Accounting

Accounting — No Comments
1
Nov 11

Journal Entry for Depreciation

Before looking into journal entry for depreciation one must know about depreciation, deprecation is an expense for a company but it is a non cash expense as company does not have to pay anything for it but company have to make provision for depreciation because assets have to be replaced in few years. Given below is the journal entry for depreciation –

Depreciation Account Dr

To Accumulated Deprecation

In the above journal entry depreciation is debited because the profit of a company reduces due to depreciation and accumulated depreciation is a contra account and it is shown in asset side of the balance sheet by way of deduction from the value of fixed assets so as to arrive at net figure of fixed assets.

Accounting — No Comments
17
Sep 11

Variance Analysis

Variance analysis is the term which is used in the context of budgeting, it can be compared with a report card of students, If as a parent you had excepted your child to score between 70 to 80 percent marks but report card show 60 percent marks then that is variance and you as a parent would look into factors which resulted in lower marks.

In the same way a company makes certain budgets for costs and revenue and when the actual revenues and costs are different from planned costs and revenues then the analysis of that difference is called variance analysis. It can be better understood with the help of an example, suppose a company has a budget of $100000 for manufacturing a product and the sales target of a company is $150000 but the actual costs turned out to be $120000 and sales turn out to be $125000 than there is a variance of $20000 in cost and $25000. Variance analysis involve finding out the reasons for variance between the actual and budget and taking steps to make sure that next time there is no such variance.

Variance can be in many forms like it can be sales price variance, labor rate variance, material price variance and so on. The main reason behind variance analysis is to improve the productivity of the company by reducing the variance and thereby increasing the profitability of the company.

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28
Jul 11

Current Ratio Analysis

If you are into finance then you know the meaning of Current ratio, which is calculated as Current Assets/Current Liabilities. But many people do not know how to analyze the current ratio because it is easier to calculate the current ratio but is very difficult to interpret or analyze the current ratio.

Current ratio is a tool to measure the liquidity position of the company and ideal current ratio is 2:1, which implies that for every 1 dollar of Liability a company should have 2 dollar of assets. However a 2:1 current ratio does not mean that liquidity position of the company is sound because if a company has too much inventory in its balance sheet than also current ratio will be higher but that does not necessary implies that liquidity position of the company is good because inventory takes times to get converted into cash.

Hence before giving judgment on the liquidity position of the company on the basis of current ratio an individual should take care to see composition of current assets and current liabilities and also look at other ratios like liquid ratio, inventory turnover ratio and other such ratios.

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20
Jun 11

Advantages and Disadvantages of Just in Time

Just in time is an inventory management strategy which is used by the manufacturing companies so that these companies can reduce their cost of production. Under this strategy company does not hold inventories rather they produce as the demand for product arises. Just in time strategy has both advantages and disadvantages let’s look at both of them –

Advantages of Just in Time

Just in time makes possible for the companies to use the cash for other productive purpose which would have been otherwise tied in the inventory.
Since company buys the raw materials when there is need for it, company can have the advantage of buying the raw materials at lower price if the prices have reduced and also there is no risk of wastage of raw materials leading to cost saving for the company.
Under this strategy company has more space as there is no inventory and therefore there is no requirement for storage and that vacant space can be used by the company for other productive purpose.

Disadvantages of Just in Time

This strategy may lead to embarrassment for the company since if the company is not able to produce the product on time, it can have far reaching consequences on the goodwill of the company.
Company is more dependent on the supplier of raw materials under this strategy and therefore chances of supplier exploiting the company increases when there is urgent need for raw material.

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6
Jun 11

Cash Equivalents

Cash is one thing which every company would love to have in its balance sheet because having excess cash helps the company in making profitable investments and avoiding any embarrassment related to nonpayment of dues to its creditors. However companies would be also happy if they do not have cash but have cash equivalents.

Cash equivalents are those short term investments of the company which are highly liquid and can converted into cash in short period of time usually within 3 to 15 days. Some examples of cash equivalents are the treasury bills. Commercial paper, money in the saving account, investments of the company in money market mutual funds etc….

Cash equivalents apart from helping the company whenever the need for cash arises, they also provide returns in terms of interest received to the company as they are interest giving securities. Cash equivalents have virtually no risk because these investments are into government securities or those corporate securities which are of highest rating and therefore companies tend to have cash equivalents in their balance sheet because cash equivalents are as good as having cash.

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