Retained Earnings imply a part of companies net earnings that are set aside and not paid as a dividend to reinvest it in business or pay off the debt. But, reserves are that part of the profit which is earmarked to provide for business needs in future or to fulfil future contingencies and unexpected liability. Risks and uncertainities are a part of the business. As human beings, we all save some part of our income to cover our future needs and contingencies. Likewise, business enterprises … [Read more...]

“Luca Pacioli” is the father of accounting. He discovered the concept of a double-entry system of book-keeping. As per this system, each business transaction affects two sides of an account, i.e. debit, and credit. While debit indicates the destination, credit implies the source of monetary benefit. As per the Double Entry System: For each debit or credit entry, there is always a corresponding and equal credit or debit entry. The debit and credit entries are made in the ledger accounts to … [Read more...]

A centre for which cost is ascertained and used to control cost is Cost Center. Whereas a centre whose performance we can measure through its income earning capacity is Profit Center. We divide the organization into various sub-units for the purpose of costing. That is the collection and utilization of cost data in an optimum manner. These sub-units are the smallest area of responsibility or segment of activity. Such sub-units are nothing but cost centres. In the simplest sense, those … [Read more...]

Accounting is the art of keeping the record of business events and transactions in a systematic manner. It helps in determining the financial position and profitability of the company at the end of the financial year. It is not exactly the same as finance. Technically, finance is a part of economics that is concerned with resource allocation and management of funds. While accounting is a sub-domain of finance. The two differ in the sense that accounting is all about recording the flow of … [Read more...]

Financial Accounting is the original form of accounting that deals with recording business transactions and summarizing the data into reports, which are presented to the users so that financial decisions can be made rationally. On the other hand, management accounting is a new field of accounting that studies managerial aspects. It deals with the provision of financial data to the company's management so that they can make rational economic decisions. Financial accounting emphasizes on giving … [Read more...]

The Cash Flow Statement shows the changes in the cash position (Inflows and outflows) of a firm. It is an analytical reconciliation statement that explains the reasons for the differences between the opening and closing cash balances over a period. On the other hand, the Fund Flow Statement is a statement that shows the ups and downs of the financial position or the changes in working capital of the entity between the two financial years. While a cash flow statement is concerned with the flow … [Read more...]

In finance, the term 'insolvency' can be used in the context of both individuals and organizations. Insolvency represents that particular 'state' in which the individual or organization is not able to settle debts on time when they fall due for payment because of lack of funds or bank balance. On the other hand, Bankruptcy can be defined as a formal and legal declaration of an individual's inability to settle debts. What is Liquidation? Liquidation implies the closure or winding up of the … [Read more...]