any activity for which a separate measurement of costs is desired.(Collin drury). A cost object is generally a separated activity for which a cost is computed. Examples include cost of operating a particular unit, cost rendering service. You

Monday, September 26, 2011

BEST PRACTICES TO CHOOSE THE BEST ACCOUNTING SOFTWARE

Accounting software selection starts with the detail study of current business practices, followed by gap analysis, requirements definition, ranking of the requirements, preparation of detailed request for proposal, evaluation and short listing of the vendors on the defined criteria, performance of the cost and benefit analysis and finally selection of the best accounting software. Selection of the right accounting software for your organization is an important decision which should not be taken lightly. An accurate decision regarding the selection of the accounting software would help in the reduction of costs of your company with the ready access to accurate information. The decision should be taken .The following tips give the insight for taking a thoughtful decision.


Documentation of the current business requirements and mapping of the future requirements should be undertaken to highlight any weaknesses in the system. Since accounting software is a business initiative, you should first document your current business processes and analysis should include preparation of to-be state system requirements.Prepare a detailed analysis regarding volume of data, need for collaborating working, available resources and most importantly time frame for implementation and data migration from the legacy system.


Determine and evaluate the key performance indicators that will be used to measure the accounting system’s effectiveness and efficiency. Compare the proposals of the vendors with the set criteria and give them opportunity to demonstrate it.


The criteria may vary according to the requirements of your company but consider at minimum;


Experience and expertise of the vendor


Attend the training sessions being conducted by the vendor for its clients


Consider the reputation of the vendor in the market


Prepare a comprehensive evaluation sheet for evaluating the vendors which would allow you to compare and contrast one system with another effectively.


Client recommendations and references are vital for selecting right accounting package. Endorsement of the client along with the vendor’s reputation may help you in taking right decision. But do not over rely on personal recommendation rather pay a visit to the client of the vendor where the product has been implemented and in running condition.Engage the company's financial manager in the decisions.


Set a realistic budget according to the needs of your organization. Usually companies spend about seven to ten percent of their annual revenue on Enterprise Resource Planning (ERP) systems. One of the major factors for the failure of planned implementation of accounting software is not to consider the hidden costs of training, support and staffing. Compile project milestones along with the cost to be incurred on every milestone.


Hiring an independent consultant can assist you in preparing your company’s requirements and need analysis in more detail. Likewise selection of the accounting package, selection of a consultant should be done carefully. The consultant will help you in drafting the comprehensive evaluation performa about the product .


7. Adequate support and co-operation of executive management is required for the selection of good accounting software. A full time project manager should be assigned to oversee all the functions related to selection of the software. His responsibilities should include defining objectives, finding ways to achieve set objectives and ensuring that everyone in the organization knows their roles and responsibilities.


Good implementation is also necessary along with the good accounting software. When going for off the shelf package, also check for the well reputed implementation firms.


9. Once decided about the software, ensure that all the documents relating to licensing of the software are included in the contract package. A well drafted agreement will help you a lot in purchasing and implementing the right choice.



  • Get the contract reviewed from the legal counsel before signing. Do not forget to read any hidden clauses which may be used for exploitation. Evaluate the contract in terms of monitoring costs, payment schedule, defined responsibilities and deliverables of the vendor, going concern of the vendors’ business.

The Accounting Game

The Accounting game is worth reading accounting book that comprehensively explains complex accounting in a fun and easy way.

This book uses the world of a kid's lemonade stand to teach the basics of financial terms You'll run your own lemonade stand and make it grow by creating signs to advertise it, borrowing money from Mom, buying lemons and sugar and selling to the whole neighborhood. As you run your stand, you'll begin to understand and apply financial terms and concepts like assets, liabilities, earnings, inventory and notes payable, plus:

  • Know the difference between accrual vs. cash accounting methods
  • Create and understand an income statement and balance sheet
  • Track inventory using LIFO and FIFO
  • Create cash statements and understand cash flow and liquidity
  • Apply your new knowledge to real-life situations

The innovatory approach of The Accounting Game takes the typically complex and boring subject of accounting and business finance a fun game. The concept of understand, learn and use has made this book a step ahead from other like books.

The following three basic financial statements have been explained in a very good way

  • the balance sheet
  • the income statement
  • the cash flow statement.
To sum up, it is worth studying book, which should not be missed in any case!

Core Concepts of Accounting (8th Edition)

Core Concepts of Accounting offers the accounting learners a complete understanding of the basic terminology and fundamental accounting concepts. The revised book includes now full text of the self paced workbook approach and includes important accounting concepts and terms, a comprehensive explanation of financial statements, the use of financial accounting information, and a complete basis glossary of over 500 key accounting terms. Major key topics include

  • Interpretation of balance sheet and financial statements
  • Income measurement and accounting
  • Preparation of accounting records and systems
  • Revenues and monetary assets
  • Expense analysis and measurement
  • Inventories management and cost of sales
  • Non current assets and depreciation
  • Liabilities and equity
  • Statement of cash flows.

§ I

Understand Accounting Information Systems

Accounting information systems are the most critical information systems in business. These system are based on double entry book keeping concept, responsibility accounting and activity based costing. Computer based accounting system records and processes transactions to generate meaningful information like balance sheet, profit and loss account and reference reports for monitoring.

Transaction processing systems include

Order processing systems

Captures and processes customer orders and produces data for inventory control and accounts receivable. Sales order processing is an important transaction processing system that by capturing and processing sales order data produces analysis reports. Further it also tracks the customer order, till delivered.

Inventory control systems

Processes data reflecting changes in inventory and provides shipping and reorder information. Following the order processing system, inventory control system updates the inventory and gives the information about the optimal inventory keeping. Economic order quantity (EOQ) is determined by it, and the order levels are defined to ensure the minimum investment in inventory. EOQ is the inventory level at which the holding costs and ordering costs related to inventory are equal so minimum.

Accounts receivable systems

Records amounts owed by customers and produces customer invoices, monthly customer statements and credit management reports. Receivable system produces aging report of the receivable which ensures timely follow-up of the collection resulting in minimal investment in working capital.

Accounts payable systems

Records purchases from and payments to suppliers and produces cash management reports. The system maintains the list of approved vendors and ensures that the purchases have been made from the approved list so minimizing the possibility of employee related frauds. It also generates payments according to the credit period granted by the supplier thus helps in managing working capital requirement of the company.

General ledger systems

The GL system consolidates data from other accounting systems and produces the periodic financial statements and reports of the business. It is the most critical accounting system whose performance depends on the effective controls over the other TPS systems.

Saturday, September 24, 2011

General Ledger and Concept of Accounting


The nominal ledger is an accounting record which summarizes the financial affairs of the business. It is also called general ledger.It includes details of assets, liabilities, capital, income and expenditure, and so profit and loss. It consists of a large number of different accounts, each account having its own purpose or name and identifies or code.




Examples of accounts in the nominal ledger include the following
  • a. Plant and machinery at cost (non current asset)
  • b. Motor vehicle at cost (non current asset)
  • c. Plant and machinery, provision for depreciation (liability)
  • d. Motor vehicle, provision for depreciation (liability)
  • e. Proprietor’s capital (liability)
  • f. Inventories- raw materials (current asset)
  • g. Total trade account s receivable (current asset)
  • h. Total trade accounts payable (current liability)
  • i. Wages and salaries (expense item)
  • j. Rent and local taxes (expense item)
  • k. Advertising expenses (expense item)
  • l. Bank charges (expense item)
  • m. Motor expenses (expense item)
  • n. Telephone expenses (expense item)
  • o. Sales (revenue item)
  • p. Total cash or bank over draft (current asset or liability)
How to draw the ledger account:

There are two sides of the account with an account heading on the top, and also called as T account.

There is a left hand side, or debit side.
There is a right side, or credit side.

Double Entry Bookkeeping:

Double entry bookkeeping is a method which is used to transfer weekly/ monthly total from book of prime entry into the nominal ledger. Concept of double entry implies that every transaction has two effects.

Rules of double entry book keeping:

A double entry bookkeeping is a method by which a business record financial transactions. An account is maintained for every supplier, customer, asset, liability, and income and expense. Every transaction is recorded a twice so that every debit is balanced by credit.

Rules of debits and credits:
  1. An increase in expense (eg a purchase of stationery ) or an increase in an asset ( eg purchase of office furniture ) is debit.
  2. An increase in revenue ( eg a sale) or an increase in a liability (eg buying goods on credit) is a credit.
  3. A decrease in an asset (eg making a cash payment ) is credit.
  4. A decrease in a liability (eg paying a creditor) is a debit.

Friday, September 16, 2011

Thursday, September 15, 2011

Review of FRANK WOOD'S BUSINESS ACCOUNTING






Frank Wood's accounting book covers all the topics for the beginners. It provides a very sharp view of the basic accounting and managerial concepts. From introduction of accounting cycle to the concept building till transaction posting, the book is worth reading.

Review of Wiley IFRS practical implementation Guide and Workbook


Wiley IFRS is an excellent book and a quick reference guide for understanding practical implementation of International Financial Reporting Standards/ International Accounting Standards. The book includes complete and comprehensive overview of the standard along with the practical guidelines. Illustrations at the end of chapters summarizes the whole topic with true application guidelines.

Wednesday, September 14, 2011

ACCA F1: Introduction to motivating people

ACCA F1 : Introduction to recruitment methods

Paper F1: What are recruitment methods ?

Accounting Equation Illustration

To be precise, accounting equation is the most important concept for preparing financial statements. It is the rule that assets of the business are always equal to liabilities of the business. So accounting equation becomes
Assets = Liabilities

Business liabilities consist of two types. 1) External liabilities . 2) Internal liabilities / Equity

Example: On 1 January 2X11, John decided to open up a bakery in the market to sell fresh baked items. He had some savings and invested USD 10,000 into his business.The business is a separate entity in terms of accounting. It has obtained its assets from its owner, John. Business therefore owes this money to the business. The money invested into business by the owner is the Capital.

Capital In accounting, capital is an investment of money with the intention of earning a return. As long as the amount of money is invested in the business, it will be treated as the money owed to the owner by the accountants.so the Journal entry that would be made on the investment of funds would be

Bank Account (DR) USD 10,000
Capital(CR) USD 10,000

Capital invested is a form of liability, because it is an amount owed by the company to its owner.So Accounting equation would become now :

Assets = Liabilities + Capital (Equity)

As the cash is the asset so 10,000 = 0 + 10,000 It equates our accounting equation.

Tuesday, September 13, 2011

Basic Accounting Concepts

To understand the accounting you are required to understand some basic concepts of it. These include
1) Going Concern
2) Prudence
3) Matching Concept
4) Consistency
5) Materiality
6) Substance over form

Going Concern
Going concern concept implies that the entity will continue to operate in the foreseeable future and has not any intentions or necessity to liquidate. Assets should not be measured on realizable ( selling) value.

Example:

ABC Foods Pty has acquired a grinding machine costing USD 100 million with nil residual value. Assets has a life of 10 years.
Using the going concern assumption, it is assumed that business will remain in operation and asset will live out its total life of 10 years. A depreciation charge of USD 10 million ( USD 100m/10 years) would be made each year. The value in the balance sheet for the asset would be cost less accumulated depreciation.

Prudence

Prudence concept is about the exercise of the judgement needed in making the estimates. According to the prudence concept, assets or income should not be overstated and expenses or liabilities should not be understated.

Example:

Loss of USD 150m by ABC foods pty due to damage of premises by fire should be accounted for immediately. An accurate estimate is needed to be accounted for.
Profits or incomes should only be recognized when realized in any asset.

Matching Concept

Matching means expenses, income and profits and losses of a certain period should be matched with each other.

Example:

Let say ABC foods pty incurred an expense of USD 450 and earned an income of USD 650. The income and expense should be matched in the relevant period.

Consistency

The presentation and classification of items in the financial statements should remain the same from one period to another except in case of any significant change in the nature of operations.

Materiality

Materiality is an important concept in the accounting which implies that all material information should be disclosed adequately.

What is material information?

Any information which can influence the economic decision of the users taken on the basis of financial statements.

Substance overform

The principle that the transactions are recorded on the basis of their nature and not only with regard to their legal form. In accounting the substance of the transaction is far more important than the legal form of it.

For example a car leased by the company should be recorded in the books of the company as a leased asset not merely rental expense.

Inventory Valuation Method - FIFO

Understand Tax Basis concept

What is Deferred Tax Asset?

Basic elements of revenue recognition

IAS -18 : Revenue recognition

IAS 7 - Cash Flow

IAS 2 - Inventories

International Accounting Standard - IAS 1

How to reconcile a bank ?

Bank Reconciliation

Depreciation - Declining method

Depreciation - straight Line method

Monday, September 12, 2011

Understand Accrued expenses

What are Unearned Revenues?

Depreciation and accumulation depreciation

What are prepaid expenses?

Understanding Depreciation

How to calculate debt equity ratio

Introduction of Debt Equity Ratio

Understanding Cash Flow Statement - Format

Cash and Accrual basis understanding

Accrual vs Cash Basis Accounting

Trial balance

How to make Balance sheet

How to Create an Income Statement

How to prepare Balance sheet?

Profit and Loss account Explained

How to prepare profit and Loss account

Understand the basics of financial statements

Four core financial statements

Financial Statements

Accounting Cycle

How to prepare T accounts ?

Transactions and accounting equation

T Accounts and Jounal Entries

Basic Accounting Equation

Rules of debits and credits

Debits and Credits

Accounting Basic Tutorial

 

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