Category: Accounting Content

Accounting Content!

The Account is the art of conveying financial information about a business unit for shareholders and managers etc. Accountancy has call ‘business language’. In Hindi, the words ‘लेखा विधि’ (account law) and ‘लेखाकर्म’ (accounting) are also useful in ‘Accountancy’. Accounting Content, Financial, and Accountancy!

Also learn, Accountancy is a branch of mathematical science that is useful in finding out the reasons for success and failure in business. The principles of accountancy are applicable to business units on three divisions of practical arts, namely, accounting, bookkeeping, and auditing.

As Well as the definition “Accountancy refers to the art of writing business practices in a scientific manner and classifying articles and preparing summaries and interpreting the results.”

The functioning of Accountancy is to provide quantitative information regarding economic units, which are basically financially inadequate. Which is useful in taking financial decision-making, accountancy, identifying, and measuring. Analyzing information relevant to an economic event of an organization There is a process for doing and collecting. Which is used to prompt users of this information.

  • What does Materials? Meaning, Control and Objectives

    What does Materials? Meaning, Control and Objectives

    Introduction; The term “Materials” refers to the raw materials used for production, subassemblies and fabricated parts. Also, define as “anything that can store stock or stockpiled”. The terms “materials” and “stores” are sometimes used interchangeably. However, both terms differ. The term “stores” has a wider meaning and includes not only the raw materials used in production but also other items held in stock in the storeroom, such as components, tools, patterns, maintenance material, consumable stores, etc.

    Here are explain; What does Materials? Introduction, Meaning, Control and Objectives.

    It also includes stock of finished goods and partly finished goods. “Consumable” stores are items used in, production but do not become a part of the finished product, such as oil, grease, sandpaper, soap, and other cleaning materials, etc. Material is a chemical substance or mixture of substances that constitute an object. The material can be pure or impure, living or non-living matter. They can classify based on their physical and chemical properties, or their geological origin or biological function.

    Materials science is the study of materials and their applications. Raw material can process in different ways to influence their properties, by purification, shaping or the introduction of other materials. New material can produce from raw material by synthesis.

    Dressmaker making the dress by Materials
    Dressmaker making the dress by Materials. #Pixabay.

    Meaning of Materials:

    The term “Material” refers to the raw material used for production, subassemblies and fabricated parts. Material control is the main component of the process of material management. Control over material is of utmost importance for the smooth and uninterrupted functioning of an organization.

    A few definitions of the term is given as under:

    “Material control is a systematic control over purchasing, storing and consumption of materials, to maintain a regular and timely supply of materials, at the same time, avoiding overstocking.”

    Another definition;

    “Material control refers to the management function concerned with the acquisition, storage, handling and use of materials to minimize wastage and losses, derive maximum economy and establish responsibility for various operations through physical checks, record keeping, accounting, and other devices.”

    In simple words, material control refers to the various measures adopted to reduce the amount of loss of material at the time of receiving, storing and issuing the raw material. Material control in practice is exercised through periodical records and reports relating to purchase, receipt, inspection, storage and issuing direct and indirect material. Proper control over material can contribute substantially to the efficiency of a business.

    What does Materials Introduction Meaning Control and Objectives
    What does Materials? Introduction, Meaning, Control and Objectives. Wool Materials #Pixabay.

    Concept and Objectives of Materials Control:

    Material form an important part of the cost of a product and, therefore, proper control over material is necessary. No cost accounting system can become effective without proper and efficient control of the material. As well as, Materials control aims at efficient purchasing of material, efficient storing and efficient use or consumption.

    Material or inventory control may define as,

    “Systematic control and regulation of the purchase, storage and usage of materials in such a way that maintains a smooth flow of production and at the same time avoids excessive investments in inventories. Efficient material control cuts out losses and wastes of materials that otherwise pass unnoticed”.

    The broad objectives of material control are below:

    • It eliminates the problem of understocking and, therefore, the material of the desired quality will available when the need for efficient and interrupt production.
    • The material will purchase only when the need exists. Hence, it avoids the chances of over-stocking.
    • By purchasing material at the most favorable prices, the purchase can make a valuable contribution to the reduction in cost.
    • Material is protecting against loss by fire, theft; handling with the help of proper physical controls.
    • Issues of material are properly authorizing and accounting for.
    • Vouchers will approve for payment only if the material has been receiving and is available for the issue.
    • Material is, at all times, charge as the responsibility of some individual.
    Knitting product makes by Dressmaker
    Knitting product makes by Dressmaker. #Pixabay.

    Objectives of Materials Control:

    The following are the main objectives of materials control:

    To the availability of Materials:

    There should be a continuous availability of all types of materials in the factory so that the production may not be held up for want of any material. Also, the minimum quantity of each material is fixing to permit production to move on schedule.

    To reasonable Price:

    While purchasing materials, it is seen that it is purchasing at a reasonably low price. Quality is not to sacrifice at the cost of the lower price. The material purchase should be of that quality alone which is a need.

    To enable uninterrupted production:

    The main object of material control is to ensure smooth and unrestricted production. Production stoppages and production delays cause substantial loss to a concern.

    To ensure the requisite quality of materials:

    The quality of finished products depends mainly on the quality of the raw material used. If the quality of the raw material is not up to desired standards, the end product will not be of the quality of the desires which affects the sale of the product in the market resulting in loss of profits as well as the goodwill of the concern. It is of vital importance to exercise strict control and supervision over the purchases, storage, and handling of material.

    To minimize wastage:

    The loss of material may occur on account of rust, dust, dirt or moisture, bad and careless handling of material, poor packing and many other reasons. The causes responsible for such losses must be brought to light and utmost efforts should make to minimize the wastage of raw material. This is possible only by introducing an efficient materials control system. There should be minimum possible wastage of materials while these are being stored in the go-downs by storekeepers or used in the factory by the workers.

    Wastage should allow up to a certain level known as the normal level of wastage and it should not exceed that level. Leakage or theft of material must avoid keeping the cost of production under control. Storekeepers and workers should train to handle the material in a scientific way to avoid wastage. Also, the storekeeper is to keep the stores neat and tidy to avoid the wastage due to rust, dust or dirt.

    To fix responsibility:

    A proper system of materials control also aims at fixing the responsibility of operating units; and, also individuals connected with the purchase, storage, and handling of material.

    To provide information:

    Another objective of materials control is to provide accurate information regarding material cost; and, inventory whenever needed by management.

  • What does Labor cost? Introduction, Meaning, and Control

    What does Labor cost? Introduction, Meaning, and Control

    Labor costs represent human contribution. Labor cost is sensitive. The second Major element of cost in most of the manufacturing undertakings is labor cost. Proper accounting and control of labor costs, therefore, constitutes one of the most important problems of management. In controlling labor costs, the problem is complicated by the human element.

    Here are explain; What does Labor cost? Introduction, Meaning, and Control.

    Introduction: Under the present political conditions with restive labor in an organized industry, it is very difficult to reduce labor costs. Therefore, proper control and accounting for labor costs are one of the most important problems of a business enterprise. But control of labor costs presents certain practical difficulties unlike the control of material cost. The human element in labor makes difficult the control of labor costs whereas materials, being inanimate, could subject to rigid control.

    Labor is the most perishable commodity and as such should effectively utilize immediately. Labour, once lost, cannot recoup and is bound to increase the cost of production. On the other hand, materials, being durable, can use as and when required and can store without having to incur an immediate loss.

    Meaning of Labor Cost:

    Payment of remuneration to the workers for their service to the firm knows as labor payment. This is the second element of the total cost. It may be direct or indirect. If it treats as a direct expense, it will include prime cost and if it relates to the factory, it will treat as an item of factory cost. Direct labor costs or Direct wages represent the cost that is incurred directly to change the composition, form or condition of a product.

    Its primary nature is that it can easily identify and allocated to specific cost units. It also varies directly with the volume of production/output. Indirect labor costs, on the other hand, are the number of wages paid to workers who are not related to change the form, composition of a product but they engage themselves to complete the product, e.g. Supervisor’s Salary works office staff salaries, etc.

    Bakers Labor!
    Bakers Labor! #Pixabay.

    It is interesting to note that the difference between direct labor costs/direct wages and indirect labor costs/indirect wages depends on the types of work/job done and at the same time, the conditions in which cost of labor incurred. Under the circumstances, some labor costs treated as direct whereas the same treats as indirect in some other cases.

    So, they will treat as a direct one when; 1) the payment makes to the workers to change the composition of a product, and 2) identification of the job is possible. Similarly, labor costs will treat as indirect when; 1) the same is not directly related to change or form of a product, 2) identification is not possible.

    Control of Labour Cost:

    To control the cost of labor (both direct and indirect), it becomes necessary to study the behavior of labor, to control the attendance and departure of workers, measurement of performances, assessing the results, time and motion study, etc. It is the function of the management to control the cost of labor in every step whether the same is direct or indirect. Individual columns of timesheet and job cards should maintain direct and indirect labor costs for proper ascertaining and controlling the cost of labor.

    We know that direct labor costs/direct wages an element of prime cost whereas indirect labor costs/indirect wages an element of factory cost. Direct labor cost can control easily as it relates to variable cost which varies with the quantity produced, i.e. if more quantity produces with the same rate of remuneration, a post per unit must reduce. But it is not so easy to control the indirect labor cost.

    What does Labor cost Introduction Meaning and Control
    What does Labor cost? Introduction, Meaning, and Control. #Pixabay.

    Control over Labor cost:

    This is so because labor consists of a lot of different individuals, each with a different mental and physical capacity and each with a different personality.

    Proper control over it involves the following:

    • Appropriate systems for recruitment and selection, training and placement of workers.
    • Satisfactory methods of labor remuneration.
    • Healthy working conditions consistent with legal requirements and competitive undertaking.
    • Method of assuring efficient labor performance.

    Direct and Indirect Labor Costs:

    For accounting, they are classified into;

    1. Direct, and.
    2. Indirect.
    Direct Labor Cost:

    This cost incurs on the employees who engage directly in making the product. Their work can identify clearly in the process of converting. The raw materials into the finished product called direct labor costs. For example, wages paid to the workers engaged in the machining department, fabrication department, assembling department, etc.

    Construction Labor!
    Construction Labor; Direct and Indirect work! #Pixabay.
    Indirect Labor Cost:

    Indirect employees not directly associated with the conversion process. But assist in the process by way of supervision, maintenance, transportation of materials, material handling, etc. Their work benefits all the items being produced and cannot specifically identify with the individual products. Hence, the indirect labor cost should treat as production overhead. These costs will accumulate and apportion to different cost centers on an equitable basis and absorbed into product cost by applying the overhead absorption rates.

    Items of Labour Cost:

    They can analyze into the following:

    • Monetary benefits are payable immediately; Salaries and Wages, Dearness and other allowances, production incentive or bonus.
    • Monetary benefits after some time in the future; Employer’s contribution to P.F., E.S.I., Pension, Gratuity, Profit linked bonus, etc.
    • Non-monetary benefits (Fringe benefits); Free or subsidized food, free medical or hospital facilities, free or subsidized education to the employee’s children, free or subsidized housing, etc.
  • Understand the Usefulness of Cost Accounting to Managers

    Understand the Usefulness of Cost Accounting to Managers

    What is the Usefulness of Cost Accounting? The shortcomings inherent in financial accounting have made the management to realize the importance of cost accounting. Meaning: Usefulness of Cost accounting is the classifying, recording and appropriate allocation of expenditure for the determination of the costs of products or services, and the presentation of suitably arranged data for purposes of control and guidance of management. Whatever may be the type of business, it involves the expenditure on labor, materials and other items required for manufacturing and disposing of the product. Moreover, big business requires delegation of responsibility, the division of labor and specialization.

    Know and understand the Usefulness of Cost Accounting to Managers.

    Management has to avoid the possibility of waste at each stage. Management has to ensure that no machine remains idle, efficient labor gets due initiative, proper utilization of by-products makes and costs are properly ascertained.

    Besides management, creditors and employees also benefit in numerous ways by the installation of a good costing system in an industrial organization. Cost accounting increases the overall productivity of an industrial establishment and, therefore, serves as an important tool in bringing prosperity to the nation.

    How to understand the Usefulness of Cost Accounting to Manager?

    The various advantages derived by management on account of a good costing system can be put as follows:

    Costing helps in inventory control and cost reduction.

    Costing furnishes control which management requires in respect of stock of materials, work-in-progress and finished goods. Costs can reduce in the long-run when alternates try. This is particularly important in the present-day context of global competition. Cost accounting has assumed special significance beyond cost control this way.

    Costing makes comparison possible.

    If the costing records are regularly kept, comparative cost data for different periods and various volumes of production will be available. It will help the management by informing future lines of action.

    Provides data for periodical profit and loss accounts.

    Adequate costing records supply to the management such data as may be necessary for the preparation of profit and loss account and balance sheet, at such intervals as may desire by the management. It also explains in detail the sources of profit or loss revealed by the financial accounts, thus helps in the presentation of better information before the management.

    Costing results in increased efficiency.

    Losses due to wastage of materials, the idle time of workers, poor supervision, etc. will disclose if the various operations involved in manufacturing a product study by a cost accountant. The efficiency can measure and costs controlled and through it, various devices can frame to increase efficiency.

    Useful in periods of depression and competition.

    During trade depression, the business cannot afford to have leakages which pass unchecked. The management should know where economies may seek, waste elimination and efficiency increase. The business has to wage a war for its survival. The management should know the actual cost of their products. Before embarking on any scheme of reducing the prices or giving tenders. The costing system facilitates this.

    It helps in pricing decisions.

    Though economic law of supply and demand and activities of the competitors, to a great extent. Determine the price of the article, the cost to the producer does play an important part. The producer can take necessary guidance from his costing records.

    Helps in estimates.

    Adequate costing records provide a reliable basis upon which tenders and estimates may prepare. The chances of losing a contract on account of over-rating or the loss in the execution of a contract due to under-rating can minimize. Thus, “Ascertained costs provide a measure for estimates, a guide to policy, and control over current production”.

    It helps in channelizing production on the right lines.

    Costing makes possible for the management to distinguish between profitable and non-profitable activities. Profits can maximize by concentrating or profitable operations and eliminating non-profitable ones.

    It helps in reducing wastage.

    As it is possible to know the cost of the article at every stage. It becomes possible to check various forms of waste, such as time, expense, etc., or in the use of machinery, equipment, and tools.

    It helps in increasing productivity.

    The productivity of material and labor requires to increase to have growth and more profitability in the organization. Costing renders great assistance in measuring productivity and suggest ways to improve it.

    Understand the Usefulness of Cost Accounting to Managers
    Understand the Usefulness of Cost Accounting to Managers.

    Advantages of Cost Accounting:

    For better understand the Usefulness of Cost Accounting to Manager, important advantages of Cost Accounting are as follows:

    Profitable and Non-profitable Activities.

    It will throw light upon those activities which bring profits and those activities which result in losses. This will be done only if the cost of each product or each job ascertain and compare with the price obtained.

    Support and guide in Reducing Prices.

    In certain periods it becomes necessary to reduce the price even below the total cost. This will be so when there is a depression or slump. Costs, properly ascertained, will guide management in this direction.

    Information for Proper Planning.

    For a proper system of Costing, it is necessary to have detailed information about the facilities available about machine and labor capacity. This helps in proper planning of work so that no section overwork and no section remains idle.

    Control over all Materials.

    Information about the availability of stocks of various materials and stores must be constantly available if there is a good system of Cost Accounting.

    This helps in two ways. Firstly, production can be planned according to the availability of materials and fresh stocks can arrange in time when old stocks are exhausted. Secondly, loss due to carelessness or pilferage or any other mischief will know and, therefore, put down.

    Decision Regarding Machine or Labor.

    Some of the important questions before management can solve only with the help of information about costs.

    For example, if there is the problem of replacement of labor by machinery, Cost Accounting will at least guide management in finding out what the cost of production will be if either machinery or labor use.

    Expansion in Production.

    Sometimes it is necessary to decide whether the production of one product or the other is to increase. This problem can also be solved only if proper information about costs is available.

    Reasons for Losses Detected.

    Exact causes of the existence of profits or losses will reveal by a system of Cost Accounting. For example, a concern may suffer not because the cost of production is high or prices are low but because the output is much below the capacity of the concern.

    It is only Cost Accounting which will reveal this reason for the loss. It also helps in distinguishing between expenditure and loss which is necessary and that which is unnecessary, that is to say, between normal and abnormal losses.

    Helps in Making Decisions.

    Cost Accounting inculcates the habit of making calculations with pencil and paper before taking a decision. It will certainly check recklessness. Also, some of the silly mistakes that sometimes occur can avoid if there is a good Cost Accounting system.

    To give an instance, a well-known firm once quoted for the supply of mosquito nets to the Government at a very low price. It was only after the order was obtained that the firm found that, by mistake. The price of materials was not included in the quotation.

    Check on Accuracy of Financial Accounts.

    A good system of Cost Accounting affords an independent and most reliable check on the accuracy of financial accounts. This check operates through the reconciliation of profits shown by Cost Accounts and by Financial Accounts. Based on various advantages of Cost Accounting. It can easily say that “a good system of costing serves as a means of control over expenditure and helps to secure economy in manufacture”.

    Fixation of Prices.

    In many cases, a firm can fix a price for its products based on the cost of production. Such a case, the price cannot be properly fixed if no proper figures of cost are available.

    In the case of big contracts, no quotation can make unless the cost of completing that contract can ascertain. If prices fixed without costing information. The price quoted may either be too high. In which case orders cannot obtain, or it may be too low, in which case order will result in a loss.

    It is a mistake on the part of any management to believe that a mere increase in sales volume will result in profits; increased sales at prices lower. Then the cost may well lead the concern to the bankrupt court. Only Cost Accounting will reveal what price will be profitable.

    Understand the Measurement and Improvement of Efficiency.

    The chief advantage to gain is that Cost Accounting will enable a concern too. First of all, measure its efficiency and then to maintain and improve it. This is done by suitable comparisons and analysis of the differences that may observe.

    For example, if materials spent upon a pair of shoes in the Year come to $ 100 and for a similar pair of the shoe, the amount is $ 120 in next Year. It is an indication of a decline in inefficiency.

    Of course, the increase may only be due to an increase in the price of materials; it may also be due to greater wastage in the use of materials or inefficiency at the time of buying. So, that unnecessarily high prices were paid. Comparisons may also be made with average figures for the whole industry (if such figures are available) and with ideal figures. Which may have been determined before the head.

    In any case, it is this sort of comparison which tells management about the going up or coming down of efficiency. The study will certainly indicate the steps to take to remove the causes of inefficiency or to consolidate a factor which leads to greater efficiency.

  • Explanation of Statement of Cash Flows with Objectives

    Explanation of Statement of Cash Flows with Objectives

    What does the Statement of Cash Flows mean? In accounting, a statement of cash flows, also known as the cash flow statement, is a financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to operating, investing, and financing activities. Explanation of Statement of Cash Flows with Objectives. The statement of cash flows is one of three very important financial reports. That managers and investors look at when analyzing a company’s past or present financial status.

    Know and Understand the Concept of the Statement of Cash Flows.

    The balance sheet and the income statement are the other two reports. All of these reports are very important in running a successful business. But the statement of cash flows is the most important. It is like the blood of a company since it would not survive successfully without it. Cash on hand can be much more important. Than income, profits, assets, and liabilities put together, especially in the early stages of any company.

    Introduction:

    The statement of cash flows tells us how much cash we have on hand after all costs are met. It shows how much cash we started with and how much we pay out. There are two parts to the statement of cash flows which are the top and bottom halves. The top half deals with the inflow and outflow of the company’s cash.

    The bottom half of the statement reports where the funds end up. Just like the balance sheet, the top and bottom halves of a cash flow statement match. Knowing just how important it is to have cash on hand to pay the bills we want to make sure and review cash flow statement regularly.

    Cash flow is a little more honest than an income statement because the cash flow statement shows money coming in only when we deposit it and money going out only when we physically write out a check. Because the statement of cash flows reflects the actual receipt of cash, no matter where it comes from, the entries are a bit different from the revenue shown in a company’s income statement.

    These funds are usually made up of gross receipts on sales, dividend and interest income, and invested capital. Gross receipts on sales represent the total money that we take in on sales during the period. Gross receipts are based on our gross revenue, of course, but they also take into account when you receive payment. Dividend and interest income is the income that we receive from savings accounts and other securities.

    Meaning:

    The statement of cash flows is one of the financial statements issued by business and describes the cash flows into and out of the organization. Its particular focus is on the types of activities that create and use cash, which are operations, investments, and financing. Though the statement of cash flows is generally considered less critical than the income statement and balance sheet, it can use to discern trends in business performance that are not readily apparent in the rest of the financial statements.

    This is one of those amounts that are also reporting on the income statement and should be the same as long as we receive the money during the period covered by the cash flow statement. Invested capital is part of the owner’s equity in the balance sheet. Although it does not represent revenue from our business operations and would not be part of the income statement, it can be a source of cash for our company.

    Extra Knowledge:

    The statement of cash flows keeps track of the costs and expenses that incur for anything and everything. Some of the expenses appear in the income statement and some don’t because they don’t directly relate to our costs of doing business. These funds consist of the cost of goods produced, sales, administration, interest expense, taxes, etc. The cost of goods produced is exactly that, the cost incurred to produce our product or service during the period. Sales expenses are the same expenses that appear in an income statement except that paying off bills or postponing payments may change the amounts. On to the bottom half of the statement of cash flows which shows where the money is ending up.

    When the company’s cash reserves raise the money flows into one or more of asset accounts. The bottom half of the cash flow statement keeps track of what is happening to those accounts. This part of the statement consists of changes in liquid assets and net change in cash position. With cash flowing in and out of the company, liquid assets are going to change during the period covered by the cash flow statement. The items listed in this portion of the cash flow statement are the same ones that appear in the balance sheet. Raising the level of our liquid asset accounts has the effect of strengthening the cash position.

    Explanation of Statement of Cash Flows with Objectives
    Explanation of Statement of Cash Flows with Objectives, #Pixabay.

    Cash flow analysis:

    To properly construct a cash flow analysis, we have to look at three very important activities which are operating, investing and financing.

    • Operating activities are the cash components that are generating from the sales of the companies goods or products affecting the core business operation. These include the purchase of raw materials, production costs, advertising cost and even the delivery to customers.
    • Investing activities are straight forward items that report adjustments in the balances of fixed asset accounts like equipment, buildings, land, and vehicles. Investing activities include making and collecting loans and acquiring and disposing of investments and property, plant and equipment.
    • Financing activities are cash adjustments to fixed liabilities and owners’ equity. Cash increases when the company takes up a loan or raised capital when dividends are paid out, cash decreases accordingly. Financing activities involve liabilities and owner’s equity items. They include obtaining resources from owners and providing them with a return on their investments and borrowing money from creditors to repay the amounts borrowed.

    #Objectives of the statement of cash flows:

    There are a few main objectives of the statement of cash flows one of which is to help assess the timing, amounts and the uncertainty of future cash flows. This is one of the quarterly financial reports that publicly traded companies are required to release to the public. Because public companies tend to use accrual accounting. The income statements they release each quarter may not necessarily reflect changes in their cash positions.

    The statement of cash flows is very important to businesses. Because it helps investors see where the company can benefit from better cash management. There are many profitable companies today that still fail at adequately managing their cash flow. So it is important to be able to see where the weaknesses are to correct them.

    Conclusion of Objectives:

    In conclusion, the objectives are to explain why the statement of cash flows is very important for companies and people. That want to invest in a certain company. It shows how well a company manages its cash in-comings and outgoings as well as showing how profitable a company might be or become.

    It is a very clear document to understand so that we don’t fall victim to making a profit while still going broke. It’s also helpful for the companies finance department. So that they can see where the company stands to get more potential investors. It’s a great resource to look at to recap a company’s financial standing that most people can understand.

    What does Financial Statements mean?

    A firm communicates to the users through financial statements and reports. The financial statements contain summarized information of the firm’s financial affairs, organized systematically. Preparation of the financial statements is the responsibility of top management. They should prepare very carefully and contain as much information as possible.

    Two basis financial statements prepared for external reporting to owners, investors, and creditors are:

    Balance sheet:

    The balance sheet contains information about the resources and obligations of a business entity and about. Its owner’s interests in the business at a particular point of time. In accounting’s terminology, balance sheet communicates. Information about assets, liabilities and owner’s equity for a business firm as on a specific date. It provides a snapshot of the financial position of the firm at the close of the firm’s accounting period.

    Profit and loss account:

    The profit and loss account presents the summary of revenues, expenses and net income (or net loss) of a firm for some time. Net income is the amount by which the revenues earned during a period exceed the expenses incurred during that period.

    More information requires planning and controlling and therefore the financial accounting information is presenting in different statements and reports in such a way as to serve the internal needs of management. Financial statements are preparing from the accounting records maintaining by the firm.

    The various objectives of financial statements are:

    • To provide reliable financial information about economic resources and obligations of a business enterprise.
    • To provide reliable information about changes in the resources of an enterprise that result from the profit-directed activities.
    • Also, financial information that assists in estimating the earning potential of the enterprise.
    • To provide other needed information about changes in economic resources and obligations.
    • To disclose, to the extent possible, other information related to the financial statement that is relevant to statement users.
  • What does Cash Flow Statements mean? Introduction, Meaning, and Definition

    What does Cash Flow Statements mean? Introduction, Meaning, and Definition

    Cash Flow Statements; In financial accounting, a cash flow statement, also known as the statement of cash flows, is a financial statement. That shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to operating, investing, and financing activities. What does Cash Flow Statements mean? Introduction, Meaning, and Definition; Essentially, the cash flow statement concerns with the flow of cash in and out of the business. The statement captures both the current operating results and the accompanying changes in the balance sheet.

    Know and Understand the concept of Cash Flow Statements with their Introduction, Meaning, and Definition.

    The cash flow statement was previously known as the flow of funds statement. The cash flow statement reflects a firm’s liquidity. The balance sheet is a snapshot of a firm’s financial resources and obligations at a single point in time. And, the income statement summarizes a firm’s financial transactions over an interval of time. These two financial statements reflect the accrual basis accounting used by firms to match revenues with the expenses associated with generating those revenues.

    The cash flow statement includes only inflows and outflows of cash and cash equivalents. It excludes transactions that do not directly affect cash receipts and payments. These noncash transactions include depreciation or write-offs on bad debts or credit losses to name a few. The cash flow statement is a cash basis report on three types of financial activities: operating activities, investing activities, and financing activities. Noncash activities are usually reporting in footnotes. As well as know more; Cash Flow Statement: Explanation, Classification, and Objectives.

    #Introduction to Cash Flow Statements:

    Did you know? You can earn our Financial Statements Certificate of Achievement when you join PRO Plus. To help you master this topic and earn your certificate, you will also receive lifetime access to our premium financial statements materials. These include our video seminar, visual tutorial, flashcards, cheat sheet, quick tests, a quick test with coaching, business forms, and more. The official name for the cash flow statement is the statement of cash flows. The statement of cash flows is one of the main financial statements.

    #Meaning of Cash Flow Statements:

    Cash Flow Statement is a statement which describes the inflows (sources) and outflows (uses) of cash and cash equivalents in an enterprise during a specified period. Such a statement enumerates the net effects of various business transactions on cash. And, its equivalents and takes into account receipts and disbursements of cash.

    A cash flow statement summarizes the causes of changes in the cash position of a business enterprise between dates of two balance sheets. According to AS-3 (Revised), an enterprise should prepare a cash flow statement and should present it for each period for which financial statements are prepared.

    Extra Knowledge:

    The terms cash, cash equivalents, and cash flows are used in this statement with the following knowledge of meaning below are:

    • Cash comprises cash on hand and demand deposits with banks.
    • The cash equivalents are short term, highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value.
    • Cash equivalents are held to meet short-term cash commitments rather than for investment or other purposes.
    • For an investment to qualify as a cash equivalent. It must be readily convertible to a knows amount of cash and be subject to an insignificant risk of change in value. Therefore, an investment normally qualifies as a cash equivalent only. When it has a short-maturity, of say, three months or less from the date of acquisition.
    • Investments in shares are excluding from cash equivalents unless they are, in substance, cash equivalents. For example, preference shares of a company acquired shortly before their specified redemption date.
    • If the effect of the transaction increases cash and its equivalents. It calls an inflow (source) and if it results in the decrease of total cash, it knows as outflow (use) of cash.

    Cash flows exclude movements between items that constitute cash or cash equivalents. Because these components are part of the cash management of an enterprise rather than part of it’s operating, investing and financing activities. Cash management includes the investment of excess cash in cash equivalents.

    What does Cash Flow Statements mean Introduction Meaning and Definition
    What does Cash Flow Statements mean? Introduction, Meaning, and Definition, #Pixabay.

    #Definition of Cash Flow Statements:

    Cash flow statements a statement of changes in the financial position of a firm on a cash basis. It reveals the net effects of all business transactions of a firm during. A period on cash and explains the reasons for changes in cash position between two balance sheet dates.

    It shows the various sources (i.e., inflows) and applications (i.e., outflows) of cash during. A particular period and their net impact on the cash balance. The following definition of Cash flow statements as define by different-different authors below;

    According to Khan and Jain:

    “Cash Flow statements are statements of changes in financial position prepared on the basis of funds defined as cash or cash equivalents.”

    The Institute of Cost and Works Accountants of India defines Cash Flow statement as,

    “A statement setting out the flow of cash under distinct heads of sources of funds and their utilization to determine the requirements of cash during the given period and to prepare for its adequate provision.”

    Thus, a cash flow statement is a statement which provides a detailed explanation for the changes in a firm’s cash balance during a particular period by indicating. The firm’s sources and uses of cash and, ultimately, the net impact on cash balance during that period.

    Explanations:

    The cash flow statement intends to provide information on a firm’s liquidity and solvency. And, its ability to change cash flows in future circumstances provide. Additional information for evaluating changes in assets, liabilities, and equity improve the comparability of different firm’s operating performance by eliminating the effects of different accounting methods indicate the amount, timing and probability of future cash flows.

    The cash flow statement has been adopting a standard financial statement. Because it eliminates allocations, which might derive from different accounting methods. Such as various time-frames for depreciating fixed assets.

  • Cash Flow Statement: Explanation, Classification, and Objectives

    Cash Flow Statement: Explanation, Classification, and Objectives

    What does Cash Flow Statement mean? A cash flow statement counters the ambiguity regarding a company’s solvency that various accrual accounting measures create. We are studying Cash Flow Statement: Explanation, Classification, and Objectives; In financial accounting, a cash flow statement, also known as statement of cash flows, is a financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to operating, investing, and financing activities.

    Here explains the Concept of Cash Flow Statement with their Explanation, Classification, Objectives, and Limitations.

    The following concept is; Explanation of Cash Flow Statement, Classification of Cash Flow Statement, Objectives of Cash Flow Statement, and Limitations of the Cash Flow Statement. Meaning: A Cash Flow Statement is a statement which is prepared by acquiring Cash from different sources and the application of the same for different payments throughout the year. It is prepared from analysis of cash transactions, or it converts the financial transactions prepared under accrual basis to cash basis.

    The information about the number of resources provided by operating activities or net income after the adjustment of certain other charges can also obtain from it. The changes in Cash both at the beginning and at the end can also know with the help of this statement and that is why it is called Cash Flow Statement.

    #Explanation of Cash Flow Statement:

    A cash flow statement is an important indicator of financial health because a company can show profits while not having enough cash to sustain operations. It is a financial report that shows to the user the source of a company’s cash and how it was spent over a specific period. A cash flow statement counters the ambiguity regarding a company’s solvency that various accrual accounting measures create.

    It also categorizes the sources and uses of cash to provide the reader with an understanding of the amount of cash a company generates and uses in its operations. As opposed to the amount of cash provided by sources outside the company. Such as borrowed funds or funds from stockholders. They also tell the reader how much money was spent on items that do not appear on the income statement. Such as loan repayments, long-term asset purchases, and payment of cash dividends.

    The cash flow statement was previously known as the flow of funds statement. The cash flow statement reflects a firm’s liquidity. The balance sheet is a snapshot of a firm’s financial resources and obligations at a single point in time, and the income statement summarizes a firm’s financial transactions over an interval of time. These two financial statements reflect the accrual basis accounting used by firms to match revenues with the expenses associated with generating those revenues.

    Extra Knowledge:

    They include only inflows and outflows of cash and cash equivalents; it excludes transactions that do not directly affect cash receipts and payments. These non-cash transactions include depreciation or write-offs on bad debts or credit losses to name a few. It is a cash basis report on three types of financial activities: operating activities, investing activities, and financing activities. Non-cash activities are usually reported in footnotes.

    It is intended to provide information on a firm’s liquidity and solvency and its ability to change cash flows in future circumstances provide additional information for evaluating changes in assets, liabilities, and equity improve the comparability of different firms’ operating performance by eliminating the effects of different accounting methods indicate the amount, timing and probability of future cash flows. The cash flow statement has been adopting as a standard financial statement because it eliminates allocations, which might derive from different accounting methods, such as various time-frames for depreciating fixed assets.

    #Classification of Cash Flow Statement:

    The cash flow statement should report cash flows during the period classification by operating, investing and financing activities.

    Thus, cash flows are classifying into three main categories:

    1. Operating activities.
    2. Investing activities.
    3. Financing activities.

    Now, explain;

    Operating Activities:

    Operating activities are the principal revenue-producing activities of the enterprise and other activities that are not investing or financing activities. The amount of cash flows arising from operating activities is a key indicator of the extent to which the operations of the enterprise have generated sufficient cash flows to maintain the operating capability of the enterprise, pay dividends, repay loans, and make new investments without recourse to external sources of financing.

    Information about the specific components of historical operating cash flows is useful, in conjunction with other information, in forecasting future operating cash flows. Cash flows from operating activities are primarily derived from the principal revenue-producing activities of the enterprise. Therefore, they generally result from the transactions and other events that enter into the determination of net profit or loss.

    Explanations:

    Examples of cash flows from operating activities are:

    • A cash receipts and cash payments of an insurance enterprise for premiums and claims, annuities and other policy benefits.
    • Cash receipts from the sale of goods and the rendering of services.
    • Cash receipts from royalties, fees, commissions, and other revenue.
    • The cash payments to suppliers of goods and services.
    • Cash payments to and on behalf of employees.
    • Refunds or cash payments of income taxes unless they can specifically identify with financing and investing activities, and.
    • Cash receipts and payments relating to futures contracts, forward contracts, option contracts, and swap contracts when the contracts are heling for dealing or trading purposes.

    Some transactions, such as the sale of an item of plant, may give rise to a gain or loss which includes in the determination of net profit or loss. However, the cash flows relating to such transactions are cash flows from investing activities.

    Investing Activities:

    Investing activities are the acquisition and disposal of long-term assets and other investments not included in cash equivalents. The separate disclosure of cash flows arising from investing activities is important because the cash flows represent the extent to which expenditures have been making for resources intended to generate future income and cash flows.

    Explanations:

    Examples of cash flows arising from investing activities are:

    • The cash payments to acquire fixed assets. These payments include those relating to capitalized research & development costs and self-constructed fixed assets.
    • Cash receipts from the disposal of shares, warrants, or debt instruments of other enterprises and interests in the joint venture.
    • Cash advances and loans made to third parties, other than advances and loans made by a financial enterprise.
    • The cash receipts from disposal of fixed assets.
    • Cash receipts from the repayment of advances and loans made to third parties, other than advances and loans of a financial enterprise.
    • Cash payments to acquire shares, warrants, or debt instruments of other enterprises and interests in joint ventures. Other than payments for those instruments considering to be cash equivalents and those held for dealing or trading purposes.
    • The cash payments for futures contracts, forward contracts, option contracts, and swap contracts except when the contracts are heling for dealing or trading purposes, or the payments are classifying as financing activities, and.
    • Cash receipts from futures contracts, forward contracts, option contracts, and swap contracts except when the contracts are heling for dealing or trading purposes or the receipts are classifying as financing activities.
    Financing Activities:

    Financing activities are activities that result in changes in the size and composition of the owner’s capital and borrowings of the enterprise. The separate disclosure of cash flows arising from financing activities is important because .it is useful in predicting claims on future cash flows by providers of funds (both capital and borrowings) to the enterprise.

    Explanations:

    Examples of cash flows arising from financing activities are:

    • Cash proceeds from issuing shares or other similar instruments.
    • Cash proceeds from issuing debentures, loans, notes, bonds, and other short-or long-term borrowings, and.
    • The cash repayments of amounts borrowed such as redemption of debentures, bonds, preference shares.
    Cash Flow Statement Explanation Classification and Objectives
    Cash Flow Statement: Explanation, Classification, and Objectives, #Pixabay.

    #Objectives of Cash Flow Statement:

    The primary objectives of the cash flow statement are to supply the necessary information relating to the generation of cash to the users of the financial statement. It also highlights the future or prospective cash positions i.e. cash or cash equivalent. The inflows and outflows of cash can represent with the help of this statement.

    The main objectives of the cash flow statement are:

    Measurement of Cash:

    Inflows of cash and outflows of cash can measure annually. Which arise from operating activities, investing activities and financing activities.

    Generating inflow of Cash:

    Timing and certainty of generating the inflow of cash can know. Which directly helps the management to take financing decisions in the future.

    Classification of activities:

    All the activities are classifying into operating activities, investing activities and financing activities. Which help a firm to analyze and interpret its various inflows and outflows of cash.

    Prediction of the future:

    A cash flow statement, no doubt, forecasts the future cash flows. Which help the management to take various financing decisions since synchronization of cash is possible.

    Supply necessary information to the users:

    A cash flow statement supplies various information relating to inflows and outflows of cash to the users of accounting information in the following ways:

    • Assess the ability of a firm to pay its obligations as soon as it becomes due.
    • Analyze and interpret the various transactions for future courses of action.
    • To see the cash generation ability of a firm, and.
    • Ascertain the cash and cash equivalent at the end of the period.
    Helps the management to ascertain cash planning:

    No doubt, a cash flow statement helps the management to prepare. Its cash planning for the future and thereby avoid any unnecessary trouble.

    Evaluation of future cash flows:

    Whether the cash flow from operating activities is quite sufficient in the future to meet the various payments e.g. payment of expense/debts/dividends/taxes.

    Assessing liquidity and solvency position:

    Both the inflows and outflows of cash and cash equivalent can know, and as such, liquidity and solvency position of a firm can also maintain as timing and certainty of cash generation knows i.e. It helps to assess the ability of a firm to generate cash.

    #Limitations of the Cash Flow Statement:

    Despite several uses, the cash flow statement suffers from the following limitations:

    • As the cash flow statements based on the cash basis of accounting. It ignores the basic accounting concept of accrual basis.
    • A cash flow statements, not a substitute for an income statement it is complementary to an income statement. Net cash flow does not mean the net income of a firm.
    • A cash flow statement is also not a substitute of funds flow statement which. Provides information relating to the causes that lead to an increase or decrease in working capital.
    • The comparative study of cash flow statements may give misleading results.
    • Some people feel that as working capital is a wider concept of funds. A funds flow statement provides a more complete picture than the cash flow statement, and.
    • Cash flow statements not suitable for judging the profitability of a firm as non-cash charges are ignored while calculating cash flows from operating activities.
  • Fund Flow Statement: Explanation, Importance, and Structure

    Fund Flow Statement: Explanation, Importance, and Structure

    What does the Fund Flow Statement mean? Funds flow statement is the statement of sources and uses of the fund. Fund Flow Statement: Explanation, Importance, and Structure. Funds flow statement shows the source from which the funds are received and the areas to which they obtained funds have been utilized. Funds flow statement indicates various mean by which funds were received during a particular period and the ways in which these funds were applied. Also learned, Venture Capital: Introduction, Definition, Characteristics, Advantages, and Disadvantages.

    The Concept of Fund Flow Statement.

    The topic is studying; Explanation of Fund Flow Statement, Meaning of Fund Flow Statement, Definition of Fund Flow Statement, Importance of Fund Flow Statement, and Structure of Fund Flow Statement. Funds flow statement comprises three words- fund, flow, and statement. “Fund” means the financial resources used by a concern. In the sense of working capital. The excess current asset over the current liabilities is called net working capital.

    Similarly. The term “Flow” means the movement of funds and includes both inflows (receipt) and outflows (payments) of found. Funds from the operation, issue of share and debentures, additional long term debt, non-operating revenues etc. are considered as the major sources of fund. Increase in working capital, the redemption of the debenture, repayment of the long term loan, payment for non-operating expenses etc. are the amine areas of uses of the fund.

    The term “Statement” represents the format or account under which the flows of fund i.e. cash inflows and outflows are recorded. Funds flow statement is known by various names such as statements of sources and uses of funds, the summary of financial operations, which got and where go statement, movement of the working capital statement, funds received and disbursement statement etc.

    #Explanation of Fund Flow Statement:

    The balance sheet and income statement are the traditional basis financial statements of concern. They furnish useful financial information regarding the operation of the concern; however, a serious limitation of these statements is that they fail to provide of time regarding changes in the financial position of a concern during a particular period of time. Funds flow statement, which is known as the statement of changes in financial position, overcomes these limitations of traditional financial statements.

    Funds flow statement is the statement of sources and uses of the fund. Funds flow statement shows the source from which the funds are received and the areas to which they obtained funds have been utilized. Funds flow statement indicates various mean by which funds were received during a particular period and the ways in which these funds were applied.

    Meaning of Fund Flow Statement:

    A fund flow statement is a statement in summary form that indicates changes in terms of financial position between two different balance sheet dates showing clearly the different sources from which funds are obtained and uses to which funds are put. The profit and loss account and balance sheet statements are the common important accounting statements of a business organization.

    The profit and loss account provides financial information relating to only a limited range of financial transactions entered into during an accounting period and its impact on the profits to be reported. The balance sheet contains information relating to capital or debt raised or assets purchased. But both the above two statements do not contain a sufficiently wide range of information to make an assessment of the organization by the end user of the information.

    In view of the recognized importance of capital inflows and outflows, which often involve large amounts of money should be reported to the stakeholders, the funds flow statement is devised. In funds flow analysis, the details of financial resources availed and the ways in which such resources are used during a particular accounting period, are given in a statement form called “Funds flow statement”.

    The sources of funds also include the funds generated from operations internally. The funds flow statement can explain the reasons for the liquidity problems of the firm even though it is earning profits. It helps the efficient working capital management and indicates the ability of the firm in servicing its long-term debt obligations. The changes in working capital position can also be tracked by observing the surplus/deficit of funds during a particular accounting period.

    Definition of Fund Flow Statement:

    Funds Flow Statement is a method by which we study changes in the financial position of a business enterprise between the beginning and ending financial statements dates. It is a statement showing sources and uses of funds for a period of time.

    Some definitions of financial experts are given for the clear conception of fund flow statement:

    Foulke defines these statements as:

    “A statement of sources and application of funds is a technical device designed to analyze the changes in the financial condition of a business enterprise between two dates.”

    According to R. N. Anthony:

    “The fund’s flow statement describes the sources from which additional funds were derived and the use to which these sources were put.”

    I.C.W.A. in Glossary of Management Accounting terms defines Funds Flow Statement as,

    “A Statement prospective or retrospective, setting out the sources and applications of the funds of an enterprise. The purpose of the statement is to indicate clearly the requirement of funds and how they are proposed to be raised and the efficient utilization and application of the same.”

    Roy A. Fouke defines a fund flow statement as,

    “A statement of sources and application of funds is a technical device designed to analyze the changes in the financial condition of a business enterprise between two dates.”

    Thus, the fund flow statement reveals the volume of financial transactions and explains the flow of funds taking place within a business during a particular period of time and its effect on the net working capital. It is not a substitute for either the Profit and Loss Account or the Balance Sheet, but it is a useful supplement to them. It describes the sources from which funds are obtained and the uses of these funds, in a condensed form.

    #Importance of Fund Flow Statement:

    A funds flow statement is an essential tool for financial analysis and is of primary importance to financial management. Nowadays, it is being widely used by the financial analysts, credit granting institutions and financial managers.

    The basic purpose of a funds flow statement is to reveal the changes in the working capital on the two balance sheet dates. It also describes the sources from which additional working capital has been financed and the uses to which working capital has been applied.

    The importance of fund flow statement may be summarised:

    Analyses Financial Statements:

    Balance Sheet and Profit and Loss Account do not reveal the changes in the financial position of an enterprise. Fund flow analysis shows the changes in the financial position between two balance sheet dates. It provides details of inflow and outflow of funds i.e., sources and application of funds during a particular period.

    Hence it is a significant tool in the hands of the management for analyzing the past, and for planning the future. They can infer the reasons for imbalances in the uses of funds in the past and take corrective measures for the future.

    Answers Various Financial Questions:

    Fund flow statement helps us to answers various financial questions such as:

    • How many funds flowed into the business?
    • How much of these funds were provided by the operations?
    • What are the other sources of funds?
    • How were these funds used?
    • Why was there less/more amount of net working capital at the end of the period than at the beginning?
    • Why were the dividends not larger?
    • How was the purchase of fixed assets financed?
    • Where has the net profit is gone?
    • How were the loans repaid?

    Rational Dividend Policy:

    Sometimes it may happen that a firm, instead of having sufficient profit, cannot pay dividend due to inadequate working capital. In such circumstances, fund flow statement shows the working capital position of a firm and helps the management to take policy decisions on dividend etc.

    Proper Allocation of Resources:

    Financial resources are always limited. So it is the duty of the management to make its proper use. A projected fund flow statement enables the management to take the proper decision regarding allocation of limited financial resources among different projects on a priority basis.

    Guide to Future Course of Action:

    The future needs of the fund for various purposes can be known well in advance from the projected fund flow statement. Accordingly, timely action may be taken to explore various avenues of the fund. A projected funds flow statement also acts as a guide for the future to the management.

    The management can come to know the various problems it is going to face in near future for want of funds. The firm’s future needs of funds can be projected well in advance and also the timing of these needs. The firm can arrange to finance these needs more effectively and avoid future problems.

    Proper Managing of Working Capital:

    It helps the management to know whether working capital has been effectively used to the maximum extent in business operations or not. It depicts the surplus or deficit in working capital than required. This helps the management to use the surplus working capital profitably or to locate the resources of additional working capital in case of scarcity. A funds flow statement helps in explaining how efficiently the management has used its working capital and also suggests ways to improve the working capital position of the firm.

    Guide to Investors:

    It helps the investors to know whether the funds have been used properly by the company. The lenders can make an idea regarding the creditworthiness of the company and decide whether to lend money to the company or not.

    Evaluation of Performance:

    Fund flow statement helps the management in judging the financial and operating performance of the company.

    Fund Flow Statement Explanation Importance and Structure
    Fund Flow Statement: Explanation, Importance, and Structure, #Pixabay.

    #Structure of Fund Flow Statement:

    The structure of fund flow statement like other accounting statements is based on the equality of financial assets and liabilities.

    To bring the form of fund flow statement on a scientific line, the fund flow statement is divided into two parts:

    • Schedule of working capital changes, and.
    • Statement of sources and uses of the fund.

    Now explain;

    Schedule of Working Capital Changes:

    This schedule is also called “Comparative Change in Working Capital Statement” of “Statement of Working Capital Changes” or “Working Capital Variation Statement” or “Net Current Assets Account” or “Working Capital Account”. The increase in working capital is treated as use of fund and decrease in working capital is termed as sources of fund.

    This statement or schedule is prepared in such a way or form as to indicate the amount of working capital at the end of two years as well as increase or decrease in the individual items of current assets and current liabilities.

    The following rules should be taken into account while ascertaining the increase or decrease in individual items of current assets and current liabilities and its impact on working capital:

    • Increase in the items of Current Assets will increase the Working Capital.
    • The decrease in the items of Current Assets will decrease the Working Capital.
    • Increase in the items of Current Liabilities will decrease the Working Capital.
    • The decrease in the items of Current Liabilities will increase the Working Capital.

    Statement of Sources and Uses of Fund:

    This is the second but most important part of Fund Flow Statement. It is prepared on the basis of the changes in Fixed Assets. The preparation of Statement of Sources and Uses of Fund involves the ascertainment of increase/decrease in the various items of fixed assets, long term liabilities and share capital in the light of additional information given below.

    To give an idea of the different items of sources and uses, the probable items of sources and uses of the fund are tabulated below.

    Sources of Fund:

    The following sources below are;

    • An issue of fresh shares (derived from an increase in share capital).
    • The Issue of Debentures (derived from the increase in debentures).
    • Raising of new loans (derived from the increase in long term loans).
    • Sale of fixed assets for cash or for other current assets (derived from the decrease in fixed assets and additional information).
    • Non-trading income.
    • Profit from operations (before deducting non-cash items of expenses and losses and before adding non-cash, non-trading income), and.
    • The decrease in working capital (derived from the schedule of working capital changes).
    Uses of Fund:

    The following uses below are;

    • Redemption of Preference Shares in cash (derived from the decrease in share capital).
    • Redemption of debentures in cash (derived from the decrease in debentures).
    • Repayment of loans (derived from the decrease in long-term loans).
    • Purchase of fixed assets for consideration other than shares, debentures or long term debt (derived from the increase in fixed assets and additional information).
    • Loss from operations.
    • Payment of dividend in cash, and.
    • Increase in working capital (derived from the schedule of working capital changes).

  • What is the top Objectives and Characteristics of Budget Control?

    Budget, Budgeting, and Budgetary Control: A budget is a blueprint of a plan expressed in quantitative terms. Budgeting is the technique for formulating budgets. Budgetary control, on the other hand, refers to the principles, procedures, and practices of achieving given objectives through budgets. So, what is the question we are going to discuss; What is the top Objectives and Characteristics of Budget Control?… Read in Hindi.

    Here are explained; Meaning, Definition, Nature, Objectives, and Characteristics of Budget Control.

    The word is given in Upper “Budget, Budgeting and Budgetary Control” Rowland and William have differentiated the three terms as: “Budgets are the individual objectives of a department, etc., whereas Budgeting may be said to be the act of building budgets. Budgetary control embraces all and in addition, includes the science of planning the budgets to effect an overall management tool for the business planning and control”.

    Meaning and Nature:

    Budgetary or Budget control is the process of determining various budgeted figures for the enterprises for the future period and then comparing the budgeted figures with the actual performance for calculating variances if any. First of all, budgets are prepared and then the actual results are recorded. The comparison of budgeted and actual figures will enable the management to find out discrepancies and take remedial measures at a proper time.

    The budgetary control is a continuous process which helps in planning and coordination. It provides a method of control too. A budget is a means and budgetary control is the end result.

    Definition:

    According to Brown and Howard,

    “Budgetary control is a system of controlling costs which includes the preparation of budgets. Coordinating the department and establishing responsibilities, comparing actual performance with the budgeted and acting upon results to achieve maximum profitability.” Wheldon characterizes budgetary control as ‘planning in advance of the various functions of a business so that the business as a whole is controlled’.

    J. Batty defines it as,

    “A system which uses budgets as a means of planning and controlling all aspects of producing and/or selling commodities and services.” Welch relates budgetary control with-day-to-day control process. According to him, ‘Budgetary control involves the use of budget and budgetary reports, throughout the period to coordinate, evaluate and control day-to-day operations in accordance with the goals specified by the budget’.

    From the above-given definitions it is clear that budgetary control involves the following:

    • The objects are set by preparing budgets.
    • The business is divided into various responsibility centers for preparing various budgets.
    • The actual figures are recorded.
    • The budgeted and actual figures are compared for studying the performance of different cost centers.
    • If actual performance is less than the budgeted norms, remedial action is taken immediately.

    Top three Objectives of Budget Control:

    The following points highlight the top three objectives of Budgetary control or Budget control. The objectives are:

    • Planning.
    • Co-Ordination, and.
    • Control.

    Now, explain;

    Planning:

    A budget is a plan of the policy to be pursued during the defined period of time to attain a given objective. The budgetary control will force management at all levels to plan in time all the activities to be done during future periods. A budget as a plan of action achieves the following purposes:

    • The action is guided by the well thought out plan because a budget is prepared after a careful study and research.
    • The budget serves as a mechanism through which management’s objectives and policies are affected.
    • It is a bridge through which communication is established between the top management and the operatives who are to implement the policies of the top management.
    • The most profitable course of action is selected from the various available alternatives.
    • A budget is a complete formulation of the policy of the undertaking to be pursued for the purpose of attaining a given objective.
    Co-Ordination:

    The budgetary control co-ordinates the various activities of the firm and secures co-operation of all concerned so that the common objective of the firm may be successfully achieved. It forces executives to think and think as a group. It coordinates the broader economic trends and the economic position of an undertaking. It is also helpful in coordinating the policies, plans, and actions. An organization without a budgetary control is like a ship sailing in a chartered sea. A budget gives direction to the business and imparts meaning and significance to its achievement by making the comparison of actual performance and budgeted performance.

    Control:

    Control consists of the action necessary to ensure that the performance of the organization conforms to the plans and objectives. Control of performance is possible with pre­determined standards which are laid down in a budget. Thus, budgetary control makes control possible by continuous comparison of actual performance with that of the budget so as to report the variations from the budget to the management of corrective action. Thus, the budgeting system integrates key managerial functions as it links top management’s planning function with the control function performed at all levels in the managerial hierarchy.

    But the efficiency of the budget as a planning and control device depends upon the activity in which it is being used. A more accurate budget can be developed for those activities where a direct relationship exists between inputs and outputs. The relationship between inputs and outputs becomes the basis for developing budgets and exercising control.

    The main objectives are stated below:

    • To determine business policies for the attainment of desired objectives during a particular period of time. It provides definite targets of performance and gives the guidance for the execution of activities and effort.
    • To ensures planning for future by setting up various budgets. The requirements and expected performance of the enterprise are anticipated.
    • To co-ordinate the activities of different departments.
    • To operate various cost centers and departments with efficiency and economy.
    • Elimination of wastes and increase in profitability.
    • To co-ordinate the activities and efforts of different departments in the enterprise so that the policies are successfully implemented.
    • To regulate the activities and efforts of people to ensure that the actual results conform to the planned results.
    • To operate various cost centers and departments with efficiency and economy.
    • To correct the deviations from the established standards, and to provide a basis for revision of policies.

    The Characteristics of Budget Control:

    The above definitions reveal the following characteristics of budgetary control:

    • Budgetary control presumes that management has made budgets for all departments/units of the enterprise and these budgets are summarised into a master budget.
    • Budgetary control needs the recording of the actual performance, its continuous comparison with the budgeted performance, and the analysis of variations in terms of causes and responsibility.
    • Budgetary control is a system suggesting suitable corrective action to prevent deviations in the future.

    The Characteristics of Good Budgeting:

    The following characteristics below are:

    • A good budgeting system should involve persons at different levels while preparing the budgets. The subordinates should not feel any imposition on them.
    • Budgetary control assumes the existence of forecasts and plans of the business enterprise.
    • There should be a proper fixation of authority and responsibility. The delegation of authority should be done in a proper way.
    • The targets of the budgets should be realistic, if the targets are difficult to be achieved then they will not enthuse the persons concerned.
    • A good system of accounting is also essential to make the budgeting successful.
    • The budgeting system should have whole-hearted support of the top management.
    • The employees should be imparted budgeting education. There should be meetings and discussions and the targets should be explained to the employees concerned.
    • A proper reporting system should be introduced, the actual results should be promptly reported so that performance appraisal is undertaken.