Accounting-MHN.ORG.docVIP

Accounting Basics ASSETS = OWNER’S EQUITY + LIABILITIES Creditors are a liability. (You owe them.) = Payables. Increase of creditors is a source of cash. Debtors are an asset. (They owe you.) = Receivables. Increase of debtors is a consumption of cash. Net Profit = Change in Owner’s Equity. Gross Profit = Sales less Cost of Sales. Matching Convention: Profit is calculated by matching costs with the revenue recognized during the period. Allocation Convention: First, determine all costs. Second, allocate costs to sales, inventory, etc. Cost Convention: Items are valued at the historical cost of all input factors. Conservatism Convention: Recognize costs immediately and revenue only when it is certain. Accruals Convention: An obligation from a credit worthy customer may be regarded as a sale. Cost of Raw Materials in P/L Account = Opening Inventory + Purchases – Closing Inventory Valuation of Closing Inventory can be done by FIFO, LIFO or Average Value. High Valuation of Closing Inventory = High Profits, because low valuation of matched materials cost. Types of inventory: Raw Materials, Work-In-Progress, Finished Goods. Reserves are unallocated profits. Reserves would be a part of owner’s equity, except for some reason are being held back from recognition as such. Bad debt reserves are owner’s equity held for the purpose of covering bad debt that may arise in future periods. Depreciation Straight Line: Depreciation = (Purchase Cost – Expected Residual Value) / Service Life Reducing Balance: Depreciation = Current Book Value * Calculated Rate Calculated Rate = where n = years of service, rv = residual value, pc = purchase cost. Consumption: Depreciation = where rhy = running hours this year, rhl = lifetime running hours. Current Cost Accounting Four adjustments need to be made to convert Historic Cost (normal) statements to Current Cost statements. Adjustment 1: Fixed Assets Depreciation List assets at current value (usually replacement cost) less total accumulated d