The historical cost accounting values an asset for balance sheet purposes at the price paid for the asset at the time of its acquisition. The historical cost accounting is the situation in which accountants record revenue, expenditure and asset acquisition and disposal at historical cost: that is, the actual amounts of money, or money’s worth, received or paid to complete the transaction. Historical cost is based on actual transaction rather than forecasts. There are supporting records for all the figures provided in the financial statements. It is also relevant in making economic decisions, as past data transactions are needed for making future decisions. Another defense of historical cost is that ‘historical cost’ has been used throughout history as financial statements which use historical cost are found to be useful. Profit is the excess of selling price over historical cost. Profit is a very well accepted concept of measure of performance.Continue reading
Financial Accounting Concepts
Behavioral Aspects of Budgeting
Budgetary control relies greatly on the individuals of a corporation. The human aspect in the budgetary system can be very complicated since the budgetary process involves relationships between different people within the corporation which includes the chief executive officer, managers and staff. Some times budgets affect people’s behaviors and vice versa. Thus the behavioral aspects of budgeting are of vital significance and consist of many different areas that high attention must be paid. First and foremost, we need to know the factors affecting the behavioral aspects of budgeting, including: Budgets perceived by employees as being too difficult In situations that lack full participation of all levels in preparing for the budgets, the employees will perceive the budgets as being too difficult to follow. In addition, the punishment that comes along from failing to meet what this budgeted has a tendency to encourage staff’s attempts to beat the system. This greatlyContinue reading
The Benefits and Limitations of Budgets
A budget is a comprehensive, formal, coordinated, detailed, quantitative plan that estimates the probable expenditures for acquiring and using financial and other resource for an organization over a specific time period. Budgeting describes the overall process from preparing budget, using budgets during the business operation, and later performance evaluation. It provides us the valuable tools for planning and control of finances and affects nearly every type of organization-from governments and large corporations to small businesses-as well as families and individuals. A small business generally engages in budgeting to determine the most efficient and effective strategies for making money and expanding its asset base. Budgeting can help a company use its limited financial and human resources in a manner which best exploit existing business opportunities such production expansion and acquisition that might otherwise miss. A good and through understanding of how budgeting works is a must for ambitious business executive ifContinue reading
Fixed and Flexible Budget
According to the flexibility factor, budgets are classified into: Fixed Budget This is budget in which targets are rigidly fixed. Such budgets are usually prepared from one to three months in advance of the fiscal year to which they are applicable. Thus, twelve months or more may elapse before figures forecast for the budget are used to measure actual performance. Many things may happen during this intervening period and they may make the figures go widely out of line with the actual figures. Though it is true that a fixed, or static budget as it is sometimes called, can be revised whenever the necessity arises, it smacks of rigidity and artificiality so far as control over costs and expenses are concerned. Such budgets are preferred only where sales can be forecast with the greatest of accuracy which means, in turn, that the cost and expenses in relation to sales canContinue reading
Financial Manager – Roles and Responsibilities
Ever since the 1900s and even after the Great Depression in the 1930s, the primary role of a finance people was only a descriptive discipline on bookkeeping which means accurately recording all transactions related to the payment of suppliers, billing of customers, and handling of cash passing through the accounts department and issuing periodic financial statements. Until the late 1960s increased competition in industries forced financial managers to shift their focus towards evaluating investment opportunities and making decisions on the choice of assets and liabilities necessary to maximize the company’s value. The 1970s and 80s were a period of increased international competition, CEOs became concerned with operational efficiency to cope with the fast-growing market, this included the accounting functions which were streamlined and required to reach out to become a profit center for the whole organization. This transitional shift was gradual and finance manager’s roles are no longer stuck solelyContinue reading
Features of a Sound Capital Structure
Capital structure is a business finance term that describes ‘the proportion of a company’s capital, or operating money, which is obtained through debt and equity or hybrid securities’. Debt consists of loans and other types of credit that is to be repaid in the future, usually with interest. Equity involves ownership interest in a corporation in the form of common stock or preferred stock. Equity financing does not involve a direct obligation to repay the funds which is in contrast to debt financing. Instead, equity investors are able to exercise some degree of control over the company as they become part-owners and partners in the business. The goal of a company’s capital structure decision is to maximize the gains for the equity shareholders. The optimal capital structure is the one that maximizes the price of the stock and simultaneously minimizes the cost of capital thus striking a balance between riskContinue reading