Question 1

  1. Business entity concept – It is an accounting principle that signifies that the business proprietors must keep business and personal records separately (Weygandt et al., 2019). This notion holds that the firm is an enterprise or an institution that has its rights separate and different identity from the parties who produce the funds. Doing this requires the usage of separate accounting records from a company that entirely excludes assets and liabilities of any other firm or owner. In accounting, this concept raises the accountability of the owner whenever the commercial capital is used for individual use. It induces the firm and owner to remain accountable for their distinct fiscal commitments. This concept can also be applied to the proprietors of numerous corporations. It enables individuals to study financial performance in an adequate way, whether inside the corporation or not (Osadcha et al., 2018). This notion is not the same as the business veil. It is regarded as a bookkeeping practice instead of any legal practice. For instance, the owner of the company loans $10000 to the corporation. This transaction will be recorded by the corporation in the form of liability and by the owner as a loan receivable.
  2. Matching concept – It is the accounting concept that details that corporations report overheads at a similar time as the proceeds they are in relation to. Expenses and revenues are coordinated in the income statement for the given period. The corporation does not record any expenses when they are paid but as it acquires the revenue (Schroeder et al., 2022). This concept requires one to keep a record of any cause-and-effect relationship between the revenues and expenses on a simultaneous basis. As recording items need accrual entry, the matching principle is part of the accrual accounting system. It indicates that one records them as they are being incurred instead of when one receives payment. Matching the revenues and expenses enables investors to identify the consistency in the financial statements of the corporation (Lev, 2018). For instance, the workers earn a bonus amount of $1000 in 2022 on the basis of their performance. He will not receive a bonus until 2023. Using the matching principle, the $1000 expense will be in the income statement the year the worker earned it. Here, the company will record it in the 2022 profit and loss account.

Question 2

Trading account

Particulars

Amount ($)

Particulars

Amount ($)

To opening stock

10000

By sales 100000

 

To purchases 40000

 

Less: Sales return (5000)

95000

Less: purchase return (2000)

38000

By closing stock

6000

To wages

9000

   

To other direct expenses

12000

   

To gross profit

32000

   
       
 

101000

 

101000

Question 3

Subsidiary books are books that record transactions that are similar in a systematic way. In huge companies, it is complex to maintain the record of all forms of transactions in the journal daybook so that is why the journal daybook is categorized into several sorts of sub-books that are called subsidiary books (Kumar & Sharma, 2015). Using the subsidiary books enables for more accurate recording of transactions and can offer supplementary information that may act as useful in decision making.

  • Cash book – In this book, the company record all the cash transactions of a business. This book maintains a record of all cash receipts and cash payments.
  • Purchase book – It is the book where the company records all the credit transactions in relation to the purchase of goods only. The buying of assets is never recorded in this book.
  • Sales book – It records all the transactions in relation to credit sales. It cannot record the sale of assets (Schwartz et al., 2018).
  • Purchase return book – It is the book where one records the goods being returned to the supplier or vendor.
  • Sales return book – It is the book where one records the goods being returned by the consumers. It is also known as a sales returns journal.
  • Bill receivable book – It is regarded as the instrument of debt written by the vender of goods and services and accepted by the purchase of goods and services.
  • Bills payable book – It records all the dealings in relation to bills that are being drawn on corporate and are payable by the firm.
  • Journal proper – There are a few dealings that cannot be documented in any of the books mentioned above. These transactions are termed as varied transactions. It consists of the transactions like sale of assets, depreciation, commission paid, etc.

All these books are significant as they offer a detailed record of the transactions of the company. This form of information can be applied to make informed decisions regarding where to allocate resources and in what way to manage funds. In addition, subsidiary books can aid management in identifying problems and keeping track of progress over time. Each of these books has its purpose and can offer distinct information to decision-makers.

Specimen of purchase book and sales book

Purchase book

Date

Particulars

Inward invoice no.

L.F.

Amount

         
         

Sales book

 

Date

Particulars

Outward Invoice no.

L.F.

Amount

 
           
           

Question 4

The liquidity of the business firm is measured by its capability to pay off its short-term debts as and when they become due. Liquidity ratios help in determining if the firm can use its liquid or current possessions to cover the current accountabilities (Lalithchandra, 2021). There are majorly 4 liquidity ratios that are used, namely current ratio, cash ratio and quick ratio. These ratios recognize how rapidly the company can convert its possessions and use them to fulfil the charges that come. The greater the ratio, the simpler the capability to clear the arrears and circumvent evasion on the payments. It is a very significant criterion that creditors check prior to offering any short-term advances to the firm. The corporation that is not able to clear the dues results in leading an impact on the creditworthiness and also adversely impacts the credit rating of the corporation.

  • Current ratio – This ratio determines the capability of the corporation to pay off the current obligations with the total sum of current possessions like accounts receivable, cash and inventories. The greater the current ratio of the company, the better would be its liquidity position (Husna & Satria, 2019). On the other hand, the lower the current ratio of the company, the more complex would be for the firm to fulfil its short-term financial obligations and commitments. It is computed by dividing the current assets by the current obligations.
  • Quick ratio – It is a stricter test of liquidity as associated to the current ratio. Quick ratio only takes into consideration a few current assets. It takes into consideration more liquid possessions like cash and cash equivalents, and accounts receivables, and leaves out prepaid expenses and inventory as these two assets are less liquid. It is measured by dividing the quick assets by current obligations.
  • Cash ratio – It is calculated by dividing the cash and saleable securities by the current obligations (Dar & Dar, 2017). It takes the test of liquidity even further. This metric just considers most liquid assets of the corporation. These are the assets that are most readily available to the corporation to pay off the short-term debt obligations.
  • Net working capital ratio- This ratio is used to identify whether the firm has enough cash or finances to endure its processes. It is computed by deducting the current obligations from current possessions.

Question 5

Marginal costing is regarded as the total cost computed by aggregating the variable cost and prime cost. Therefore, it includes all the costs except fixed costs. Marginal costing is not a costing method identical to job costing or process costing (Drury, 2018). It is a different technique and is used for the motive of managerial decision-making. It can be used for computing the profitability of different product lines or cost centres.

Marginal costing has below listed features –

  • This technique is used for the purpose of analyzing and depicting the costs to the administration for aiding in the procedure of decision-making. It is not a different costing method like process costing or job costing.
  • It categorizes all components of cost into variable and fixed categories. Semi-variable costs are also classified into variable and fixed categories (De Loecker et al., 2016).
  • The variable portion of the total cost is regarded as the marginal cost of the product.
  • The contribution margin is used for computing the profitability of items and cost centres.
  • Variable cost is used for valuing the closing stock.
  • The selling price is grounded on marginal cost-plus contribution. Thus, the contribution is the surplus of the trading price over the marginal price of sales.
  • Assessment of inventory in WIP (work in progress) and finished products is completed on the grounds of marginal cost.
  • The profit on any item is determined after a close study of the contribution made available by every unit of output.

The contribution margin depicts the part of the sales revenue of the product that is not used by variable costs and so makes a contribution to covering the fixed costs of the corporation (Guerreiro & Amaral, 2018). It is the variance between sale price and marginal charge, and it is used to improve the fixed expenses first. Any surplus of contribution over static prices would be proceeds. The notion of contribution aids in determining the break-even point, effectiveness of items, departments, etc. to choose the product mix for maximizing profits, and to fix the selling rates under distinct conditions like export sales, trade depression, price discrimination, etc. The contribution margin acts as the grounds for break-even examination used in overall cost and sales price scheduling for items (Cooper, 2017). It helps in distinguishing fixed cost and profit basics arriving from sales of products and can be applied for defining the selling price range of an item, profit extent that can be assumed from sales and structure sales charges paid to the members of the sales team, commissions agents and distributors.

Question 6

Variance analysis is regarded as the method of evaluating the difference between forecasted budgets and actual numbers. It is more of a quantitative method that aids in maintaining effective control over the entire business. It can aid corporations in managing projects, productions or operational expenses by supervising the planned versus actual costs (Akeem, 2017). Establishing an effective analysis can assist firms in maintaining and improving operations. For instance, the corporation may forecast the number of sales for subsequent year and associate its forecasted amount to the definite sum of sales revenue it acquires.

  • Material variance – It aids corporations in identifying where they might be using more number of materials as compared to actually required. It is the variance among the real cost suffered for direct materials and the budgeted cost of such materials (Blocher et al., 2019).
  • Purchase price variance – It is concerned only with the rate at which direct materials were procured. It is computed by multiplying the real amount by the difference between the real value and the standard price.
  • Material yield variance – It is associated with the quantity of elements of materials used in the procedure of production. It is calculated by multiplying the standard cost per unit with the difference between actual unit usage and standard unit usage.
  • Material quantity variance – It is that part of the material cost variance that is because of the distinction between the normal amount of materials quantified for actual production and the actual amount of materials used. It is figured by multiplying the standard price per unit by the difference between the normal quantity and the real quantity.
  • Labour variance – This variance rises when the actual cost linked with the labour activity differs from the assumed amount (Pazarceviren & Celayir, 2021). It helps firms in identifying how competently they use labour and the effectiveness of their rates.
  • Labour cost variance – It acts as the variance between the normal cost of labour permitted for the real output accomplished and the real rate of labour being hired. It is simply calculated by subtracting the actual cost of labour from the standard rate of labour.
  • Labour rate variance – It is that share of labour cost variance that arises because of the distinctions among the standard rate stated and the actual rate being paid. The rate of pay variance is computed by multiplying the actual time taken by the difference between the standard rate and the actual rate.
  • Labour efficiency variance – It is that part of labour cost variance that rises because of the variance among standard labour hours quantified for output accomplished and actual labour hours consumed. It is calculated by multiplying the standard rate with the variance between the standard time for real output and the definite time worked.

References

Akeem, L. B. (2017). Effect of cost control and cost reduction techniques in organizational performance. International business and management14(3), 19-26.

Blocher, E. J., Stout, D. E., Juras, P. E., & Smith, S. (2019). Cost Management (A Strategic Emphasis) 8e. McGraw-Hill Education.

Cooper, R. (2017). Target costing and value engineering. Routledge.

Dar, S. Q., & Dar, A. A. (2017). The working capital and its ratios: A qualitative study. International Journal of Statistics and Actuarial Science1(1), 24-30.

De Loecker, J., Goldberg, P. K., Khandelwal, A. K., & Pavcnik, N. (2016). Prices, markups, and trade reform. Econometrica84(2), 445-510.

Drury, C. (2018). Cost and management accounting. Belmont, CA, USA: Cengage Learning.

Guerreiro, R., & Amaral, J. V. (2018). Cost-based price and value-based price: are they conflicting approaches? Journal of Business & Industrial Marketing.

Husna, A., & Satria, I. (2019). Effects of return on asset, debt to asset ratio, current ratio, firm size, and dividend payout ratio on firm value. International Journal of Economics and Financial Issues9(5), 50-54.

Kumar, R., & Sharma, V. (2015). Auditing: Principles and practice. PHI Learning Pvt. Ltd.

Lalithchandra, B. N. (2021). Liquidity ratio: an important financial metric. Turkish Journal of Computer and Mathematics Education (TURCOMAT)12(2), 1113-1114.

Lev, B. (2018). The deteriorating usefulness of financial report information and how to reverse it. Accounting and Business Research48(5), 465-493.

Osadcha, O. O., Akimova, A. O., Hbur, Z. V., & Кrylova, I. I. (2018). Implementation of accounting processes as an alternative method for organizing accounting. Financial and credit activity problems of theory and practice4(27), 193-200.

Pazarçeviren, S. Y., & Celayir, D. (2021). Direct labour cost volume variance in success measurement and an application. Sakarya Üniversitesi İşletme Enstitüsü Dergisi4(1), 1-5.

Schroeder, R. G., Clark, M. W., & Cathey, J. M. (2022). Financial accounting theory and analysis: text and cases. John Wiley & Sons.

Schwartz, J. T., Flynn, D. T., & Karahan, G. (2018). Merchant Account Books, Credit Sales, and Financial Development. Accounting and Finance Research7(3), 154-154.

Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2019). Financial accounting. John Wiley & Sons.

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