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A report of all the costs associated with the production, administrative, financing, selling and distribution of a product is called as cost sheet. Preparation of a cost sheet is done to calculate the margin or profit of a product. Also, it is used as a basis while setting the price of similar products in the future. Cost sheet should be prepared by every business before it starts with the operations. The importance of cost sheet is explained as follows.
Determining Selling Price
Cost sheet helps in fixing the selling price of a product or service. It is essential to prepare a cost sheet for determining the individual costs which lead to determining the cost of the product or service. Once you know your total cost, add the margin or the profit percentage to the total cost in order to arrive at the selling price.
Facilitates the Managerial Decisions
Fixing of selling price is aided by the cost sheet and so cost sheet help managers in making management decisions such as whether to produce or buy a component, what prices of goods can be quoted in the tender, whether to retain or replace an existing machine, how to reduce costs, etc.
Disclosure of Profitable and Unprofitable Activities
Since cost accounting calculates individually the cost, selling price, and profitability of the product, the separation of profitable and unprofitable activities or items becomes easy. So if the cost of any product is exceeding than the revenue, then it helps the decision-making to identify and make decisions whether they need to continue with the product or not.
Find Out Exact Cause of Change in Profit
Cost sheet keeps a track of all your cost. As a result, you are able to identify the cause behind a change in profit. If the wages of labor is increased, then your profits will decrease. Similarly, if the price of raw materials is reduced, your profits will increase. Therefore, you can determine which cost element has led to change in profits and keep a check on all your business expense. Moreover, cost sheet can be used to determine the profitability of each department within your organization. This helps you to know which department is performing better and what needs to be done to improve the profitability of other departments.
Preparation of Budget
Companies can prepare a budget with the help of cost sheet. You can prepare the budget by using the current or previous year’s data. Based on your existing cost sheet, you can make estimates of your cost for the next financial year. It helps you to be prepared and make the necessary arrangement of funds for costs of the next financial year. For example, if you expect factory overheads to increase by 10%, then accordingly you can make the arrangement of funds to cater to the increase in the cost of factory overheads.
Cost sheet can prove to be extremely beneficial in taking future business decisions. Now that you know the importance of cost sheet, it is advisable that you contact a professional accountant who will help you understand the implications of different cost on your business and prepare a cost sheet in order to enable you to make right business decisions.
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Do you find it difficult to formulate your balance sheet? Do you get confused between what are assets and liabilities? Is it that you always tend to classify your assets and liabilities in the wrong manner? Although assets and liabilities seem easy to classify, they can be quite confusing once you actually start recording them in your books of account. This article will help you in classifying your assets and liabilities and so, you will be able to manage your balance sheet in a much more efficient way. Listed below are the differences between assets and liabilities.
Assets are those items which are the property of the company. They can tangible as well as intangible. Tangible assets include those items which can be seen such as plant and machinery, building, land, etc. Intangible assets include goodwill, investments, patents, etc. Assets are what you own and are you receive benefits from these assets at present as well as in the future. For example, when you purchase a building, its benefits are enjoyed in the current financial year as well as in the coming years.
Liabilities are those items for which you are liable to make payments. These liabilities have to be paid to the people you have borrowed money from or taken loans or credit. Usually, a company obtains capital from the general public in the form of shares and from financial institutions in the form of loans. These liabilities are called termed as capital. Other types of liabilities include salary and wages, interest on loans, payments to creditors where goods are taken on a credit basis for a specific period.
Current Assets and Liabilities
Assets which can be converted into cash quickly (usually within one year) are called current assets. They include cash and cash equivalents, accounts receivable, inventory, marketable securities, prepaid expenses, and other liquid assets that can be readily converted to cash. Current assets are important to the business as they can be readily converted into cash for paying ongoing business expenses or day-to-day operations.
Current liabilities are bills which are due and have to be paid within the current financial year. Short- term debts, accounts payable, accrued liabilities, and other debts are examples of current liabilities. The working capital which is the capital required for the day-to-day expense is calculated by deducting current liabilities from current assets (Working Capital = Current Assets – Current Liabilities). A positive working capital indicates that the company is highly efficient and has a good short-term financial health.
Non-Current Assets and Liabilities
An asset whose complete value or benefits will be enjoyed over a period of years is called a non-current asset or fixed asset. Thus, the value of such assets is higher than current assets. Examples of non-current assets include investments, property, plant and equipment, and intangible assets such as goodwill, brand recognition, intellectual property, etc.
Liabilities which are not due within the current accounting year are called long-term liabilities or non-current liabilities. They include long-term borrowing, bonds payable, and long-term lease obligations. Non-current liabilities are important for investors as they want to check whether the company has more capital in the form of debt or borrowing than its owned capital. If the majority of the capital is in the form of debt, then the cost of capital increases as they need to be regularly serviced by interest rates.
You need to classify current assets and liabilities, and non-current assets and liabilities in the right manner in order to get a true and fair view of your financial statements. You may tend to make errors in your financial statements if you do not know what are assets and liabilities and how to classify them. However, if you want to avoid errors in classifying assets and liabilities, it is advisable you consult a professional accountant who will prepare and maintain books of account for your business without any errors.
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Inventory management is important for a business in order to maintain a good cash flow. The practice of looking after and controlling the orders, storing and delivering the goods is known as inventory management. If you do not have an inventory management system, it may lead to overstocking or understocking. Also, you may end up having a low cash flow. The importance of inventory control system cannot be ignored and so, here are a few reasons why inventory control system is beneficial for your business.
Improves the Accuracy of Inventory Orders
Maintaining a proper inventory system will help you know how much stock is available in your warehouse. You will have an accurate knowledge of the items in your inventory. Once you know how much inventory is stored in the warehouse, you can send the required number of inventory to the retail store as and when you receive the order. This will help you have a stable count for the stocks in the retail store and your warehouse will have sufficient stocks to cater to the orders.
Lost Sales can be Avoided
Lost sales can be avoided if you maintain an accurate inventory management system. For instance, if there’s no count of the level of inventory in your warehouse, then you may end up understocking. When there’s a demand for your product from the retail store, you may not be able to fulfill the order. As a result, the retailers or customers may approach your competitors and you lose out on sales. However, this can be avoided if you have a record of the level of inventories at your warehouse.
Deliver Before Time
Late deliveries on a regular basis indicate you have a poor customer service. Making a customer wait for the shipment which has been sent by the vendor is also a sign of poor customer service. An inventory management system helps you track where your order has reached and in case, there’s a delay, you can make the necessary arrangements by contacting other warehouses to deliver the products.
Increases Efficiency and Productivity
Having inventory management devices such as barcodes will help you record the inventory on a system instead of manual counting. This will prove beneficial as tracking your inventory transactions will become easier. Hence, the efficiency and productivity will increase because of having a much smoother inventory system and plus, errors in counting or registering the products can be avoided.
Helps Save Time and Money
Managing your inventory efficiently will help you save time and money. You will know exactly how much is required to meet customer demands and make necessary arrangements for the production process. Moreover, certain inventories are perishable and you can ensure that there is no overproduction. This helps you prevent any damages and you save time and money.
Maintaining your inventory efficiently will help you cater better to customers. A business is dependent on their customers for its profitability. In case you have difficulty in managing your inventory, you should consider hiring an accountant.
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QuickBooks are for small and medium-sized accounting businesses which help them to maintain basic accounting transactions. It offers on-premises as well as cloud-based accounting application system which records business payments, pay bills, and payroll systems. If you are a beginner, here are a few tips on how to use QuickBooks.
1. Backup your Files Regularly
QuickBooks deals with your financial files, reports, and customer information. It is of utmost importance that you always save your work like you would do for any other application such as Word Documents. Backing up your files regularly will help you retain crucial data in case you delete or lose your files due to some reason.
2. Customize Navigational Panel
One of the most difficult tasks of learning a new software is to get used to some regular functions. QuickBooks includes a navigational panel which can be customized as per your liking. Ensure that you set this up early so that you do not have to keep looking for certain function repeatedly.
3. Use QuickBooks Memorized Transactions
QuickBooks’ memorized transactions is a great tool. Entering any bill, cheque payment, invoice or a journal entry that is occurring regularly can be a time-consuming task. Your transactions can be auto-recorded by QuickBooks’ memorized transactions. Memorized transactions help you to handle your cash flow better as it will record the transaction details which are going to occur in the future. Also, this feature prevents you from missing out on any payment or collection.
4. Print Checks and Pay Bills
Printing checks from QuickBooks will increase efficiency by reducing unnecessary data entry. It also helps make your monthly reconciliations smoother.
Efficient management of entering and paying bills is made possible with QuickBooks. When making a payment, either use online bill payment linked to QuickBooks or print your checks.
5. Set Up Invoices For Online Payment
Online payment options can be set up to allow your clients to pay online via ACH bank transfer or PayPal. You will be charged a small fee but it’s worth considering the amount of time you will save in making the payments.
6. Use QuickBooks Find Feature
This feature can come in very handy when you need to find a transaction that you need to check again or need more information. With the help of the find feature, you can search inside QuickBooks itself and quickly get your desired information.
QuickBooks is a great way to help your business in recording accounting transactions. It makes your life easier. However, if you want to know how to use QuickBooks extensively, it is recommended that you consult a professional firm that will provide training for QuickBooks.
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Financial and cost accounting are a part of the company’s operations. Both help the company control its finances and formulate strategic organization policies. An overall picture of profit and loss is provided by financial accounting, while cost accounting provides a detailed analysis of a product’s cost.
Financial accounting keeps track of a company’s financial transactions for a given period of time which is usually for a year. Financial transactions are recorded using a standardized format and following certain guidelines and is presented in the form of income statement or balance sheet.
Cost accounting is a system of recording all the costs incurred in a business. It includes the cost of used to calculate each overhead product-wise, such as materials, labor, direct and indirect expenses, etc.
Financial accounting is done for a set of audiences who need to analyse the profitability of the company and make business decisions. The various stakeholders who are interested in financial accounting include company’s management, investors, creditors, credit rating agencies, and other regulatory agencies.
Cost accounting is required by stakeholders within the company. This includes board of directors, business owners, departmental heads, etc. Cost accounting helps the management make better business decisions.
Financial accounting uses the information of cost accounting for multiple products and the figures are represented in the balance sheet.
Cost accounting includes the cost of raw materials, work in progress, and finished goods to determine the cost of a product. The information is provided in a detailed manner.
Valuation of Inventory
Financial accounting values inventory at cost or net realizable value (market price) whichever is less. Net realizable value is the value of the asset which is realized only when the asset is sold.
In cost accounting, only the cost price of the inventory is considered.
The transactions are recorded in the books of account as and when they occur. However, the final report is often presented at the end of the financial year.
Cost accounting is reported as and when the management requires it for making decisions such as increasing the production or change in the price of labor, etc.
Initially, the transaction are entered into journal entries and then ledger accounts are made. Once the ledger accounts are prepared, they are converted into trial balance and finally the financial statements are prepared.
For cost accounting, you need to first determine the cost of sales. This includes expenses such as prime cost, administrative costs, financial costs, selling and distribution, etc. Once the cost of sales are determined, you need to add margin/profit in order to get the selling price for a product.
Apart from the above mentioned points, there are other differences such as fixation of selling price which is not an objective of financial accounting but cost accounting helps in determining selling price, possibility of forecasting, etc. If you need more information or any help relating to difference between financial accounting and cost accounting, then do not hesitate in consulting a professional accountant.