Marginal Cost
Definition and Explanation: Marginal means Extra. Marginal cost is defined by CIMA as “the cost of one unit of a product or service which would…
Read more
Latest Accounting Articles
Solved Example of Financial Ratios
John Brown is running a business which manufactures nuts and bolts which are then sold to local industrial units. The abridged accounts for 2014 and…
Read more
Preparation of Income Statement and Balance Sheet with the help of Financial Ratios
Sometimes examination questions may require the candidates to prepare financial statements with the help of a given set of financial ratios. In these cases at…
Read more
Limitations of Ratio Analysis
Financial ratio analysis faces some limitations, which are given below: (1) Ratio analysis requires a proper comparison i.e., one ratio its own is of no…
Read more
Uses of Financial Ratio Analysis
Financial ratio analysis helps a business in a number of ways. The importance and advantages of financial ratios are given below: (i) Ratios help in…
Read more
Liquid Ratio
Liquid Ratio or Acid Test Ratio or Quick Ratio – Definition, Explanation and Use: Current ratio (which takes all current assets into account) may give…
Read more
Current Ratio
Current Ratio or Working Capital Ratio – Definition, Explanation and Use: The current or working capital ratio is determined by dividing the total current assets…
Read more
Liquidity Ratios
Definition, Explanation and Use: Liquidity ratios determine the ability of a business to finance, its day to day operations, or in other words, to pay…
Read more
Non Current Asset Turnover
Definition, Explanation and Use: Non-current asset turnover ratio determines the efficiency with which a business uses its non-current assets to generate revenue for the business….
Read more
Trade Payable Payment Period
Definition, Explanation and Use: The trade payables’ payment period ratio represents the time lag between a credit purchase and making payment to the supplier. As…
Read more
Trade Receivable Collection Period
Definition, Explanation and Use: The trade receivables’ collection period ratio represents the time lag between a credit sale and receiving payment from the customer. As…
Read more
Inventory Turnover Ratio
Definition, Explanation and Use: Inventory turnover ratio is often linked with the measurement of profitability. Though this ratio does not in itself measure profitability, but…
Read more
Activity Ratios
Activity Ratios or Turnover Ratios – Definition, Explanation and Use: The activity ratios or turnover ratios (which are sometimes referred to as efficiency ratios or…
Read more
Return on Equity
Return on Equity (ROE) Ratio – Definition, Explanation and Use: Return on equity ratio (ROE) is one of the most widely used financial ratio. This…
Read more
Return on Capital Employed
Definition, Explanation and Use of ROCE Ratio: Return on capital employed (ROCE) ratio is used to determine the returns that a company is generating from…
Read more
Return on Assets
Definition, Explanation and Use of Return on Asset Ratio: The return on assets percentage determines the performance of business’ assets in terms of profitability. This…
Read more
Operating Expenses Ratio
Definition and Explanation: Operating expenses ratio shows operating expenses as a percentage of sales. Operating expenses relate to the operations of a business entity. In other…
Read more
Markup Percentage Formula and Margin Percentage Formula
Difference between Markup Percentage Price and Margin Percentage Price: Many business often use concepts of margin and markup as guides for setting the prices of…
Read more
Physical Count Method of Closing Inventory
Physical Count Procedure of Closing Inventory – Definition and Explanation: The inventory value shown in the balance sheet is usually calculated through a physical inventory…
Read more
Periodic and Perpetual Systems of Inventory Accounting
There are two types of systems of inventory accounting, which are briefly discussed below: (1) Periodic Inventory System – Definition and Explanation: When the periodic…
Read more
Goods on Sale or Return Basis
Goods Sent to Customers on Sale or Return (Approval) Basis: When goods are sent on a “sale or return” or on “approval” basis, these goods…
Read more
Effects of Errors in Valuing Inventory
The errors in valuing inventories affect the profit and assets in the following way:
Separate Valuation of Inventory Items
Accounting standards require that the cost and net realizable value (NRV) of each inventory item should be calculated individually and the lower figure taken in…
Read more
Role of Accounting Concepts in Inventory Valuation
Historical “Cost Concept” states that assets including inventory should be recorded at their original cost until they are sold. In other words, no profit should…
Read more
Physical Flow of Goods VS Inventory Valuation Methods
The valuation methods are bookkeeping methods and must not be confused with the physical flow of inventory. As most goods deteriorate with age, the physical…
Read more
Calculation of Gross Profit using Calculated Inventories of FIFO and AVCO
Calculation of Gross Profit (Perpetual): To calculate gross profit (perpetual) and gross profit (periodic), we take calculated inventories of FIFO from First in First out…
Read more
Weighted Average Cost (AVCO) Method
Definition and Explanation: The weighted average cost (AVCO) method or standard cost method involves computing the weighted average cost of the inventory held after each…
Read more
First in First out Method (FIFO)
Definition and Explanation: The FIFO method uses the price of first batch received for costing all units of sales until all units from this batch…
Read more
Inventory Valuation Methods
Records of inventories are not normally included in the double entry system. Most organizations keep a separate record of inventories, outside the ledger, by maintaining…
Read more
Balance Sheet and Income Statement – Solved Examples
Example 1: Preparation of Balance Sheet – Horizontal and Vertical Style: The following trial balance is prepared after preparation of income statement for F. Green…
Read more
Items in the Balance Sheet
Balance sheet is a financial statement so it should give much information as possible to the users of the balance sheet. The items in the…
Read more
Drawings
Drawings in Accounting – Definition and Explanation: Drawings are the amounts taken by the owner of a business for his personal use in anticipation of…
Read more
Accounting Period
What is an Accounting Period/Reporting Period? Definition and Explanation: Accounting period (reporting period) is that period for which the organization ascertains its profit or loss. It…
Read more
Carriage Inwards and Carriage Outwards
Difference between Carriage Inwards and Carriage Outwards: Carriage Inwards – Definition and Explanation: Carriage inwards is an expense incurred to bring the goods purchased to…
Read more
An Introduction to Financial Statements
We had detailed discussion of trial balance and also learnt that how it is being prepared with the help of ledger account balances. We had…
Read more
Closing of Incomes and Expenses
As mentioned in the accounting for inventories chapter, businesses close the accounts for all its incomes and expenses by transferring their balances to incomes statement…
Read more
Calculation of Net Profit
Definition and Procedure to Explain Net Profit: We have already learnt in the accounting for inventories chapter that how profits and losses may be determined…
Read more
Net Profit Ratio
Net Profit Ratio or Net Profit Margin or Operating Profit Ratio – Definition and Explanation: The net profit ratio (net profit margin or operating profit)…
Read more
Gross Profit Ratio
Gross Profit (GP) Ratio or Gross Profit Margin – Definition and Explanation: Gross profit ratio (GP ratio or gross profit margin) tells us how much…
Read more
Profitability Ratios
Profit is as essential for a business as blood for life of a human being. A business running in continuous losses finds it dubious to…
Read more
Bookkeeping for Incomes and Expenses
The mechanism of recording incomes and expenses transactions/entries are given below: Explanation with Example Entries and T-Accounts: Transaction 1: Capital Injection by Owner: Transaction 2:…
Read more
Double Entry for Expenses and Incomes (Revenues)
The double-entry for expenses and incomes (revenues) are slightly more complicated as compared to assets, liabilities and capital. Debit and Credit Rules for Incomes and…
Read more
Incomes and Expenses
Definition of Income: The most important and possibly the only source of revenue for most businesses is the income derived from the sale of goods…
Read more
Calculation of Profits for Service Business
Many trading and manufacturing organizations, there may be service businesses which sell knowledge and or skills such as solicitors, accounting firms, estate agents and advertising…
Read more
Opening Inventory
Definition: Businesses may inventory of unsold goods at the beginning of the period called opening inventory. Normally, an assumption is made that this inventory is…
Read more
Closing Inventory
Definition: This is very unlikely that a business sells all the goods that it purchased during the current period. Therefor cost of purchases is not…
Read more
Closing of Incomes and Expenses
At the end of an accounting period businesses close the nominal accounts (accounts for all incomes and expenses) by transferring their balances to the income…
Read more
Trading Section of Income Statement
Preparation Methods of Trading Section of Income Statement: Trading section of income statement is usually prepared on a separate sheet (in a vertical layout) rather…
Read more
Sales Returns or Returns Inwards
Definition and Explanation: Sales returns are also known as returns inwards because they are being returned back to the firm which sold them. It provides…
Read more
Purchase Returns or Return Outwards
Definition and Explanation: Purchase returns are also known as returns outwards because they are being sent out from the firm which bought them. It provides…
Read more
Explains financial and managerial accounting. Exercises, problems, calculators and more.