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…
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There are two types of systems of inventory accounting, which are briefly discussed below: (1) Periodic Inventory System – Definition and Explanation: When the periodic…
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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…
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The errors in valuing inventories affect the profit and assets in the following way:
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…
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Historical cost concept of accounting states that assets including inventory should be recorded at their original cost until they are sold. In other words, no…
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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…
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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…
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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…
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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…
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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…
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Example 1: Preparation of Balance Sheet – Horizontal and Vertical Style: The following trial balance is prepared after preparation of income statement for F. Green…
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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…
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Drawings in Accounting – Definition and Explanation: Drawings are the amounts taken by the owner of a business for his personal use in anticipation of…
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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…
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Difference between Carriage Inwards and Carriage Outwards: Carriage Inwards – Definition and Explanation: Carriage inwards is an expense incurred to bring the goods purchased to…
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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…
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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…
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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…
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Net Profit Ratio or Net Profit Margin or Operating Profit Ratio – Definition and Explanation: The net profit ratio (net profit margin or operating profit)…
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Gross Profit (GP) Ratio or Gross Profit Margin – Definition and Explanation: Gross profit ratio (GP ratio or gross profit margin) tells us how much…
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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…
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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:…
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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…
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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…
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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…
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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…
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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…
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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…
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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…
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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…
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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…
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Definition of Sale: Sales refers to the sale of goods which have been purchased with the intention of selling. Sales just like purchases include both…
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Definition of Purchase: Purchase refers to those goods which are bought with the intention of selling. This also means that purchases of non-current assets should…
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Bookkeeping of inventory may be determined in two different ways: (1) By reducing the purchases figure on account of every sale using the cost (purchase)…
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Inventory of goods, for trading businesses, holds a key place in accounting analysis as it is mainly responsible for generating profits which is one of…
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Definition: As the business grows, the number of entries increases and it is therefore rightly desired by the businesses to carry out periodic checks on…
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Definition of Balance, Debit Balance and Credit Balance: The difference between the sum of the two sides of an account is called the balance. This…
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Double entry system for assets and liabilities can be well explain with the help of following examples: Before reading “double entry for assets and liabilities”…
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Definition: Instead of using a plus or minus sign to indicate increase or decrease of an item, an account is prepared to show summarized record…
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Accounting as language of business has its own vocabulary. There are certain rules for recording increase or decrease in assets, liabilities and capital in the…
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Balance Sheet or Statement of Financial Position – Definition: The balance sheet (statement of financial position) is a statement (not an account) which shows financial…
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We should know that accounting equation is only affected when business enters into a transaction. The term transaction is defined below: Definition: Business transaction is…
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The whole system of accounting has developed from the same basic tenet of a single equation. As a business does not own any thing at…
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There are following three main branches of accounting: (1) Bookkeeping. (2) Financial accounting. (3) Managerial accounting. Definition and Evolution of Bookkeeping: Firstly accounting is related…
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Explains financial and managerial accounting. Exercises, problems, calculators and more.