Category: Commerce Notes PPT

Accounting conservatism is the set of bookkeeping guidelines that call for a high degree of verification. This is done before a company can legally claim any profit in its name. The general concept of conservatism is able to factor in the worst-case scenario, keeping in view a firm’s financial future. These uncertain liabilities are to be recognized, soon after their discovery. While in an even worst-case scenario they are recorded when they are only assured of receiving it. 

We will know further about this amazing concept of conservatism. 

Principle Accounting Conservation 

The conservatism principle works as a general concept of recognizing the expenses and the liabilities sooner, while revenues and the assets are only recognized when they are received. So, with a given choice between the several outcomes in which the probabilities of the occurrence are equally likely, one must recognize that the transaction results in a lower amount of profit, or even the deferral of a profit. While a choice of outcomes with similar probabilities of occurrence will impact the value of an asset, that is recognized in the transaction which results in a lower recorded asset valuation.

How Does Accounting Conservatism Work?

The GAAP has insisted on the number of accounting conventions that are required to be followed to ensure that these companies report their financials as appropriately as possible. Among other principles, this includes conservatism, which requires the accountants to show caution, who are opting for solutions that reflect favourably on a company’s bottom line is uncertain situations.  

The Accounting Conservatism does not manipulate the dollar amount or the timing of the reporting in the financial figures. This is a method of accounting that provides guidance when uncertainty occurs and the need for such estimation arises.

Accounting conservatism establishes the rules which are used when deciding between the two financial reporting alternatives. If an accountant has two solutions in hand, he is required to choose one that yields inferior numbers. 

A more cautious approach represents the company in a worst-case scenario. The assets and the revenue are intentionally being reported at figures that are moreover understated. While, the liabilities and the expenses, on the other hand, are thus overstated. If there is uncertainty about incurring a loss, the accountants are mandated to record it and then amplify its potential impact. In contrast to this, if there is a probability of gain coming in the company’s way, the accountants are advised to ignore it until the gain occurs.

Using Accounting Conservatism

The Accounting Conservatism is to be applied in the valuation of inventory. While determining the reporting value for inventory, the principle of conservatism dictates the lower of the historical cost or the replacement cost of a monetary value.

Other estimations like uncollectible account receivables and casual losses also ground in this principle. If a company expects to win, it cannot simply report the gain until and unless it meets all its revenue recognition principles. 

Advantages of Accounting Conservatism

Understating the gains and thereby overstating the losses means that accounting conservatism will always report low net income. Thus, lower financial future benefits.

Also, this concept encourages management to exercise greater care in its decision-making. This also means that there is a lot more scope for positive surprises, rather than disappointing upsets, which are the big drivers of the share prices. Like all standardized methodologies, these rules ought to make it easier for the investors to compare the financial results across different industries in particular periods.

Disadvantages of Accounting Conservatism

On the contrary side, the GAAP rules like accounting conservatism can welcome interpretation. This means that there will be some companies who will always find their ways to manipulate these concepts to their advantage.

Another issue with this accounting conservatism is that the potential for revenue shifting increases. If a transaction fails to meet the requirements that are to be reported, it must be reported in the period that follows. This will result in the current period being understated and the future periods remaining as overstated, this will be a problem for an organization to track business operations internally. 

Contingent liability refers to those liabilities that can incur as an entity and depends on the outcomes of the pending lawsuit. Such liabilities are not recorded in the company’s account and are shown in the company’s balance sheet when they are reasonably and probably estimated as a “worst-case” or “contingency” in the outcome. The extent and nature of the contingent liability can be explained by a footnote. The loss is described as remote or probable. And the ability to recognize is reasonably estimated. 

Define Contingent Liabilities

Contingent liabilities are those liabilities that tend to occur in the future depending on an outcome. Such liabilities are recorded when their amount can be estimated. It may or may not be disclosed in a footnote unless it meets both conditions. Some of the common contingent liabilities examples are product warranties, pending investigations, and potential lawsuits. 

Contingent liabilities meaning also signifies the fact that they change according to the amount of money estimated and their likelihood of occurring in the future. The accounting rules make sure that the readers of the financial statement receive enough information. 

Contingent Liability Accounting 

Contingent liabilities are those liabilities that are not included in the financial statement of the company. They fall under obligations that have not occurred yet but can occur shortly. As it is not a liable component, it is not included in the accounting system of the company. Contingent liabilities are not reviewed annually.

Examples of Contingent Liabilities in Accounting are

1. Lawsuit

2. Fluctuations in the foreign exchange process

3. Changes in government policies

4. Bank guarantee

5. Pending cases

Contingent Liabilities Meaning in Tamil

Contingent liability in Tamil means தொடர்ச்சியான பொறுப்பு

What is Contingent Liabilities Example? 

Contingent liabilities example is as follows:

1. Counter guarantees and guarantees that are given by the company.

2. The company gives a certain guarantee to another stakeholder on behalf of their third party. or it can also be said as the guarantee performed by certain companies as a result of the contract.

3. Product warranty is also given by the company.

4. The company also gives a guarantee on behalf of the stakeholders.

5. The company also issues a letter of credit.

6. The examples also include the adverse judgment of the potential disputes.

Liquidated Damages

The damages that need to be compensated by the party if and when there is a breach in the contract. This amount is decided during the negotiation of a contract. The breach is usually a failure in the contract or not up to the mark performance by the party.

The liquidated damages are written as legal contracts and are bound by the law.

In a situation where the real damages are difficult to ascertain, a liquidated damage amount seems appropriate and accepted by both parties.

Lets us understand the concept of liquidated damages with the help of an example.

Supposing the company is coming up with a new product to launch in the market and the product is still in the development stage. The company may need to consult with suppliers and other designers outside the company and this may require a legal contract before the business is done. One of the clauses that are added to the contract is liquidated damages. The company needs to come up with an amount that reflects an approximate value of damage if done. 

The new product the company is launching may still be kept discreet as the breach in secrecy may result in huge losses for the company. So if there is a breach of indiscretion, the other party, i.e., a supplier or designer hired may have to pay the liquidated damages.

A liquidated damages compensation can help in safeguarding the party against future discrepancies.

Legal Liability

Legal liability simply means answerable to the law. One is legally obligated or responsible for any damages done under the law. If the person or company in question does not take the responsibility, they may be legally sued.

To understand the concept of legal liability, let us take an example of a business owner.

Supposing a business is selling a certain kind of product, any damage that it can be caused to the buyer before and after it leaves the manufacturing unit is the full responsibility of the owner. If the owner is reluctant to take responsibility for their product, the customer can sue the company. 

Copyright Infringement

Copyright infringement is referred to as the use of copyright-protected material without prior permission from the copyright holder. Any use, duplication, or publication of the copyrighted material without the permission of the owner can lead to serious legal charges.

The companies or even individuals who develop new work or products can register for copyright so that they can take benefit from the profits and retain the original ownership. They can also sell the ownership if they have the copyright to do so.

Others interested in their work can take a license to produce or publish their work. Sometimes the breach in copyright infringement can lead to contingent liabilities.

Let us understand copyright infringement with an example.

Supposing the new technology developed by a certain tech company is used or launched by another company without prior permission, it is counted as stealing one property. This may lead to serious legal problems and the company that developed the technology can press charges against the other party. 

Pirating a movie or a music album is also another example of copyright infringement.

Trespassing

When an individual negligently or intentionally enters the land of another without permission, when clearly instructed not via signboards is referred to as trespassing.

The party to whom the land belongs can sue the one trespassed even if there is no evident damage done.

Let us understand trespassing with an example.

Supposing a hotel has clearly restricted its boundaries around the property and also has put up a no trespassing sign. If any individual intentionally trespasses into the property, then the hotel can press charges against that individual for the same.

Lawsuit

A lawsuit is a legal proceeding taken by the party claiming to have incurred any damage or loss by the other party. Then another party is required to respond to the complaint done. The party that made the damages either suffer legal action or have to go through with the compensation demanded by the other party.

Let us understand this with an example.

Supposing a new publication publishes a piece of private information or anything that tarnishes the image of a celebrity, then the celebrity can file a lawsuit against the media publication for doing so.

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The three terms, Cost Accounting, Costing and Cost, all are associated integrally with studies of fundamentals of accounting. Knowing them by heart is essential to continue understanding accounting in depth. The following essay is prepared with the aim of clearing the concept of all the three terms here and other things related to them. 

Cost Accounting 

When a company or organization’s cost accounting is in discussion, their business practice is referred to that involves the complete list of spending done by the company and recording them too for the purpose of summarizing and examining afterwards. The spending might be for various reasons such as acquiring a product or service, completing a process and others. 

This way the cost spent can be studied and controlled if the need arises. Strategic plans can be formulated on the basis of cost accounting and cost efficiency is thus improved. The company authority is also aware of the cost information with improved visibility. Which areas need more cost approval and which section can do with lesser amounts sanctioned, can be identified from this. 

The business practices, in which the company’s cost spent on any production process is recorded, examined, summarized, and studies are referred to as cost accounting. With the help of cost accounting, a company can control the cost and accordingly make strategic planning and decisions to improve cost efficiency. The management is able to analyze their cost information with the help of cost accounting and helps to create a future plan for the company. 

Cost Accounting can be classified into various types which include marginal costing, activity-based costing, standard cost accounting, and lean accounting. With the use of them the costs of goods and services and the expenditure made, both can be calculated. All the expenditures made are formatted in an organised way so that cost control is done efficiently by the management. Cost of selling, production cost and distribution cost all are determined from cost accounting. 

Characteristic Features of Cost Accounting

Some of the characteristics of cost accounting are listed below-

• It is a branch of accounting involving the cost of goods and services. 

• Management is able to analyze the data which helps in decision-making and budgeting for the future. The data achieved is used in financial accounting. 

• It is the sub-field for accounting where the process for accounting of costs is studied. The costing data that are recorded in this helps the management in developing the budget. It is also used in future planning and decision making processes by the organisation.

• Certain standard costs and budgets can be established with the help of cost accounting. 

• Whether a particular process adapted by the company is efficient or not can be determined from this data. 

• Costing data is provided that further helps in fixing the prices of products.

• It helps to predict the amount of wastage of time and resources. 

Types of Cost Accounting

There are mainly four types of Cost Accounting namely,

• Standard Accounting

• Lean Accounting

• Marginal Accounting

• Activity based Costing

Let us study the various types of cost accounting.

1. Standard Cost Accounting- The cost that could have incurred for the production of a particular product or service and the cost that actually have incurred are compared by the companies. This is known as standard accounting. In this type of cost, the manufacturers identify and analyze the differences between the actual costs in the production of these goods and the costs that were predicted by them in order to produce those goods. 

2. Lean Accounting- Manufacturers collect the processes and principles to access numerical feedback so that they can implement lean inventory and manufacturing practices. This is known as lean accounting. This system is for the lean organization that provides the necessary financial and nonfinancial information which is relevant in order to execute the lean strategy and drive financial success.

3. Marginal Costing- In this type of costing, all the costs are divided separately into variable and fixed costs. The former is directly proportional to production levels. But in this case the cost per unit, though a variable, remains unchanged. The latter, fixed cost, is not associated with production levels. Here, though production quantities vary, the cost remains fixed. Or in simple terms, the fixed costs do not have any relation to the level of production while the variable costs change as there is a change in the production level.

4. Activity-Based Costing- As the name suggests, this method identifies activities in an organisation and allots cost of each of those activities as per the consumption. In this method overhead and indirect costs are also assigned. In this type of costing, all the costs of the various activities in an organization are identified, and then accordingly the costs are allocated to these activities. Then the costs that are accumulated in these activities are further assigned to the products on the basis of the activities that go into the production of these products and the number of resources that are consumed by these activities. 

Objectives of Cost Accounting 

• Determining the price of goods and services

• Controlling the cost of production, distribution and sales

• Classifying the costs

• Fixing the production standard

Advantages of Cost Accounting

• Unprofitable activities can be identified

• Fixing of prices

• Efficiency can be measured and improved

• Price determination

• Reduction of prices

• Stock control

• Efficiency measurement and improvement

• Identification of time and resource waste

• Aids Future planning

• Evaluation of the reasons for losses

Cost

The monetary value which a company spends in order to produce something is referred to as cost. In business, the amount of money is expressed in terms of cost which is spent on the production of a particular product. The expenditure as incurred during the production of a particular goods or service is also termed as cost. Thus, cost can be of various types such as factory cost, prime cost, sunk cost, indirect and direct cost etc. 

Cost does not include profit mark-up. If the product is sold at the same price at which it cost, then the cost price and the selling price would break even. If something like this happens it means that there is neither a profit nor a loss. 

From a buyer’s point of view, the cost of the product would be known as the price of the product. The price includes both the cost of production of the product and the mark-up cost which is added by the seller in order to produce a profit.

Costing

The technique and process in which the ascertaining of the cost is involved are referred to as the costing. It can be defined as a systematic process that is used to determine the unit cost of the output product or the service which is being rendered. It is a system that helps a company to determine its cost of production. Historical costing and standard costing are some methods followed in costing. Both the types of costs fixed and variable which are incurred in the whole production process are looked upon in this type of accounting.

While variable costs are assigned to the various activities according to the performance, it is termed as direct costing. Fixed costs, when assigned to activities irrespectively, it is termed as absorption costing. 

 

Conclusion 

Knowing costing, cost accounting and cost is of utmost importance in case of understanding accounting. When costing and accounting are applied together, it is termed as cost accountancy. This is the job of a cost accountant. The appropriate practice of this ensures the growth, development and profitability of a company or any business organisation. 

When it comes to running a business, or rather an organization, it is a must that you understand all the aspects that are associated with it. One such aspect is where the tasks run smoothly, without a delay. This is where one has to take into account all the considerations like many of the things including how the tasks must be distributed. Now, the tasks have to be done in more of a streamlined manner where all the people are given responsibilities where they can actually work more efficiently and take the organization to newer heights.

This can happen by taking the very first steps such as delegation of authority. This is the one task that all managers must put into practice due to the fact that there is a lot of ground to cover. One can rest assured by bringing such things into practice that they can have the work done in a more efficient manner where deadlines can be met pretty easily. 

Although there is a phenomenon where one must take the authority of the work given to them, it is also a must that one challenges their subordinates with new responsibilities. Since running an organization is not a one person job, so is the case with taking the authority for various things. It is a great thing for every manager to include their subordinates in the tasks and put them as one in authority. 

Elements of Delegation of Authority

Now that you know what delegation of authority is, you must also know that it is not just transfer of tasks and authority to one’s subordinates. However, the meaning seems to be a simple one, there are many benefits along with a fair share of risks involved. It is the job of a manager that they take into account the various risk factors along with the trust factor of their subordinates and then delegate the work accordingly.

Here are the three elements of Delegation of Authority:

• Accountability

• Responsibility

It is worth noting that these three may look like elements, but these are all predominant when it comes to the functioning of an organization. It has many effects for the organization, which can make or break it, in a major way. 

Process of Delegation of Authority

The Process of Delegation of Authority has seven sequential steps. Each step has its significance and continuity. So it is important to understand every step then delegate the authority accordingly.

The first step in the process of delegation of authority is to set the goals for which we are assigning work to the subordinate.

After setting up the goals, the manager or the responsible person needs to define the responsibilities of the employee. This makes the employee learn or understand what he needs to do and whom he needs to report or take instructions.

In the process of Delegation of Authority, the third step is more crucial than all other steps. This step is about defining the Author to subordinates. The authority varies from employee to employee based on the job assigned to them.

The next step is to motivate all the subordinates. The manager is supposed to not only delegate or assign the work to the support units. He also needs to encourage his employees to work effectively and fastly by putting all their efforts. The manager also monitors all the day-to-day actions done by subordinates.

The process of delegation of authority also has accountability in its steps. The manager needs to hold accountability regarding his employees. The manager or company should not depend on the employees.

In the process of delegation of authority, the manager needs to train his subordinates according to the job assigned. If a new task is given to the employee in a different language, he needs to train his subordinate and ask him to learn and develop his skills by working on new tasks.

The last step in the process of delegation of authority is to control the employees by maintaining proper appraisals for the performance.

 

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Types of Delegation of Authority

We have four different types of Delegation of authority. Each type of Delegation of authority is based on different factors. They are- 

• General or Specific Delegation. It is based on the job assigned.

• Formal or Informal Delegation. It is based on the process of giving authority.

• Top to bottom or bottom to top Delegation. It is based on the hierarchy.

• Lateral Delegation. It requires a group or team to work in parallel.

These are the various types of Delegation of authority.

 

Hence the delegation of authority is an art of getting things to be done by the subordinates. It is clear about the meaning of delegation of authority, elements, process types of the delegation of authority. It can be seen in every organization, so all the companies’ tasks can be taken as a delegation of authority example.

Both Cash Flow and Fund Flow are two essential apparatuses to measure the financial health or position of a business or company. 

Cash Flow and Fund Flow are two completely different statements that are required for running a business and analyzing its shortcomings. Though both of them are closely related, their purposes are entirely different. 

Students of commerce need to learn the difference between Fund Flow and Cash Flow to get a fair idea about this accounting concept. 

 

What is Cash Flow?

It minutely records all the cash (or cash-like assets) inflows and outflows of a company within a specific period. It is divided into three categories.

1. Cash Flow From Operating Activities- Cash generated from the core or general activities of a company is accounted for in this category.  

2. Cash Flow From Investing- All the investments made by the company (like buying new equipment) will be listed in this section. 

3. Cash Flow From Financing- This category records all the transactions including proceeding from new debts, dividends paid to investors, etc.

Companies generally acquire an inflow of cash from selling products, providing services, rent, receiving interest on investments, selling assets, etc. 

The outflow of cash occurs from paying back loans, making purchases, paying salaries, sharing dividends, etc. 

 

What is Fund Flow?

Fund Flow records the movement of the cash flow of a company. It effectively keeps track of the net cash inflows and outflows of financial funds. It also states if a company has made any out-of-character operation like irregular expenses. 

Fund flow is extremely essential for investing purposes of a company. However, for investing aspects, Fund Flow does not provide the cash position of a company, for that matter, cash flow is required. 

 

Difference Between Cash Flow and Fund Flow

The following table elucidates the cash flow and fund flow difference clearly to clear the concept. 

 

Difference Between Cash Flow Statement and Fund Flow Statement 

Fund flow and cash flow both are recorded through a statement which is called Fund Flow Statement and Cash Flow Statement respectively. 

Hence, once you understand the basic difference between cash flow and fund flow, it will be easier for you to comprehend the overall cash flow mechanism of an organization.

Write a similar note on the difference between Trial Balance and Balance Sheet to get a better grip on this subject. For further details on this topic or other accounting topics, tune in to ’s website. 

 

Significant Differences Between Cash Flow and Fund Flow

• The cash flow statement is one of four financial statements that every investor examines to evaluate a company’s financial status. In contrast, the money flow statement is not a financial statement.

• The cash flow statement is generated so that the company’s net cash flow may be determined at the end of a specific period. A money flow statement is created to show the sources and uses of funds over a specific period, as well as how that “change in funds” affects the company’s working capital.

• A cash basis of accounting is used to generate the cash flow statement. The fund flow statement, on the other hand, is generated using the accrual accounting method.

• The cash flow statement is used to budget for cash. For capital budgeting, a fund flow statement is employed.

What is Packing?

Packing is the process of preparing a product for both storage and transportation by securing it into a box or container. It involves different methods; which can be cushioning, wrapping, sealing, weather-proofing etc. 

There are several different types of materials that are used for packing of products. The materials could range from cellophane, cardboard, bubble-wrap to foam-packaging. Primary objective of packing is to provide cover a product and stop it from getting damaged or moving around during shipment. 

Packing of a product can be considered effective only if there are no instances of leakage, breakage, pilferage etc. 

Importance of Packing 

The main objective of packing is to make sure that the product that is to be shipped to the retailers or customers reaches in intact condition.

It is likely that in the course of shipping, transportation or loading, the product may suffer damage. It becomes even more probable if the product is fragile. 

If the product is damaged, the same may be returned to the manufacturer, or the end customer may claim reimbursement. In any event, it will disrupt the flow of business and service delivery. Hence, proper packing is necessary before transportation of products. 

Here is a trivia on packing for you!

Origin of product packing was found in Egypt approximately 3500 years ago. 

The oldest form of packing was with mulberry bark containers and glass. Branding and design came into existence much later in the 1890s, while Peter Durand obtained first patent for metal packaging in 1823.

What is Packaging?

Even though packaging is one element of packing, it goes beyond simply storing or transporting products. The storing and wrapping is done in an attractive manner which helps in marketing as well. Customers make purchase decisions based on how well a product is presented. 

The customer engagement may lead to generation of higher sales, and may also acquire customers from an organisation’s competitors. 

Packaging is of three types – Primary, Secondary, Tertiary.

1. Primary 

Marketers use primary packaging for selling products to end customers. Here, products come in direct contact with retailers or consumers. The packaging acts to contain, preserve and inform customers.

Primary packaging can comprise more than one components. For instance, a bottle of wine containing the alcohol as well as the outside label will fall under primary packaging. 

2. Secondary 

Secondary packaging involves product transportation from one end to another. Its main objective in a display of branding and aiding in logistics.  

Secondary packaging is more prominent in food and beverage industry. Such packaging displays numerous units that also helps in re-stocking from inventory to a shelf. It may include counter-top-display units, shelf-ready packaging and retail-ready packaging.

This packaging has high standard finish with well-thought-out design and branding. It plays an integral part in marketing chain. For instance, beer carry packs have secondary packaging. 

3. Tertiary 

Tertiary packaging focuses on handling and protection of sales units so that everything is grouped during units loads for transit. This packaging usually does not have a consumer interface.

For instance, tertiary packaging of beer is more likely to be a hardened carton with sufficient padding. 

Importance of Packaging?

Packaging of a product is directly related to marketing and may lead to brand enhancement. Product packaging plays a critical role in consumer purchase decisions. How a product is packaged can communicate the values of the company as well as what the product can do for its customers. 

Product packaging is also crucial for differentiating the brand from its competitors, especially at a time when there are hundreds of same products that are vying for customer’s attention. 

Industry research indicates that even the colour of packaging has a bearing on purchase decisions made by consumers. Right packaging creates brand recognition and can be leveraged as an important marketing tool.

These classifications in packaging manifest the inherent difference between packing and packaging. 

Packing vs Packaging

Find out the Difference between Packing and Packaging below. 

 

If you want to know more about difference between packing and packaging, refer to the online materials available in ’s platform.