HR Value Accounting - Management Duniya

HR Value Accounting

HR Value Accounting:

This concept is based on the view that difference in present & future earnings of two similar firms is due to the difference in their human organisation. The economic value of a firm can be determined by obtaining the present value of future earnings.

LEV and SCHWARTZ Model: Lev and Schwartz developed an economic model in 1971 for determining the value of human resources in a firm. According to them the value of human capital embodied in a person of age‘T’ is Present value  of its remaining future earnings from employment in the form of salaries, wages etc..,

                               E(V_y) = Σ P_y(t+1) Σ I(T)/(I+R)^t-y

Where:

 E (V_y) = expected value of a ‘y’ year old person’s human capital

 T = the person’s retirement age

 P_y (t) = probability of the person leaving the organisation

I(t) = expected earnings of the person in period

 r = discount rate

Flamholtz Model (1971):

According to this model an individual values to an organisations determine by the service is expected to render to the organisation during a period he is likely to remain with the organisation in various positions or service stated.

Giles & Robbinson human asset multiple methods:

In 1972 the ICMA & the institute of personal management (IPM) sponsored Giles & Robbinson to produce a report on HRA. They suggested a Human Asset Measurement known as Human Asset Multiplier. According to this method the valuation of human resources should be made in the same way as other business, ongoing concern basis.

Hermanson’s unpurchased Goodwill & Adjusted Discounted future wage Model:

R.H Harmanson as suggested two model for the measurement HR’s. According unpurchase goodwill model the value of HR’s of an organisation may be calculated by capitalising earnings in exces of normal earning for the industry or the group of companies of which the firm is apart.

The adjusted discounted wages model uses compensation as a surrogate measure of a person’s valued to the firm. Compensation means the present value of future stream of wage & salaries to employees of the firm.

Jaggi & Lau Model:

This model is suggesting valuation of Human assets group basis rather than on individual basis.

TV = (N) rn (T)n(V)

Where

TV = represent the current value of all current employees in each rank.

(N) = represent the number of employees currently in each rank.

n = the time period

r = the Discount rate

(T) = the probability

(V) = the economic value of an employee of rank 1 during each period.

This model tries to simplify the measurement of value of HR’s by taking group of employees as a base.

Source: Books & Notes

Tags: accounting, accounts, Capital, Employee, finance, HR, HR Value Accounting, Human Resource, income, Loss, Management, Organisation, Profit, Profit and Loss, Resource, Return, revenue, Vlaue
By: Management Duniya

Replacement Cost Approach - Management Duniya

Replacement Cost Approach

Replacement Cost Approach:

This method was developed by” Rensis Likert” and Eric G Flamholtz” “ the cost of replacing employees is used as measure of companies HR’s. The HR’s of company are to be valued on the assumption as to walk it will cost in the concern if existing HR’s are required to be replaced with other persons of equal lent experience & talent.

Merits:

1. This approach of advantage of adjusting the human value of price trends in the economy & there by provides more realistic value in inflationary items.


2. It has the advantage of present oriented.

Limitations:

1. It may not always be possible obtain such a measure for a particular employee.


2. It is not always possible to find out the exact replacement of an employee.

Source: Books & Notes

Tags: accounting, accounts, Approach, Cost, Cost Approach, Expenditure, expenses, finance, income, Loss, Management, Profit, Profit & Loss, profit & loss account, Replacement, Replacement Cost Approach, revenue, sales, volume
By: Management Duniya

Methods of HRA - Management Duniya

Methods of HRA

Methods of HRA:

There are two major aspects of HRA

1. HR Cost accounting (HRCA)


2. HR Value accounting (HRVA)

1. HR Cost Accounting: HRCA may be defined as the measurement & reporting of the cost incurred to acquire & develop people as organisational resources. It deals with accounting for investments made by an organisation in acquisition & developing HR as well as the replacement cost of people presently employed.

It includes: 1. Historical Cost Approach 2. Replacement Cost Approach

Historical Cost Approach: Historical Cost Approach developed by “R. Lee Brummet, Eric G. Flamholtz and William C. Pyle. , according to this approach “ the actual cost incurred on recruiting, selecting, training, placing & developing the HR’s of an enterprise capitalised & written off over the expected useful life of HR’s.

Merits:

1. This method is simple to understand & easy to work out


2. The traditional account concept matching cost with revenue is flowed in this method.


3. It can help a firm in finding out a return on HR’s investment.

Limitations:

1. It is difficult to estimate the no.of years an employee will be with the firm.


2. It is difficult to determine the no. of years over which the effect of investment on employees will be realised.


3. It is also difficult to fix rate of amortisation.


4. The value of an asset decreases with amortisation.

Source: Books & Notes

Tags: Account, accounting, Cost, Expenditure, expenses, finance, goods, HRA, HUMAN RESOURCE ACCOUNTING, income, Loss, Methods of HRA, Profit, Profit and Loss, Profit and Loss account, Resource, revenue, sales
By: Management Duniya

Advantages of HRA - Management Duniya

Advantages of HRA

Advantages of HRA:

HRA help in knowing whether human asset is being build up the business or not. An executive may show good results in producing goods etc., but he might not have build human resources properly.

1. HRA will give the cost of developing HR’s in the business.


2. The investment on the development of HR’s can be compared with the benefits & results derived.


3. The return on investment can realistically be calculated only when investment on HR’s is also taken in to accounts. The return on investment may be good because there is an investment on human beings. On other hand a low investment may be the reason of low investment on human asset. So ROI can give accurate results only when expenditure on employees is treated as an asset.


4. It will help management in planning & executing personal policies.


5. It can be seen whether the business as made proper investment in human resources in terms of money or not.


6. HRA will help in improving the efficiency of the employees.

Source: Books & Notes

Tags: accounting, accounts, Advantages, Advantages of HRA, Cost, Employee, Employer, Expenditure, expenses, finance, goods, HRA, HUMAN RESOURCE ACCOUNTING, income, Loss, Management, Profit, profit & loss account, revenue, sales, volume
By: Management Duniya

Need or Significance of HRA - Management Duniya

Need or Significance of HRA

Need or Significance of HRA:

The Primary role of accounting is to provide an effective measurement & reporting system for decision making. The human resource a/c is more concerned with this decision making area of accounting. It is an effective tool decision making.

1. Formulating policies & programmes for the development of HR.


2. Decisions regarding cost reduction programmes.


3. Training & Development


4. Recruitment & Selection


5. Manpower planning & control


6. Conservation & reward of human resource.

Making a choice between various types of human investment & investments in other assets etc..

Source: A/c Books & Notes

Tags: employees, Employer, Help in investment decisions, HR, HRA, Human, Human Resource, HUMAN RESOURCE ACCOUNTING, income, investment, Need or Significance of HRA, Resource, ROI
By: Management Duniya

HUMAN RESOURCE ACCOUNTING - Management Duniya

HUMAN RESOURCE ACCOUNTING

HUMAN RESOURCE ACCOUNTING:

Human Resource accounting is that branch of Managerial Accounting, Which involves the application of economic & accounting concepts to the area of personal Management. It is the process of recognising, measuring and communication useful information relating to human resources. The American Accounting Association committee on HRA has defined  “ human resource accounting as the process of identifying & measuring date about human resources & communicating this information to interested parties”

According to David & weil “ it is the process of measuring & reporting the human dynamics of an organisation. It is the assessment of the condition of human resources wit in on organisation the measurement of the change in the condition through time.

Basic Principles of HRA:

1. People are valuable resource of an enterprise


2. The usefulness of manpower as on organisational resources is determined by the way which it is managed.


3. Information on investment & value of human source is useful for decision making in the enterprises.

Source: A/c Books & Notes

Tags: accounting, Assets, Employee, Employer, finance, Human Resource, HUMAN RESOURCE ACCOUNTING, Human Resource System, Liabilites, Management
By: Management Duniya

Current cost Operating Profit - Management Duniya

Current cost Operating Profit

Current cost Operating Profit:

CCOP is the profit as per historical cost accounting before charging  interest & taxation but after charging adjustments of cost of sales depreciation & monetary working capital.

Gearing Adjustment:

During Adjustments:

During the period of rising prices shareholders are benefited to the extend fixed assets & net working capital are financial while the amount of borrowings to be repaid remains fixed  interest charges. In the same manner there is a loss to the share holders the period of falling prices.

Gering adjustment also financing adjustment like COSA  & monetary working capital adjustment. This adjustment reduces the total adjustment of cost of sales depreciation & monetary working capital in the proportion of financed by borrowing to the total financing.

Gearing Adjustment = (  B / B+S ) x A

B= Avg. Net Borrowings

S= Avg. Share Holders interest

A= Total of the current cost adjustment.

Source: A/c Books & Notes

Tags: accounting, accounts, Cost, cost of goods, Credit, Current, Current Cost, debit, finance, goods, income, Loss, Management, material, Operating, Operating Profit, Profit, Profit & Loss a/c, revenue, sales, Stock
By: Management Duniya

Monetary Working Capital Adjustment - Management Duniya

Monetary Working Capital Adjustment

Monetary Working Capital Adjustment:

Working capital is that part of capital which is required to meet the day to day expenses & for holding current Assets for the business. It is refer to as the excess of current assets over current liabilities. The changes in price levels distribute the working capital position of a concern. CCA method requires a financing adjustment reflecting the effects of changing prices on net monetary items, leading to a loss from holding net monetary assets are to gain from holding net monetary values when prices are rising & vise varsa in order to maintain in monetary working capital of the enterprise. This adjustment reflects the amounts of additional finance needed to maintain the same working capital due to the changes in price levels.

Monetary Working Capital Adjustment:

[C – O ] – I_a [C/I_c – O/I_o]

Where

C = Closing Monetary working capital

O = Opening Monetary Working capital

I_a = Avg. Index for the period

I_c = Appropriate index for closing monetary working capital.

 I_o = Appropriate index for opening monetary working capital.

Source: A/c Books & Notes

Tags: Account, accounting, accounts, Adjustment, Capital, Cost, expenses, finance, income, Loss, Management, Monetary, Price, Profit, Profit & Loss, Profit & Loss a/c, revenue, sales, volume, Working Capital
By: Management Duniya

Depreciation Adjustment - Management Duniya

Depreciation Adjustment

Depreciation Adjustment:

 Under CCA method assets are shown in the Balance sheet on current replacement cost after allowing for depreciation. This will require an adjustment in depreciation also. Current year depreciation under CCA can be calculated with the help of following formula.

Depreciation:

Opening Current value Assets + Closing Current value of Asset

——————————————————————————

                                 2 x life of Assets

A machine was purchased on 1-1-1994 at a cost of Rs. 1000000 & its useful life was estimated to be 10years. Its replacement cost was Rs. 1800000 on 1-1-1999 & Rs. 2000000 on 31-12-1999. Calculate the amount of depreciation adjustment.

Cost of Assets = Rs.1000000

Life of the assets = 10years

Historical Depreciation:  Cost of assets/ Life of assets =

1000000/10 = 100000

Current year depreciation in CCA = 1800000 + 2000000 / 2 x 10

Depreciation Adjustment:  Current year Under CCA – Historical Depreciation

                                                                190000 – 100000 = 90000

Tags: Account, accountant, Adjustment, Capital, Cost, Cost Accounting, Depreciation, Expenditure, expenses, finance, income, Loss, Management, Management Accounting, Profit, Profit and Loss a/c, revenue, sales, valume
By: Management Duniya

Current Cost of Sales Adjustments (COSA)- Related Problem with Solution - Management Duniya

Current Cost of Sales Adjustments (COSA)- Related Problem with Solution

Problem:

Calculate the cost of sales adjustments from the following

Opening stock = 52000

Closing Stock = 72000

Purchases = 220000

Index No. Opening 100 Avg.=110 Closing =120

Solution:

Cost of Sales (Historical cost) = Opening Stock + Purchases – closing stock

                                                                 52000 + 220000 – 72000  = 200000

Cost of Sales = (C-O) – I_a  [ C/I_c – O/I_o]

[72000-52000]= 110 [72000/120 – 52000/100]

[20000] = 110 [600-520]

[20000] = 110 [80]

20000 = 8800 = 11200

COSA = 11200

Verification:

Opening Stock: [52000 x 110/100]=             57200

(+) Purchases:                                                         220000

                                                                                    —————-

                                                                                     277200

(-) Closing Stock: [72000 x 110/120]            66000

                                                                                  —————–

                Cost of Sales                                           211200

Adjustment: 211200 – 200000 = 11200

Tags: Account, accountant, accounting, Accounting Management, Adjustments, closing stock, Cost, cost of sales, Expenditure, expenses, finance, financial, historical cost, income, Loss, Management, Management Accounting, Opening stock, problem, Profit, Profit and Loss, Profit and Loss account, purchases, revenue, sales, solution, tax
By: Management Duniya

Current Cost of Sales Adjustments (COSA) - Management Duniya

Current Cost of Sales Adjustments (COSA)

Current Cost of Sales Adjustments (COSA):

Under the CCA technique cost of sales are to be calculated on the basis of cost of replacing the goods at the time they are sold. The important principle is that the current cost must be matched with current revenues. As for sales are concerned it is current revenue & out of the cost all operating expenses are current cost. But in case of inventories are certain adjustments will have to be made known as cost of sales adjustment.

COSA =  (C-O) – I_a  [ C/I_c – O/I_o]

Where

C = Historical Cost of Closing Stock

O= Historical Cost of Opening Stock

I_a = Avg. Index Number.

I_c = Index number appropriate to closing stock

I_o = Index number appropriate to opening stock.

Source: A/c Books & Notes

Tags: accounting, accounts, Adjustments, Assets, Balance sheet, Capital, closing, closing stock, COSA, Cost, Credit, creditor, Current Cost, Current Cost of Sales Adjustments (COSA), debit, debt, debtor, Expenditure, historical cost, income, index number, liabilities, Loss, of, Opening stock, Profit, Profit and Loss, revenue, sales, Stock, tax
By: Management Duniya

Current Cost Accounting - Management Duniya

Current Cost Accounting

Current cost Accounting:

The value of an item may be increased on the basis of general price index where as the actual value of that item might have decreased. To remove this drawback the Govt of UK setup a committee under chairman ship of MR. Fransis Sandilands to consider the problem of price level accounting. In its report published in sep. 1975, the committee recommended the adoption of current cost accounting for dealing with the problem of inflation accounting.

In this method historic values of items are not taken into account. Rather current values of individual items are taken as the basis for preparing P&L a/c & Balance sheet. Thus items are not adjusted as a result of the change in the general price level as they are adjusted the CPP method.

Source: A/c Books & Notes

Tags: Account, accountant, accounting, Accounting Management, accounts, capital expenses, Cost, Cost accountatn, cost accounts, cost management, Current, Current cost Accounting, Expenditure, expenses, finance, Finance Management, income, Loss, Management Accounting, Profit, Profit and Loss, Profit and Loss account, revenue, sales, tax
By: Management Duniya

Current purchasing power Accounting- - Management Duniya

Current purchasing power Accounting-

Mr. A purchased a piece of land in 1982 for Rs. 50000 when the general price index is 125. He sold this piece of land in 2011 for Rs. 105000, when the general price index was 300. Calculate Profit or Loss in the sale of land keeping a side the price level changes.

Sales- cost = Profit or Loss

105000-50000 = 55000 (Profit)

Converted Value of land at 2011 Index  Rs. 50000 x 300/125 = 120000

So there is rather loss of 15000

Sales – converted value = Profit or Loss

105000 – 120000 = 15000 (Loss)

Tags: Capital, conversion, Cost, Expenditure, expenses, income, Loss, Power, Profit, Profit & Loss, Purchase, purchasing power, revenue, sales, Statement, volume
By: Management Duniya

Current purchasing power Accounting - Management Duniya

Current purchasing power Accounting

Current purchasing power Accounting:

In CPP accounting the historical cost accounting data are adjusted on the basis of any established & approved general price index at a given date. In India wholesale price index of the reserve bank of India can be taken which shows the change in the value of the rupee in the past years. This method takes in to consideration the changes in the value of items as a result of the general price level. But it does not account for changes in the value of individual items. The formula for the conversion of historical cost to the general price level is as follows.

Conversion Factor: Current Price Index / Previous price index at the rate of existing figure.

The formula for calculated converted figures

Converted figure = Historical Figure x conversion factor (or)

                      Historical Figure x Current year Index/ Previous year Index at the date of Existing figure

A Building was purchased in 1982 at a price of Rs. 180000 the general price index at that time was 150. Convert the figure in current rupees on 31-12-2012. Where the index stood at 300. Click here for solution

Source: A/c Books & Notes

Tags: Account, accountant, accounting, Assets, Capital, Cost, Credit, creditor, debit, debtor, expenses, finance, historical cost, income, Income statement, liabilities, Loss, Management, Profit, Profit and Loss, Ratio, revenue, sales, volume
By: Management Duniya

Meaning of Accounting for changing Prices - Management Duniya

Meaning of Accounting for changing Prices

Meaning of Accounting for changing Prices:

Accounting for changing prices is also known as inflation accounting, because changes in the prices are usually on the upward side.

Accounting for changing price (Inflation accounting) is a system of accounting which regularly records all items in financial statements at their current values. The system recognises the fact that the purchasing power of money is decreasing day by day during inflation & finds how profits or loss are states the financial position of the business, on the basis of the current prices prevailing in the economy.

Approaches to Price level Accounting (Inflation Accounting)

At present there are 4 approaches.

Current purchasing power accounting

Current cost accounting

Specific & general price level accounting

Periodic revaluation of fixed assets along with the adoption of LIFO method of inventory.

Source: A/c Books & Notes

Tags: Account, accountant, accounting, analysis, Benefits, Cost, Expenditure, expenses, finance, historical cost, income, Loss, Management, Profit, Profit and Loss, revenue, sales, tax, volume
By: Management Duniya

Accounting for Price Level Changes- Limitations of Historical Cost - Management Duniya

Accounting for Price Level Changes- Limitations of Historical Cost

Limitations of Historical Cost:

Utility of accounting records seriously impaired:

Financial Statements / reports based on historical cost fail to reflect of such changes in purchasing power on the financial position & profitability of the firm.

Unrealistic Profits:

Under the historical accounting system depreciation calculated on the basis of historical cost of old assets is usually lower than that of those calculated at current value or replacement value. This results in more profits on paper which if distributed inful will lead to various consequences of various statements/ over statements of profits as more taxes, more bonus will be demanded by the employees, more dividend to shareholders etc.., Thus there will be reduction of capital & ultimately the company may go in to liquidation.

Insufficient Provision of Depreciation:

Under the historical accounting system depreciation is calculated on the original cost of fixed assets with the results that only the amount equallent to the original cost of fixed assets is available for its replacement when its life is over.

Fixed Assets values are unrealistic:

In times of rising prices the conventional system of accounts based on historical cost does not give true & fair view of the business enterprise as is required under the companies act 1956 as fixed assets are shown at their historical cost & not at current values.

Different Basis:

In conventional system of accounting fixed assets as shown at the historical cost where as operating expenses & incomes are taken at current prices. Thus different bases  adopted & not desirable for having correct & reliable information about the business.

Return on capital employed misleading:

Return on capital employed which is very useful for the valuation of the business by its bonus, creditors & management will not be correct & may leave to misleading decisions.

 Matching Principle violated:

Financial accounting is based on historical cost. It shows closing stock at cost or market price whichever is lower.  Sales are shown at current purchasing power of the rupee while stocks are shown at cost or market price whichever is lower.

In correct ascertainment of operating capacity:

Cost of goods sold is understated because replacement cost of inventory consumed or used in not matched against revenue giving rise to higher figure of profit. It thus does not five true & fair view of the operating capability of the enterprise.

Difficulty in comparison of profitability of 2 plants:

In case of price level changes comparison of profitability of two plants setup at different dates becomes difficult.

Mixing up of holding gains & operating gains:

Historical cost accounting mixes up the holding gain & operating gain & does not help to take proper decision.

Misleading inter-period & inter firm comparison:

Financial Ratios calculated based on historical cost will not give correct view no meaningful information will be available for correct decisions.

Source: A/c Books & Notes

Tags: Account, accounting, Accounting Management, accounts, Assets, Capital, Cost, Decision, Expenditure, expenses, finance, Fixed asset ratio, Fixed Assets, Fixed assets turnover ratio, historical cost, income, liabilities, limitations, Liquidity, Liquidity position, Loss, Management, manager, Profit, profit & loss account, Profit and Loss, return capital employed, Return on capital employed ratio, revenue, tax
By: Management Duniya

Accounting for Price Level Changes - Management Duniya

Accounting for Price Level Changes

Accounting for Price Level Changes:

Financial Statements are prepared with a view of presenting the financial position of the business on a particular date & display the results achieved during an accounting period. These accounts (statements) according to historical cost (i.e. original or acquisition cost) on the assumption the purchasing power of the money remains the same. But assumption is not valid as purchasing power of the rupee the basic measuring unit of accounting in India, goes on changing from time to time on account of changes upwards or downwards in price levels.

Tags: Account, accountant, accounting, Capital, changes, Credit, creditor, debit, debtor, expenses, finance, income, level, Management, Price, price level, revenue
By: Management Duniya

Analysis of Changes in Sales & Cost-2 - Management Duniya

Analysis of Changes in Sales & Cost-2

 

Analysis of Changes in sales

Increase in amount of sales due to Quantity

Increase in no.of units sold x price of previous year.

Increase in price amount of sales due to Price

Increase in price P.u  x No.of Units sold in current year.

Combined effect of change in Quantity & Price

Increase in quantity & increase in Price.

 

 Analysis of changes in Cost.

Increase in cost of goods sold due to quantity

Increase in no of units sold x unit cost in previous year

Increase in cost of goods sold due to price

Increase in cost p.u x no.of units sold in current year.

Increase in CGS due to quantity & cost

Increase in cost die to quantity + increase in cost due to price.

Source: A/c Books & Notes

Tags: analysis, Capital, Changes in sales, Cost, finance, income, Management, of, Price, revenue, sales, volume
By: Management Duniya

Analysis of changes in Sales and Cost - Management Duniya

Analysis of changes in Sales and Cost

 

Analysis of changes in Sales:

Change due to Quantity (Volume):

Difference in Quantity x Base year Price

Change due to Price:

Difference in Price x Base year Quantity

Change due to Quantity & Price:

Difference in Quantity x Difference in Price

 

Analysis of Change in Cost:

Change in cost due to price:

Change in cost Price per unit x Base year quantity

Change in cost due to quantity:

Change in Quantity x Base year price Per unit

Change in cost due to cost & quantity:

Change in Quantity x Change in Price

Source: A/c Books & Notes

Tags: analysis, Capital, Capital Income, changes, Cost, cost of goods, Expenditure, expenses, finance, goods, in Sales, income, Management, Marketing, of, Price, revenue, sales, volume
By: Management Duniya

Elements of Financial Statement- - Management Duniya

Elements of Financial Statement-

Asset: An asset is a resource controlled by the enterprise as a result of past events & from which future economic benefits for expected to flow to the enterprise. –IASC

Liability: A liability is present arising from past events. The settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits.

Equity: Equity is the residual in the asset of the enterprise after deducting all its liabilities.

Income: Income is an increase in the economic benefits during the accounting period in the form of inflows or enhancements of assets or decrease in those liabilities that result in an increase in equity.

Expense: Expenses are a decrease in the economic benefits during the accounting period  in the form of outflows or depletion of assets or incurrance of those liabilities that result in a decrease of those liabilities in equity.(Excluding distributions to equity participant).

Source: A/c Books & Notes

Tags: accountant, accounting, accounts, Assets, Capital, Credit, creditor, debit, debtor, Elements, Expenditure, finance, income, liabilities, Management, Profit & Loss a/c, Profit and Loss, revenue, tax
By: Management Duniya

Elements of Financial Statement - Management Duniya

Elements of Financial Statement

Elements of Financial Statement:

FASB (Financial Accounting Board USA) issued in Dec-1980 the elements of financial statements are the building blocks with which financial statements are constructed the classes of items that financial statements compromise. The item in financial statements represent in words & numbers certain enterprise resources claims to those resources & the effects of transactions & other events & circumstances that result in change in those resources & claims.

The IASC has given only 5 elements of financial statement against the 10 elements given by the FASB. They are

Assets

Liabilities

Equity (in case of Balance sheet)

Income

Expenses (in case of income statement)

Source: A/c Books & Notes

Tags: accounting, accounts, Assets, Capital, expenses, finance, Financial Statement, income, liabilities, revenue
By: Management Duniya

Concept of Capital Maintenance - Management Duniya

Concept of Capital Maintenance

Concept of Capital Maintenance:

Maintenance of capital by a firm is very necessary in order to survive. If it does not keep its capital constant by way of say distribution of dividends higher than it can afford it is eating in to its own capital which it cannot continue to do for long. Capital can be like to a tree & income its fruits.

If the branches of the tree are cut off it will cease to five fruits & possibly the tree itself may dry up. A day may soon arise when the firm has to be wound up due to inadequacy of capital.

 Financial Concept:

Under the financial concept income is equal to the change in the money amount of net assets. If there is no change in the amount of net assets there is no income. Here the financial capital in measured in units of money.

Physical Concept:

A physical Concept of capital maintenance to be as well of at the end of a period as at the beginning, business must have the same quality of assets.

The firm should have capacity to produce the same value of goods or volume & services in the following year as could be produced in the current year.

Source: A/c Books & Notes

Tags: accountant, accounting, Accounting Management, Capital, Capital Expenditure, Concept, Concept of Income, Expenditure, Financial Concept, income, income and expenditure, Maintenance, Management, Management Accounting, of Capital, Physical Concept, revenue, tax, Working Capital
By: Management Duniya

Need for measuring Periodic Income - Management Duniya

Need for measuring Periodic Income

Need for measuring Periodic Income:

In olden days when business comprised one or more ventures, other one the business of modern times ones started, runs for indefinite time. If accounts of such business have to be prepared only after liquidation one has to wait for an indefinite time which is in practicable.

According to “Ray Side Botham, two factors are responsible for the introduction of the periodic reporting system. One is the advent of corporate body with the principle of limited liability. You cannot persuade an investor to invest corporate bodies unless he is assured of periodic dividends for this purpose it is necessary to measure income periodically before decision regarding dividends can be taken.

The second one is importance of taxation. Unless income is measured periodically it would not be possible for tax authority to determine the tax liability. Now in every country the requirements of company & tax legislation have made the periodic measurement of income mandatory.

Source: A/c Books & Notes

Tags: Account, accountant, accounting, Accounting Management, Capital, Capital Expenditure, Expenditure, for measuring, income, Management, Need, Periodic Income, revenue
By: Management Duniya

Economic Concept of Income - Management Duniya

Economic Concept of Income

The Economic Concept of Income:

In the opinion of some authors as a money measurement postulate is gradually losing its validity. The money income concept is also getting absolute. Mac. Neal revolted against this concept has early as 1939 & advocated the “economic value concept in his book “Truth in Accounting”.

Hicks said “the purpose of income calculation in practical affairs is to give people an indication of the amount they can consume themselves following from this idea it would seem that we ought to define a man’s income as maximum value which he can consume during a week & still expect to be as well off at the end of the week, as he was at the beginning”.

Source: A/C Books & Notes

Tags: Account, accountant, accounting, Accounting Management, Capital, Capital Expenditure, Concept of Income, Economic Concept of Income, Expenditure, income, income and expenditure, Management, Management Accounting, Profit, revenue
By: Management Duniya

Concept of Income - Management Duniya

Concept of Income

Concept of Income:

Though there are many concepts of income, but mainly two basic concepts as follows.

1. The accounting concept of Income


2. Economic concept of Income

The accounting concept of Income:

According to Carsberg Bryan in general income refers to increases in wealth. The accounting concept of income is consistent with the everyday use of the term. Income equals increases in net assets.

I_a – R-E

Where  Ia= Accounting Income

R = Realised revenues of the period

E = Expenses (Considering Historical cost)

Thus we can say the accounting income is the difference between the realised revenues arising from the transaction of the period & the corresponding historical cost.

This definition illustrates that traditionally the transactions approach has been adopted by accountants for the determination of the income. This approach largely meets the revenue principle (historical) cost principle.

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By: Management Duniya

Uses of Net Income - Management Duniya

Uses of Net Income

The most important purpose of net income reporting is that it provides useful information to those who are most interested in financial reports. It distinguishes between invested capital and income or between stocks and flows. The income is regarded as guide to a firm dividend and retention policy and is considered the basis for taxation and free distribution of wealth among individuals. A specific use of income is in the measurement of managerial efficiency decides which it is used as a means of regulated firms with a public interest. Income figures aid in the prediction of the dividend. Economists use this figures an evaluating the allocation of resources. Earnings per share is considered to be an important factor in investment decisions.

Capital and Income:

Irving Fisher described capital as a stock of wealth at an instant of time and income as a flow of service through time. Capital according to him is the embodiment of future services and income is the enjoyment of these services over a specific period of time.

Source: A/C Books & Notes

Tags: Capital, Capital Expenditure, Capital Market, daily income, expenses, income, Income and revenue, monthly expenses, Net, Net Income, of, Price, revenue, stocks, Uses, Uses of Net Income
By: Management Duniya