ACCOUNTING EQUATION ( E X P A N D E D )

A - L = O E 

*

(NCA + CA) -(NCL + CL) = O E  

**

(NCA + CA) -(NCL + CL) = (CAPITAL +PROFIT -DRAWINGS)

***
*Owners' Equity 

(NCA + CA) -(NCL + CL) = (CAPITAL +(INCOME-EXPENSE) -DRAWINGS)

*Shareholders' Equity
(NCA + CA) -(NCL + CL) = (ISSUED CAPITAL +(INCOME-EXPENSE) -DIVIDENDS)

INVENTORY - CURRENT ASSET

 

Inventory types: raw materials , work-in-progress and finished goods  Inventory must be recorded at lower of cost or net realisable value (NPV) Difference recorded as Dr Impairment loss on inventory (expense) Cr Inventory (current asset) Prudence Concept FIFO - goods bought first, sold first (Best valuation method) Weighted average - $average cost of goods bought /per unit LIFO (removed from International Financial Reporting Standards IFRS due to its profit manipulation potential)
Sales & Purchases               Calculating Gross Profit :   Inventory Account: Decrease in value of inventory           Impairment loss on Inventory account:

 

COMMON SLANG TERMS OF ACCOUNTING AND FINANCE‏

1) TAKING A BATH - Intentionally incurring all losses in  current period, rather than spreading it to other periods


2) TAKE A FLIER - Intentionally investing in high risk investments, leading to huge losses for current period

3) FLIGHT TO QUALITY- Moving to a low risk investment

4) BUBBLE - Rapid growth of an economic accompanied by a downturn in assets/securities prices

5) SPECULATION - Gambling based on individual calculations

6) MARKET CRASH - Unexpected downturn of investments value


7) HEDGE - Entering into futures contract to prevent adverse price changes

8) MASTER FEEDER FUND - Combination several funds of  into one portfolio, which reduces cost and increases service level

9) LONG POSITIONS - Purchase of a security, anticipating that its will rise in value subsequently

 

10) QUOTE STUFFING - Forcing weaker market competitors to lose out on opportunities by flooding market with quotes and removing them at high speed

11) BLEEDING EDGE - Unknown risk future of an upcoming technology

12) WHITE ELEPHANT - A Burden

13) SIX STIGMA - Quality control guide for defect goods

14) OBSOLESCENCE - Technology that are no longer attractive to consumers

15) BUILT IN OBSOLESCENCE - Product produced is made known to be outdated after a short period, in order to keep customers spending frequently

16) FREE CASH FLOW/ FCF - Cash available to increase assets

17) FREE CASH FLOW TO EQUITY/ FCFE - Amount of cash available to equity shareholders after expenses , debt payments and reinvestment


FORMULA TO FCFE

FCFE = Earning / Per Share - (Capital Expenditure - Depreciation) (1-Debt ratio**)- (Change in Net Working Capital* ) (1- Debt ratio**)


OR
 
FCFE = Net Income - Capital Expenditure - Change in Net Working Capital*+ New debt - Debt payment

*WC= CA-CL
**Debt Ratio= Total Liabilities/ Total Assets
(1:1 means Liabilities = Assets)

Why Do Exchange Rates Fluctuates ?

Simplified Reasons

Factors include:

• Monetary policies of the federal reserve or central bank.
  

• Health of an economy.
  

• Trade policies.
  

• Currency inflation and deflation.

FACTORS CAN BE CATEGORISED INTO 3:
1 Economic factors
2 Political factors
3 Market psychology

Daily Exchange Rate check have fun
http://www.oanda.com/currency/historical-rates-classic?srccont=rightnav

Source and Read
www.answers.com/Q/What_factors_contribute_to_the_fluctuation_of_exchange_rates#ixzz1F4Kxnr3v

Accounting for Depreciation Theory

* Common theory Q&A 
What is depreciation ?

*the fall in value of the fixed Assets(Vehicle , Machines) .

*It is the allocation of the cost of an asset over its useful life.

Why does a business need to open a depreciation account?

*Because the whole cost of the fixed assets should be spread out over its useful life and it is not just treated as an expense in the year of purchase.- by GOING CONCERN CONCEPT (business operation is assumed to be indefinitely)

Causes of depreciation?

*1)Physical Deterioration (Wear & Tear) -Due to the exposed of asset to the elements of nature. eg Furniture & Fittings

*2) Obsolescence- Outdated eg, Computers

*3) Depletion of assets as time passes - disappear eg , mining land

*4) Passage of time - Shorten life of assets eg , rent on land , patent rights

Calculation of Depreciation


Straight-line method
formula:

Original cost$ - Estimated Scrap Value$ / No. of useful Life(Years)

OR

Rate of  Depreciation% / year X Original cost$

Adv(+) VS Disadv(-)

+Easy to calculate and understand

-In real life, its not accurate amount of wear and tear may vary every year.

Reducing balance method
formula:

Rate of Depreciation% / year X Net Book Value$ (Remaining value aft every accounting year)

Adv(+) VS Disadv(-)

+Most Efficient in giving asset a more truthful allocation of depreciation

- takes a long time to write off the books

-Rate of depreciation is high as compared to straight-line method

Revaluation method( not in O lvl, A lvl syllabus ) 
formula:

Value of purchase $ + Any New Purchases $ - Value of asset at the end $

Adv(+)Vs Disadv(-)

+More realistic financial position to be expressed

- In practical takes up a lot of time and effort ,thus increase cost of labour.

Control Accounts

2 reason why control accounts are prepared

Define : A control account is a summary account in the general ledger (GL) . The details that support the balance in the summary account are contained in a subsidiary ledger --a Ledger outside of the general ledger .

1) The purpose of control account is to reduce details in the(GL), yet have the correct balance for P&L and BS.

2) It saves effort when the sales manager and credit manager wants to know the details and information of every individual customers ,including whether a customer recently reduced their account balance. The company can provide these individuals with access to the Debtors Subsidiary Ledger and keep the(GL) free of a tremendous amount of details.

ADV of Subsidiary Ledgers :

1) Reduces the number of accounts in the (GL) as two Largest groups *debtors & creditors* are taken out. Frees (GL) from unnecessary details because only the totals were recorded in it .

2) Making it possible to keep track of these accounts.

3) It helps the business to locate errors as each ledger contains fewer accounts than if all accounts are kept in one (GL).

4) It allows division of labor as different checks can be employed to take charge of the Ledgers

Accruals and Prepayments

Accrued Expense : expenses incurred by business for the accounting year , but not yet paid or recorded in books , are included in the expenses for the period.

Accrued Revenue : Revenue earned by business for the accounting year , but not yet received or recorded in books , is included in the revenue for the period.

Prepaid Expense : Expenses paid or recorded in books , but it is related to the next accounting year are excluded from the expenses for the current year .

Prepaid Revenue : Revenue received and recorded in books , but will not be earned , until the next financial period , is excluded from the revenue for the current year.
 

A Qn on Accruals and prepayments: