What is inventory

What is inventory?

In business inventory consist of two items i.e. items purchased for resale, item purchased to be used in manufacturing. The manufacturing inventory can be further classified into three classes or types i.e. raw material, work in progress and finished Goods.

What is manufacturing inventory?

The manufacturing inventory can be classified into three types i.e. inventory not yet used (Raw material), partial manufactured Goods (Work in progress material) and fully manufactured Good (Finished Goods).

What are cost component of inventory?

Inventory cost includes cost of purchase, import duties, carriage inward and manufacturing cost. All cost incurred directly or indirectly to bring the inventory to its present location and condition.

What is present condition and location of inventory?

The present condition and location of inventory for the purpose of valuation can be classified into four condition and location i.e. inventory is ready to resale, inventory is ready to used in manufacturing , inventory is partially manufactures and inventory fully manufactured.

How inventory is valued?

Inventory is valued at lower of cost or net realizable value. Net realizable value is expected selling price of the inventory minus cost necessary to complete the asset and sell the asset. The cost may be calculated using specific cost method, first in First out method or average method.

Where specific cost method is used?

Specific cost method is used where there are limited numbers of unit which are not interchangeable i.e. Jumbo jet, heavy capacity Generators,

Where FIFO and Average method is used?

The FIFO and average method is used where there are a number of small items which can be exchange with each other i.e. nuts and bolts.

Why inventory is valued lower of cost or net realizable value?

Inventory is valued at lower of cost or net realizable value under prudence concept which requires that assets are not to be overstated in the financial statements.

How inventory is initially measured?

Inventory is initially measured at cost.

How inventory is subsequently measured?

Inventory is subsequently measured at lower of cost or net realizable value at reporting date (Balance sheet date).

What is Cost Accounting

What is cost Accounting?

Cost accounting primarily deals with the cost of product or service. Cost accounting supports the management for performing the management function. Cost accounting also provide useful information for financial reporting.

What are advantages of cost accounting?

The advantage of cost accounting includes setting price, product profitability, cost control, evaluating performance and allocation of resources.

What is difference between cost and Management accounting?

Management accounting is broader term than cost accounting. Cost accounting primarily focuses over the cost structure and costing, where management accounting meets the management information requirement for planning, controlling, decision making.

What is Variance

What is Variance?

Variance is difference between the expected result and actual result. When those variances are analyzed, then this process is known as variance analyses.

What is purpose of variance Analyses?

Variance analyses are performed primarily for two reasons i.e. cost control and performance evaluation of different manager. Variance analyses are of fundamental importance in responsibility accounting.

What are different types of variances?

There are number of variances which includes material related variances, labor related variances, overheads related variances, sales related variances.

What are types of material Variances?

The material variance includes martial price variance and material usage variance.

What are types of labor variances?

Labor variance includes labour rate variances and labor efficiency variance.

What are types of variable overhead variance?

Variable overhead variance includes expenditure variance and efficiency variance

Difference between Provident Fund and Gratuity Fund

Difference between Provident Fund and Gratuity Fund

Provident fund and gratuity fund are both retirement benefits. Difference between Gratuity Fund and provident fund has been explained below;

1.    Gratuity Fund

Gratuity is the fund maintained by the employer and only employer makes contribution in that fund. Employer is typically required to make contribution equal to one Gross salary of all employees at the end of each year. Gratuity paid on the termination of employment and calculated by multiplying number of year served with Gross salary at time of termination of service.

2.    Provident Fund

In Provident fund partial contribution is made by the employee and equal contribution is made by employer. For example in 10% provident fund both employees and employer is re make contribution of 5% to provident fund. The employees are entitled to get that contribution and interest earned on such contribution on termination of service.

Difference between Provision and Contingent liability

Difference between Provision and Contingent liability

Difference between Provision and contingent liability has been explained below;

1.    Provision

Provision is future liability as result of event which has already incurred. Provision can be reasonably estimated. Example of provision includes provision for bad debt against credit sales and warranty provision for items sold.

2.    Contingent Liability

Contingent liability is a liability which depends on the happening of future event. The amount of contingent liability cannot be estimated reliably. As the amount cannot be estimated reliability therefore contingent liability are not recognized in the books of accounts.

Example of contingent liability is lawsuit against entity for damages and legal adviser is uncertain about the outcome of the lawsuit.

Difference between Reserve and provision

Difference between Reserve and provision

Difference between reserve and provision can be explained as below;

1.    Reserve

Reserve is created by setting aside some amount for future specified purpose. The reserve is created through appropriation of profit. Some examples of reserve are reserve for purchase of asset, reserve for share issue etc.

2.    Provision

Provision is charged to current profit & loss account as result of an event which has occurred. For example provision for warranty against sold items. Provision is future expense relates to current period and therefore provision is recognized on the bases of best estimate.

Difference between Expense and Expenditure

Difference between Expense and Expenditure

Difference between expense and expenditure can be explained as below;

Expense

Expense is the amount spent for carry out operation and revenue generation activity. The amount spent for operation known as Operating expense i.e. rent electricity, while amount spent on items directly related to revenue generation are known as cost of sales expense i.e. labor cost, martial cost.

Expenditure

Expenditure is simply the amount spent. The amount spent may or may not be for expense. For example amount may be spent for acquiring asset or settling liability. Therefore, technically speaking every expense is expenditure; however, every expenditure is not expense.

Difference between Allocation and apportionment

Difference between Allocation and apportionment

The allocation and apportionment are two different methods of charging expense to a cost center. Difference is being explained below

1.    Allocation

Expenses are directly charged to a cost center or department.  Allocation is done where an expense is directly traceable to a cost center. For example direct material and direct labor are allocated instead of apportioned.

2.    Apportionment

Where the expenses are not directly traceable to a cost center, then it is apportioned to cost centers by using appropriate bases. For example factory rent is distributed to different department on the bases of space occupied.

Difference between Gross profit and Contribution

Difference between Gross profit and Contribution

Profit is calculated by deducting the all related direct costs i.e. variable and fixed cost, where contribution is calculated only by deducting variable cost. The difference between contribution and profit has been further explained below;

1.    Gross Profit

Profit takes into account both type of cost i.e. variable cost and fixed cost. For example factory rent will be deducted while calculating the gross profit, but the same shall not be deducted at time of calculating contribution.

Sales	100
Material Cost	50
Labor	10
Factory overheads	10
Gross profit	30

2.    Contribution

Contribution takes into account only direct variable cost. Contribution is very effective tool for decision making because it establishes direct link with level of activity. It varies directly with level of activity. Contribution is basic tool for calculating margin of safety and break even analyses.

Sales	100
Material Cost	50
Labor	10
Contribution	40

Difference between cost and Management Accounting

Difference between cost and Management Accounting

Cost and Management accounting are closely associated and linked with each other and both provides useful information to management for performing management functions. Management accounting has wider scope than cost accounting. Difference between cost and management accounting is being explained below;

1.    Cost Accounting

Cost accounting primarily deals with the product cost and therefore Cost accounting provides useful information for setting price, stock valuation, and cost of product.

2.    Management Accounting

Management accounting focuses on management information required for management function i.e. planning, decision making, controlling. In Management accounting budget are prepared for future planning, while variance are calculated for control purposes. Relevant costs are considered for decision making purposes.

Difference between Issued and paid up Capital

Difference between Issued and paid up Capital

Issued & paid up capital are two different things. The difference is being explained below

1.    Issued Capital

Issue capital is the amount of capital issued to public for subscription. It is not necessary that public will subscribed all the capital.

2.    Paid up Capital

The amount of capital subscribed by the public is known as paid up capital. it is important to mention that paid up capital may be lower than issued capital. In practice issued and paid capital are same, because broker takes the responsibility for full subscription against some fees. It means broker takes the remaining capital portion, if any.

Difference between Revenue and Sales

Difference between Revenue and Sales

There is no difference between sales and revenue, both term can be used interchangeably. It is to be noted that both term represent the Gross inflow of cash or benefit before deducting of any relevant expenses. There are some Gross inflows where revenue term is more appropriate than sales, for example Government tax revenue.

It is to be noted that another term used for gross inflow is Gross income.

Difference between Gross profit and net profit

Difference between Gross profit and net profit

Gross profit and net profit are two different terms. Difference between gross profit and net profit is being explained below;

1.    Gross profit

Gross profit is calculated by deducting direct expenses from the revenue. Direct expense is that expense which is necessary to generate revenue. Typically direct expenses include direct labor cost, direct material cost, and other direct expenses.

2.    Net profit

Net profit is calculated by deducting the administrative, selling and financial expenses from the gross profit, these expenses collectively known as operating expenses. Operating expense does not directly relates to

Example of Gross profit & Net Profit

Sales	100,000
Cost of Sales	60,000
Gross Profit	40,000
Selling Expenses	(5,000)
Administration Expenses	(10,000)
Financial Charges	(5,000)
Net Profit	20,000

Difference between Equity and Capital

Difference between Equity and Capital

Equity and capital both are interchangeable terms. Technically, there is slight difference between equity and capital. The difference between equity and capital is being explained below;

1.    Capital

Capital is basically an original investment made be the equity holder and amount of that capital always appear under the heading of issued or paid up capital. Capital is credited for new investment and cash or bank is credited.

2.    Equity

Equity represents the residual interest of the share holder in the entity. Residual interest is calculated by deducting liabilities from the total assets. This is the amount equity holder will receive on liquidation. Alternatively equity is running capital i.e. paid up capital plus profit or minus loss.

Example of equity and Capital

	$
Equity
Issued Capital 100,000 @ 10	1,000,000
Accumulated Loss	(350,000)
	650,000

Difference between Debenture and loan

Difference between Debenture and loan

Difference between debenture and loan can be expressed in term of security, rate of interest, repayment of loan. Debenture is an instrument against which loan is raised, while loan is an agreement between Borrower and lender.

1.    Security

Debenture may be secured or UN -secured, reputable company can issue UN secured debenture. In case of loan, security is essential requirement for raising the funds i.e. assets are pledged to raise loan.

2.    Rate of Interest

In case of debenture rate of interest is decided by the borrower, while in case of loan rate of interest is decided by the financial institution i.e. lender.

3.    Repayment of Loan

In case of denature loan is repaid on maturity, while in case of loan, there are periodical repayment. Therefore debenture does not impact short term cash flows, while loan has short term cash flows implications.

4.    Trading

Debenture being an instrument can be traded in the bond market, while loan being a specific agreement between two parties are not traded in the open market.

Difference between Franchise and branch

Difference between Franchise and branch

Branch is sub office of the entity and operated by itself, where franchise is operated or run by other party known as franchisee. Franchisee uses the business methods & services of the Franchiser against an agreement.

Difference between Franchise and branch can be explained in term of operation, investment in operations, operational employee, profit sharing and quality of the product and services.

1.    Business Operations

In case of branch entity itself responsible for business operations and operational decision making, where in case of franchise another party is responsible to carry out the business operations.

2.     Investment in Operations

in case of branch, investment in operations are made by the entity , while in case of franchise the investment for operation is made by the another party (Franchisee).

3.    Operational Employees

In case of branch employees responsible to carry out operations are employed by the entity, while in franchise, those employees are employed by the franchisee.

4.    Profit Sharing

In branch there is no profit sharing concept with another party, entity enjoy the sole profit from the operations, in case of franchise some profit is shared with franchisee. Profit sharing arrangement varies franchise to franchise.

5. Quality assurance

In case of branch quality is directly maintained by the entity, while in case of franchise quality is ensured by effective monitoring.

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Difference between financial accounting and financial management

Difference between financial accounting and financial management

Financial accounting primarily related to reporting of financial result and record keeping, where the financial management relates to financial decision making i.e. investment decision , dividend decision etc. the difference between financial and financial management has been further elaborated below;

1.    Historical VS Future Cost

Financial reporting primarily deals in historical cost, where financial management takes into accounts future cost.

2.    Reporting Financial result VS Decision Making

Financial accounting primarily provides information about the financial performance and financial position of the organization, where financial management accounting provides management information for financial decisions.

3.    Compliance requirement

Financial accounting reports are prepared in accordance with universally accepted rules and regulation i.e. international accounting standard, where financial management account or report is prepared as per requirement of management.

Difference between Running Finance and Loan

Difference between Running Finance and Loan

Running Finance is kind of financing where interest is charged on the spent amount, while in case of loan the interest is charged on whole amount, irrespective of its usage. Running finance facility is suitable for trading business where the income from the business can be deposited; in case of fixed asset purchase long term is more suitable product due to lower rate.

1. Rate of interest

Running Finance is expensive product than loan due to its flexibility of repayment.

2. Flexibility in repayment

Running finance offer higher flexibility both in timing and amount of repayment, where in case of long term liability a fixed amount within due time is required to be repaid. In running finance the amount spent can be repaid any time, while in case of loan a regular installment is required to be repaid.

Difference between and Share and Debenture

Difference between and Share and Debenture

Share and debenture is both financing instrument; however, there are some difference in both of these instrument, these difference is being explained below;

1.    Interest Vs Dividend payment

Debenture holder is paid interest, where share or equity holder is entitled to receive dividend.

2. Voting Right

Share holder has voting right and can participate in decision making through voting right where debenture holder does not have such rights.

3. Trading Market

Shares are normally traded in stock exchange, where the debenture is trade in bond market. It is important to note that both instruments are traded at market price.

Difference between share and preference share

Difference between share and preference share

Difference between share and preference share can be explained in terms of dividend payment, rate of dividend, and voting rights;

1.    Dividend Payment

Preference share are paid before the ordinary share dividend payment, and therefore these are called preference shares. Preference share payment is obligatory payment and does not depend on profitability of the organization.

2.    Rate of Dividend

Preference share are paid at a fixed rate, where the ordinary shares are paid at a rate proposed by the board of director. It means that preference share payment rate does not change over the period of time, where ordinary share rate of dividend may fluctuate over the period of time.

3.    Voting Rights

Preference share carry no voting right, where ordinary share carry the voting right.

Difference between authorized and issued Capital

Difference between authorized and issued Capital

1.    Authorized Capital

Authorized capital is the maximum amount of capital that can be issued to public by the company. Authorized capital is mentioned in the incorporation document of the company. Authorized capital amount is decided keeping in view the future capital requirement of the company. Issued capital can be raised up to authorized capital.

2.    Issued Capital

The amount of capital issued to public is known issued capital. The issued capital sometime known as paid up capital. Amount of issued or paid up capital cannot exceed the amount of authorized capital.

Example of authorized and issued capital

Entity incorporated under the companies’ act 2002, and has authorized capital of 100 million.  The company decided to issue 800,000 shares @ 100 each, and then in this case the issued or paid capital would be 80 million against authorized capital of 100 million.