The stock in hand at the end of the accounting period is called as closing stock. Closing stock is to be prized at cost or market price whichever is lower.
Value of closing stock will always materialize on the credit side of trading account and on the assets side of balance sheet.
Final accounts are the channel of conveying the profitability and financial stance to management, entrepreneurs and interested outsiders of the business.
When a entrepreneur starts a business he desires to know the financial execution of his business. He can easily ascertain these by preparing the Final Accounts, which is prepared on the basis of the Trial Balance.
The preparation of Final Accounts is the last step in the accounting cycle and that is why they are called Final Accounts.
Final Accounts include the preparation of
1. Trading and Profit and Loss Account ; and
2. Balance sheet.
Final accounts have to be prepared periodically that to on yearly basis, Its done in order to make a continuous assessment of the business for a completed span. All the expenses and incomes for the full accounting period are to be taken into account for preparing Final Accounts.
Major adjustments used in Final Accounts:
Few important and widespread items, which need to be adjusted at the time of preparing the final accounts are discussed below.
1. Closing stock
2. Outstanding expenses
3. Prepaid Expenses
4. Accrued incomes
5. Incomes received in advance
6. Interest on capital
7. Interest on drawings
8. Interest on loan
9. Interest on investment
10. Depreciation
11. Bad Debts
12. Provision for bad and doubtful debts
13. Provision for discount on debtors
14. Provision for discount on creditors.
Investments can be categorized on quite a few bases like significance, size, functional activity, cost and revenue management, etc. On all the above, most appropriate way of classification is on the basis of correlation between investments.
The probable correlation between investments are listed below:
1. Prerequisite
2. Complement
3. Independent
4. Substitute
5. Mutually Exclusive
1. Prerequisite: One investment might be a prerequisite for the other. In other words, an initial investment is required for further investment.
For example: Investment in land is prerequisite for construction company
2. Complement: If secondary investment increases the expected returns from the primary (or decreases cost), then the secondary investment is said to be a complement of the primary investment.
For example, Erection of new plant to enjoy the cost advantage due to mass production.
3. Independent: Investments are said to be independent, if the cash flows from primary investment would be the same despite of whether the secondary investment is undertaken or not.
For example, Buying a lathe for the plant and computerizing administration activities are independent investments.
4. Substitutes: If secondary investment decreases the returns generated from the first investment (or increases costs), then the secondary investment is said to be a substitute of the first. This kind of investment are inversely correlated to complement investment.
For example, Producing air-coolers and fans for the same market may lead to product cannibalization and erode profitability.
5. Mutually Exclusive: In the extreme situation, the benefits from the primary investment may totally disappear if further investment is accepted or it may be technically impossible to undertake both. Such investments are called mutually exclusive investments.
For example, it is not possible to build a plant in two different locations. Accepting one will result in involuntary rejection of the other.
The time value of money has obtained greater significance in studying the feasibility of the project by associating the initial investment with the projected future benefits. If the anticipated future benefits is greater than the initial investment made then the investment is found to be feasible in generating the economic benefits.
Time value of money is important to determine the real rate of return, with reference to capital employment on productive assets; In an inflationary era, a rupee today has greater value or purchasing power than rupee in the future; The future is uncertain, because of the risk of uncertainty individuals prefer current consumption rather than future consumption.
Time value of money on the whole contains three different components viz:
1. Real rate of return: Actual return of the investment made.
2. Expected/Anticipated rate of return: It is the optimistic rate of return normally expected by every one on the amount of investment from the future.
3. Risk premiums: This an allowance is normally given to the investors to compensate the uncertainty.
Classifications of Time Value of Money
1. Future Value
a. Single sum
b. Annuity
2. Present Value
a. Single sum
b. Annuity
Sweat equity is one kind of Equity share, which was introduced in the Ordinance 1998, smoothing the progress of the companies to get hold of the technical know-how, intellectual property through the issue of equity shares.
In other words, "The equity shares which are issued at discount to employees and directors and consideration other than cash for Technical know-how, intellectual property are known as sweat security."
In general the sweat security is issued by the companies in two different categories:
1. Issued at preferential pricing more specifically for employees
Issued at face value, that may be either at par or above par
Sinking Fund factor method one of the most popular method used by investors. Investors knows the proposed value of investment they require in future, accordingly they see to that, the fund made available by investing/depositing now viz the amount deposited with regular time intervals for fetching returns and those returns are accumulated for future needs till certain point of time.
The amount deposited with regular time interval is calculated based on the time availability, interest of deposit, required amount. This can be expressed in formula
A = FVA [(K/(1+K)^n) -1]
Where,
A = Amount to be deposited
FVA = Future Value of deposited Amount
K = Interest
n= Number of years
For example
Mr. X is running a business and planning to expand his business after 10 years and he arrives the value of proposed project is Rs. 20,000. The interest rate prevailing in market is 12%
Thus the Amount to be deposited annually is = Rs.20,000 [(0.12/(1+.12)^10) -1]
= 20,000*(0.05698) = Rs. 1,139.60. Therefore by depositing Rs 1,1,39.60 annually for 10 years yields the required amount of Rs. 20,000.
As we all know the value of money today is not the value of money tomorrow, the discounting may not be annually it can be frequent in times like intra month, intra quarter, intra year compounding and so on.
This can be formulated like
PV = FV * {1 /[1+(k/m)]}^(m*k)
Where,
PV = Present Value
FV = Future Value
K = Discount Rate
M = Number of times discounting
For example
Mr. X has the cash inflow of Rs.1,00,000 at the end of four years. The present value of cash inflow when the discount rate is 12% and discounting quarterly is calculated as
PV = Rs.1,00,000 * {1/[1+(0.12/3)]}^(4*4) = 1,00,000*0.623 = Rs. 62,300.
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