ITUCU

The need for providing considerable amount of depreciation over the useful life of an asset comes up  for the following purposes:

1. To Ascertain the Correct Profit or Loss: The first objective is to ascertain the correct profit or loss. If depreciation is ignored, the loss that is occurring (though not being paid for in cash) in respect of fixed assets will be ignored. The loss will suddenly loom large when the asset becomes useless or valueless. Looking at it from another point of view, when gods are produced it involves use of fixed assets—the reduction in their value should be treated like another cost for production of the goods. Depreciation should , therefore, be debited to the Profit and Loss Account before profit is ascertained.

2. To Show a True and Fair View of the Financial Position: Depreciation, if not charged, would result in assets being stated at a higher value. As a result of this the Position Statement (Balance Sheet)would not present a true and fair view of the financial position.

3. To Show the Assets at its Proper Value: Another objective is to show the fixed assets in the Balance Sheet at their proper value. To continue to show them at cost, when their value has fallen because of wear and tear will be improper—it will tantamount to painting a financial picture better than it is. If depreciation is not allowed, the Balance Sheet would fail to show the true financial position. Therefore, depreciation must be accounted for in order to present the assets at their proper value.

4. To Retain, Out of Profits Funds for Replacement: The fourth objective of depreciation is to retain, out of profits, funds for replacement of assets. The amounts debited in the Profit and Loss Account are retained in the business (no   payment is made like other expenses) . These are available for replacement of the asset when its life is over. Funds would not be collected for this purpose without accounting for depreciation.

5. Compliance of Legal  Provisions : It is necessary to charge depreciation to comply with the provisions of the Companies Act and the Income Tax Act.

The accounting concept of depreciation refers  to distribute the cost of fixed assets over its presumed life in a reasonable manner. Annual depreciation in the value of assets can be charged to that accounting period. Annual  depreciation in the value of assets is  an expense which is due to use of assets in business functions and therefore, is a charge on profits. Thus, this is an expense like other expenses.

 Its provision is not optional but mandatory. If we do not deduct any expense from the income of an accounting period, the Profit and Loss Account will not show correct profit or loss. As  depreciation is also an expense which refers to the cost of the use of fixed assets, it must be deducted from the incomes of that accounting period. Therefore, there should be a regular provision for annual depreciation.

Depreciation means a fall in the value of an asset because usage or with efflux of time or due to obsolescence or accident. Every fixed asset looses its value, once it is put to use. Let us consider some important definitions of depreciation. These are:

“The permanent and continuing diminution in the quality, quantity or value of an asset.”                    — Pickles

“Depreciation may be defined as a measure of the exhaustion of the effective life of an asset from any cause during a given period.”           — Spicer and Pegler

“Depreciation is the diminution in intrinsic value of the asset due to use and / or lapse of time.”    –   Institute of Cost and Management Accountants (ICMA), London

Having considered the above definitions, we can now define depreciation as a part of the cost of fixed asset which has expired on account of its usage and / or lapse of time. In other words, it is reduction in the value of a fixed asset.

Here, it is important to note that depreciation is charged is charged on all fixed assets except land. The reason is that unlike other fixed assets like machinery and furniture, it does not have a finite economic life.

Characteristics of Depreciation

The above definition brings to light the Characteristics of Depreciation as follows:

1. Depreciation is a reduction in the book value of fixed assets.

2. It reduces the book value of the asset but not its market value.

3. The reduction in the book value of an asset is permanent, gradual and of continuing nature. When the book value is reduced, it is not possible to restore its original cost.

4. Depreciation is a continuing process because the book value is reduced either due to use or with the passage of time.

5. It takes place gradually unless there is a quick physical deterioration or obsolescence due to technological developments.

6. It is not the process of valuation of asset, it is a process of allocation of cost of the asset to the period of its life.

7. The term depreciation is used only for tangible fixed assets. This term is not used in the case of wasting and fictitious assets such as depletion of natural resources and amortization of goodwill respectively.

Credit purchases of goods dealt in or materials and stores used in the factory are recorded in a separate register, called the Purchases Book or the Purchases Journal. On the  basis of the invoice received from the supplier, necessary record in made in the Purchase Book.

Features of Purchases Book

1. Credit purchases of goods traded in or material used for production are recorded in the purchases book. Credit purchases of goods or materials not dealt in, such as office furniture or computers for office use are not recorded in the purchases book. They are journalized.

2. Cash purchases are not recorded in the purchases book since they are recorded in the cash book.

3. The entries in the purchases book are made on the basis of invoices received from the suppliers with the net amount after trade discount.

The Purchases Book has six columns:

1. Date: In the first column, the transaction date is written.

2. Particulars: In this column, the name of the supplier, name of the articles and quantities purchased are written.

3. Invoice No.: Invoice number of the goods purchased is written.

4. L.F.: When the Purchases Book is posted to the Ledger, the page number of the ledger  is written.

5.  Details: The amount in respect of each article is written in this column. If the seller has allowed a trade discount it is also deducted in this column itself. It is shown as follows:

Quantity x Price per Article                     ….

Less: Trade Discount                                 ….

—————–

…..

Add: Expenses                                           …..

——————–

6. The net amount of the invoice is recorded in the extreme right hand column. The total in this column will show the total purchases made in a period.

Sales Return or Return Inwards Book is maintained to record the goods or materials returned by the purchaser that had been sold on credit. This book is maintained if the return of goods is frequent otherwise it can be recorded in the journal.

A ‘Credit Note’ is prepared on receipt of goods in duplicate. The original copy is sent to the customer while the second copy is retained for record and entry is recorded in the book on its basis.

Ruling of Sales Return Book

Ruling of Sales Return Book is as follows:

• Date
• Particulars
• Credit Note No.
• L.F
• Details Rs.
• Amount Rs.

Casting or Totalling of Sales Return Book

A Sales Return Book is totaled at the month end and in the Particulars column ‘Sales Return Account … Dr.’ is written and the book for the month is closed.

Ledger Posting from Sales Return Book 

The amount of the goods received is credited to the debtors (customer) account and credited  to the Sales Returns Account. The Debtors Account is credited by writing ‘By Sales Return Account’ in the particulars column and Sales Returns Account is debited by writing ‘To Sundries as per Sales Return Book.’

Cash Discount is an allowance or deduction allowed to encourage prompt or early cash payment. The usual way to encourage payment within the specific time, the seller usually allows cash discount say@2% of invoice value to the buyer. The amount of cash discount is calculated after deducting trade discount from the invoice price. In other words, cash discount is calculated always on net amount. It is always allowed at the time of receipt of amount in by cash or by cheque. It is an expense for the business allowing it and a profit for the business availing it, it is therefore, recorded in the books of account. Discount received and discount allowed are transactions of income and expense respectively. Thus, two separate accounts are operated Discount Received Account and Discount Allowed Account. Discount received or discount allowed is related to payment and thus, they are recorded in the books of account alongwith the entry recorded for payment and receipt of amount, in cash or by cheque.

The accounting entries regarding cash discount are as follows:

 1. When Cash Discount is received:

     Creditors’  A/c                                    …Dr.

     To  Cash or Bank A/c

     To Discount Received A/c

2.  When Cash Discount is allowed:

      Cash or Bank  A/c                             …Dr.          

     Discount Allowed A/c                     …Dr.

           To   Debtors’  A/c                   

 ADVANTAGES OF CASH DISCOUNT

To the Seller

1. He gets the amount within specified time because it is allowed to encourage a debtor to pay within a specified period.

2.The possibility of bad debts is reduced.

3. Prompt payment saves the trader from some clerical work, maintaining of debtors’ accounts.

4. It improves the cash inflow of the business which can be better utilized.

To the Buyer

1. Early payment results in higher cash discount, thus , increasing income.

2. Better cash discount earning enables selling of goods at lower prices.

Trade discount is usually allowed by one business to another business which is making a purchase for resale to an ultimate customer. Trade Discount is allowed when goods are purchased in bulk, large quantity. Trade Discount is allowed as a deduction from the invoice, and hence not recorded in the books of accounts. In the Purchase Day Book or Sales Day Book, the net total of the invoices are shown in the total column. Trade Discount availed by retailer allows him improved profit margin by selling the product at the list price while making purchases at economical price. This discount is allowed on both transactions, cash transactions as well as credit transaction since it is related to the purchases and not to the payment.

ADVANTAGES OF TRADE DISCOUNT

1. It improves sales by encouraging the purchaser to buy large quantities.

2. It reduces the purchase cost of the purchaser and thus, increases profit margins.

3. A change in the rate of trade discount may be used as a tool to face competition.

4. Different prices can be charged to regular customers and occasional customers.

5. It enables the retailer to sell at the ‘list’ price and at better profit.

6. It is an easy method of making changes in prices without reprinting catalogues or changing the price given in the articles.

A Cash Book is a book containing cash transaction records of a business. The Cash Book is a  book of primary entry and also a Ledger Account. Cash receipts are recorded on the debit side of the Cash Book and cash payments on the credit side. A balance is struck by deducting the total cash payments from the total cash receipts to know the cash in hand. It is necessary and useful for a business to continuously know the cash or bank balance on hand. The number of cash transactions in a firm is generally large, therefore, it becomes convenient to have a separate Cash Book to record such transactions.

Features of Cash Book

1. Only cash transactions are recorded on the Cash Book.

2. All cash receipts are recorded on the debit side and all cash payments are recorded on the credit side.

3. All cash transactions are recorded in the Cash Book in a chronological order in order they take place.

4. It performs the function of both journal and the Ledger at the same time.

Cash Book-A Subsidiary Book and a Principle Book

Kinds of Cash Books

There are three types of Cash Books:

1. Simple Cash Book or Single Column Book: For recording cash transactions only.

2. Two-Column Cash Book (Cash Book with Cash, bank and discount columns): For recording cash and bank transactions involving loss or gain on account of discount.

3. Three-Column Cash Book,(Cash Book with cash, bank and discount columns): For recording cash and bank transactions involving loss or gain on account of discount.

In addition to the main Cash Book, firms sometimes also maintain a Petty Cash Book but that is purely a memorandum book. On the basis of the information provided by the Petty Cash Book, journal entries are made.

Subsidiary Books, also known as Special Journals are journals in which transactions of a similar nature are recorded.

As discussed earlier, it is practically difficult to record numerous transactions in only one book of prime entry. For convenience, the journal is divided into a number of subsidiary books. These are:

1. Cash Book: To record receipts and payments of cash, including receipts into and payments out to the bank.

2. Purchases Book: To record credit purchases of goods dealt in or of the materials and stores required in the factory.

3. Sales Book: To record the credit sales of goods dealt in by the firm.

4. Purchases Returns Book: To record the return of goods and materials previously purchased on credit.

5. Sales Returns Book: To record the returns of credit sales made by customers.

6. Bills Receivable Book: To record the receipts of promissory notes or hundis from various parties.

7. Bills Payable Book: To record the issue of promissory notes or hundis to other parties.

8. Journal Proper: To record the transactions which cannot be recorded in any of the seven books mentioned above.

It may be noted that in all the above cases the word ‘Journal’ may be used for the word ‘book’.

Advantages of Subsidiary Books

The use of subsidiary books has the following advantages:

1. Division of Work: Since in the place of one Journal there are many subsidiary books, accounting work can be divided among a number of persons.

2. Specialisation and Efficiency: When the same work is handled by a particular person for a considerable time, he acquires full knowledge of it and becomes efficient in handling it. Thus, accounting work is done more efficiently.

3. Time Saving: Various accounting processes can be undertaken simultaneously because of the use of number of books. This leads to the work being completed quickly.

4. Availability of information: Since a separate book is kept for each class of transactions, information relating to each class is available at one place.

5. Facility in Checking: When the Trail Balance does not agree, location of error or errors is facilitated by the existence of separate books. Even the commission of errors and frauds can be checked by the use of various subsidiary books.

6. Responsibility: Division of work results in assigning a particular job to a particular person. If an error is committed in recording, responsibility can be easily fixed.

In a business besides large payments, a number of small payments, such as for conveyance, stationary, cartage, etc have to be made. If all these payments are recorded in the Cash Book, it will become unwidely. Also, the main cashier will be overburdened with work. Therefore, it is usual for firms to appoint a person as ‘Petty Cashier’ and to entrust the task of making small payments , say below Rs.250, to him. Of course, he is reimbursed for the payments made. The respective accounts are debited.

Petty Cash Book is the book which is used for the purpose of recording petty cash expenses. It is prepared by petty cashier. It acts as the Petty Cash Account in which details of the receipts and payments of petty cash are entered.

Recording of Petty Cash: Petty cash given to the Petty Cashier for small payments is recorded on the credit side of the Cash Book as ‘By Petty Cash A/c’ and is posted to the debit side of the petty cash account in the Ledger.

Petty Cash Book may be maintained by ordinary system or by imprest system.

In case of Ordinary System of Petty Cash, petty cashier is given a certain amount to cash and after spending the whole of that amount, he submits the account to the Head Cashier

Imprest System of Petty Cash Book

It is convenient to entrust a definite sum of money to the petty cashier at the beginning of a period and to reimburse him for the payments made at the end of the period. Thus, he will again have the fixed amount at the beginning of the new period. Such a system is known as the ‘Imprest System of Petty Cash’.

Advantages of Imprest System of Petty Cash

1. Control Over Mistakes: The Petty Cash Book is checked by the cashier at regular intervals so that a mistake, if committed, is soon rectified.

2. Control Over Petty Expenses: Petty expenses are kept within the limits of imprest since the petty cashier can never spend more than the available petty cash.

3. Control Over Fraud: Under this system defalcation of cash can be minimized since the Petty Cashier is not allowed to draw cash as and when he desires.

Advantages of Petty Cash Book

The advantages of maintaining a Petty Cash Book are:

1. Time Saving: Saves the chief cashier’s time.

2. Labour Saving: Saving of labour in writing up the Cash Book and posting into the Ledger.

3. Control: It provides control over small payments.

4. Convenience in Preparing Ledger Accounts: The totals are only taken to post them into the Ledger. No unnecessary details are to be given. Hence, it is convenient to post these directly into the ledger.

The purchaser of goods gives his acceptance to the seller. The acceptance so given is the Bill Payable for him. Similarly, a promissory note made by him is also a Bill Payable. Bills Payable are recorded in a  book called the ‘Bills Payable Book.’

Usual Format of Bills Payable Book is given below:

BILLS PAYABLE BOOK

• S. No.
• Date of Bill
• Name of Drawer
• Payee
• Term
• Date of maturity
• Amount Rs.
• Remarks

It is to be noted that the payment of a bill payable on the due date is recorded in the Cash Book. Dishonour or renewal of bills are recorded in the Journal.

Ledger Posting of Bills Payable Book

1. The amount column of the Bills Payable Book is totaled and the total is posted to the credit of Bills Payable Account by writing ‘By Sundries as per Bills Payable Book’.

2. Drawer’s account (the party who has written the bill) is debited writing ‘To Bills Payable Account’.

?

Purchases Return or Returns Outward Book is maintained to record the goods or materials returned to the suppliers that have been purchased on credit. This book is maintained if the return of goods is frequent otherwise it can be recorded in the Journal. Goods may be returned because of any of the following reasons:

1. Goods are not as per sample.

2. Goods are defective

3. Goods are not as per order

4. Goods have been delivered late and the customer has refused to accept them

In all these cases the purchaser prepares a ‘Debit Note’ and sends it to the supplier. A debt Note is prepared when goods are returned by the purchaser due to some reason. It is called a Debit Note because the party’s account is debited with the amount written in this note. This ‘Debit Note’ is the basis for writing Purchases Return or Return Outwards Book.

Ruling of a Purchases Return Book

Ruling of a Purchases Return Book is similar to the Purchases Book ruling except that instead of a column for ‘Invoice No.’ it has a column for ‘Debit Note No.’

Casting or Totalling a Purchases Return Book

Purchases Return Book is totaled at the month end and in the Particulars column ‘Purchases Return Account …. Cr.’ is written and the book is closed for the month.

SALES RETURN OR RETURN INWARDS BOOK

Sales Return or Return Inwards Book is maintained to record the goods or materials returned by the purchaser that had been sold on credit. This book is maintained if the return of goods is frequent otherwise it can be recorded in the journal.

A ‘Credit Note’ is prepared on receipt of goods in duplicate. The original copy is sent to the customer while the second copy is retained for record and entry is recorded in the book on its basis.

Ruling of Sales Return Book

Ruling of Sales Return Book is as follows:

1. Date
2. Particulars
3. Credit Note No.
4. L.F
5. Details Rs.
6. Amount Rs.

Casting or Totaling of Sales Return Book

A Sales Return Book is totaled at the month end and in the Particulars column ‘Sales Return Account … Dr.’ is written and the book for the month is closed.

Ledger Posting from Sales Return Book

The amount of the goods received is credited to the debtors (customer) account and credited  to the Sales Returns Account. The Debtors Account is credited by writing ‘By Sales Return Account’ in the particulars column and Sales Returns Account is debited by writing ‘To Sundries as per Sales Return Book.’

Marketing is one of the important parts of any business organization. Organizations tend to keep records only about sales, orders and shipments. However, organizations an information system which help sales and marketing managers to take decisions. A marketing Information System is mainly concerned with providing support to the following functions of a business organization:

1. Planning, promotion and sales of its existing products in the current markets.

2. Development of new products so as to serve the potential customers.

3. Discovery of new market potentials and plan to meet such demands.

Interactive Marketing

The term interactive marketing symbolizes the use of Internet or Intranet Web sites in marketing. These web sites allow businesses to interact with the customers and involve them in creating, purchasing and improving products and services. Interactive marketing include creating web applications such as Usenet discussions groups, Web forms and questionnaire’s, E-mail correspondence etc. Here the customer is an active participant. The outputs of Interactive Marketing component are:

1. Information for analysis and decision making.

2. Providing new products or service ideas

3. Building strong customer relationship

4. Profitable volume sales (the minimum sales to be made to make profit besides recovering the money spent in marketing through the Internet).

Marketing Management

Marketing Management  component of the Marketing Information System outlines product sales, profit and growth objectives and helps the marketing managers in making short-and long-term plans. For example, the MIS would provide survey-based forecasts or demand for industrial goods. This information could be then translated  into material requirements and production schedules.

Advertising and Promotion

Computers use market research information and promotion models to help in the following aspects:

1. Selecting methods and media for promoting organization products.

2. Allocating financial resources for advertising and promotion.

3. Controlling and evaluating the results for different advertising and promotional campaigns.

Sales and Management

Marketing Information System helps to plan and monitor the performance of the sales department. The system would provide sales performance report product-wise, area-wise, customer-wise or salesman-wise. Such reports help managers in determining the respective performance of products as well as that of the salesman.

Market Research

Marketing Information System also helps in market research planning by giving information regarding consumers, competitors and prospects. Data required for the same can be obtained from external sources, such as newspapers, business magazines, advertisements, Internet Web sites etc. Also, computers can help in gathering data through computer-aided telephone interviewing techniques.

Product Management

Marketing Information System can provide information to plan and control production of the items. Computer-based models can prove useful in giving price, revenue, cost and growth information for both existing and new products.

A capitalist economy is also a free market economy. Goods are produced for sale in the market. Consequently, there are markets for all kinds of consumer goods and investment goods. Prices are determined by the unhindered operation of the forces of the demand and supply, the relative pressure of buyers and sellers on the market. There are markets for factors of production also. The process of determination of their prices is similar to that of goods. In the labor market, wages are determined through free bargaining between workers and employers. Similarly , the rate of interest is determined by the demand for and supply of funds, and the rent by the demand for and supply of land use.

Thus, a market economy implies the existence of a price mechanism which is given the role of making adjustment between demand and supply. For instance, suppose the demand for a commodity increases, pressure exerted by buyers on market will increase the price of the commodity. This rise in price will indicate the new state of demand to the producers. Producers will consider this in relation to costs. Larger output may be possible at higher cost, at the same cost, or at lower cost. Taking this into account the producers either may not increase output so that the high price sticks on; or may so increase the output that price falls but does not touch the original level. Whatever may happen, one thing is certain: price will ultimately stand at such a level as equalizes demand and supply.

Quite in the same way, price system brings about equality between demand for and supply of factors. We may illustrate this by considering demand for and supply of labor in a particular industry. Suppose, the demand for labor in one industry increases, producers will try to attract workers from other industries.  Through successive adjustments, whatever may be the final wage rate, the supply of labor will be equal to its demand at this rate. What is true of labor market is also true of markets for funds, materials,machines etc.

The Cash Flow Statement highlights the sources and the usage of cash and cash equivalents from the investing, operating and financial activities during a particular period. The Cash Flow Statement is a financial report like the financial statements. The Cash Flow Statement is used for:

1. Planning for short-term cash flows: The Cash Flow Statement provides information regarding the sources and usage of cash for a period that helps to plan for the financing, investing or operating needs of the business for the next period.

2. Helping to analyze the liquidity and solvency: This statement prepared on a monthly or quarterly basis helps to ascertain the liquidity of the business. In other words, the ability of the business to meet its short-term liabilities.

3. Providing comparative cash flow analysis: The comparison of previous year and current year statements helps to determine the areas where excessive cash has been blocked.

Consider the scenario. John Barrett, has identified the inflows and outflows from the activities. Now, he needs to create a statement to consolidate the data collected. The statement should depict the cash flow each activity either as positive or negative cash flow. For this purpose he creates the Cash Flow Statement by deducting  the cash outflows from the cash inflows for each activity.

Consider the scenario.John Barrett while creating the Cash Flow Statement took into account the depreciation charged on fixed assets. The subsequent cash flow depicted was erroneous. He has to distinguish between cash expenses and non-cash experiences and consider only the cash expenses while preparing the cash flow statement.

Some important points while preparing the cash flow statement are given:

1. For non-cash expenses, no payment is involved in cash. These expenses are ignored and not deducted from the cash inflows in the Cash Flow Statement. For example, the annual depreciation charged on the fixed assets is a non-cash expense.

2. Any transfer to the reserves or surplus is not deducted from the cash inflows in the Cash Flow Statement.

3. Profit on the sale of fixed asset is not included in cash flows from operating activities. It is included either in the investing or financing activities.