Category: Commerce Notes PPT

Various aspects of business enterprises depend on their product based on its nature, production, and particular conditions for business fixed costs. The costing of products is decided via methods of costing.

There are various methods of costing which helps a business entrepreneur to know how much money they should invest in a specific product. Many methods of costing have come into notice in the business world. But at the same time, all the methods have common principles that are based on collection, analysis, allocation, absorption, and apportionment.

Types of Methods

There are two types of methods that are used for costing:

Specific Order Costing

Among two types of costing method-specific costing is one of types. This type of costing is used for those business companies where they do the construction of the product or provide jobs. Specific order costing is further classified into three types.

• Job costing

• Contract costing

• Batch costing

Job Costing

Job costing is the method of costing which comes under specific order costing. This method is used to affix the cost according to the job or the work type separately. Every job and every product has its different substances and properties and considering all the necessary costs is charged as a cost unit.

In this method, the first thing is to know about the production and its necessary substances which are required should be identified properly. Then after identifying the expenses related to it should find out. This method of costing is used for making the road, automobile works, repair shops, roads, etc.

In this method of cost, there are a few features:

• The construction is against the customer’s order by the manufacturer.

• Every work and job has its nature.

• The works are done in the factory or workshops or repair shops.

• A costing unit is a job or work.

Contract Costing

The contract is the job of a large scale. Contract costing method of another specific order costing which is not much different than the job costing method. It is mainly suitable for large-scale contracts. This type of costing method is used in the construction work of buildings which takes a tedious time to complete.

The features of Contract costing:

• Contract costing is a large-scale costing method.

• Contract consumes a lot of time.

• Contraction works a site works.

Batch Costing

Batch costing is the last method of costing under specific order costing. It is used in a group of the same or similar products which are made and passed through a factor at a specified time and number. Every batch is a unit and their cost is fixed separately.

This method is mostly used in industries where ready-made garments, chip manufacture, etc have occurred.

Continuous Operation Costing

This type of method of costing is suitable for organizations that make products in mass production via continuous operations. After that these products are sold via the stock present. This is further classified into five more types.

• Process costing

• Service costing

• Unit or single costing

• Multiple costing

• Operation costing

Process Costing

This method is the first type of costing method present in a continuous operation costing. This method is used to fix the cost of the product in every stage of product processing. The method in this type is mainly used for these which have various stages and processing ways and here each process has its separate center of the cost. This method is mainly used for producing gas, cement, sugar, textile, etc.

Its features are:

• They have standardized units.

• It occurs via the continuous process and is carried out by the stock.

• Before the complete process, it has to go through many processes and stages.

Service Costing

This method is used for finding the cost of the provided service. The services used by the industries are the major users of this method.

Unit or Single Costing

This is the third costing method under continuous operational costing. It is also known as output costing. It is mainly used for manufacturing single products or similar products. This method is used for the costing of coal, brick, oil, drilling, etc.

The features in this method are:

• The outputs are natural and identical.

• The process is continuous.

• The method fixes the cost per unit.

Multiple Costing

This type of method is used from those products where two or more products are combined and applied to fix the cost of the product. This is known as composite costing. This type of method is used where the product is produced separately. This method is suitable for manufacturing radios, airplanes, automobiles engines, cycles, etc.

Operation Costing

This is the last part of the costing of the method under the continuous operation method for costing. This method is similar to process costing only the difference is that its cost unit is not a process but an operation.

This costing method is suitable in industries that have repetitive production or have mass production or their components are in the semi-final state to processing orders to issues or later operations.

What is Commerce?

Commerce is the process of exchanging goods and services on a large scale. Commerce is an important academic stream that imparts detailed knowledge related to economy, finance, accounting, and other topics which you can easily relate to daily lives. Specifically, the subjects included in this stream are Economics, Business Studies, Accountancy, and English along with a choice of Maths or Computer Science. It is a very important subject that will help students learn about how the business world actually works. Since commerce involves a lot of processes to be completed it will have to employ lots of laborers in the process, thus it easily generates various employment opportunities in various other areas that involve transport and logistics, banking, and retail sectors. Commerce overall is an essential component of national development and wealth creation which highly contributes to the economy of the country. Commerce education is mainly aimed at giving adequate knowledge about the wholesale trade, retail, export trade, import trade, and entire- port trade. Moreover, it provides some knowledge about the movement of goods, etc., Transport, Communication Insurance, Ware-housing, Money, Banking & Finance, and Mercantile Agencies.

Meaning 

Generally, the method of costing in commerce refers to a particular system of cost ascertainment and cost accounting. Each industry in the market differs in its nature, in the products they produce and sell, and the kind of services they offer. Hence, different types of methods of costing are utilized by various different industries in the market. Job costing and process costing are the two main types of basic methods involved in costing.

Money is any item that everyone accepts as a medium of exchange. It is widely recognized as a means for purchasing goods and services and repayment of debts. It allows people to receive anything that they need for a livelihood.

In ancient times, people used to obtain things through the barter system. Here, two individuals or parties would exchange goods and services that the other needs. But the earlier method of bartering did not have the ease of transferability that eventually led to the invention of Money. 

For Example-  if anyone has rice but needs milk, he/she must find someone who not only has milk but also has the requisite of preparing meals. What if anyone finds a person who can offer milk but needs clothes? 

A trade cannot occur in such a situation. Due to such recurring hassles, a relatively more straightforward medium of exchange came into existence, and now it has worldwide recognition.

As per the meaning of Money in economics, it is a medium of exchange, a unit of accounting that allows people to make any transaction.

In terms of exchange, traders accept Money as a medium for buying or selling commodities, and employees consider it a means of remuneration for their labour. As a unit of accounting, it acts as a quick and easy method of calculation.

For Example- when someone inquires about the value of an item, it can be merely quoted in its monetary denomination.

What are the Properties of Money?

The concept of Money in economics is considered as a crucial element for the proper functioning of an Economy. It has become an essential means of exchange in the entire world. It has value, and people use it to obtain things that they wish to avail.

There are specific properties of Money that account for its worldwide usage. Some of these include:

• Interchangeability: Money has a universal application as one can interchange it with other things.

• Repeated Usage: One can use it again and again to purchase anything. It does not lose its value with time.

• Transferable: Anyone can carry Money from one place to another due to its portability.

Define Banking

A Bank is a financial institution that allows people to make deposits and receive credit. In India, Banks are licensed by the Reserve Bank of India. It operates to provide financial assistance to borrowers and allow cash transactions.

Similarly, Banking is an industry that allows credit, handles deposits, and provides financial help to borrowers. More broadly, it is a network that facilitates the Money flow in the Economy. Banks also facilitate companies with an adequate amount of funds to finance their operations.

Money and Banking are the two most essential components that drive the Economy. Money allows people to make transactions, whereas Banks play a vital role in circulating the Money supply in the Market.

What are the Different Types of Banks?

Banks provide long-term credit opportunities such as credit cards, Business loans, mortgages, etc. Similar to other Businesses, the goal of any Bank is to earn Profits.

They earn profits from the difference in interest rates charged from borrowers and offered to depositors.

For instance, a Bank gains 4% Profit by charging 6% interest from its borrowers and paying 2% interest to savings account holders.

There are different types of Banks operating in the Market. They are listed out below as:

• Retail Banks: These Banks offer services to the public, and they deal with the retail Market. Their services are known as general Banking as they provide facilities such as savings accounts, current accounts, short-term loans, credit cards, personal loans, etc. Most retail banks offer wealth management facilities to their customers. They also provide foreign exchange facilities to their NRI customers.

• Commercial Banks: They are also known as corporate Banks, and these institutions provide specific services to the companies. Apart from its daily Banking functions, they offer cash management, trade finance, real estate, and employer services to their corporate clients.

• Exchange Banks: These Banks mainly facilitate foreign trade in a country. They accept, collect, and allow discounting of bills of exchange. These Banks also deal in buying and selling of foreign currencies along with general Banking activities.

• Co-operative Banks: The primary function of these banks is to provide loans at a relatively lower rate of interest to farmers. They offer both short-term and long-term loan facilities to their customers. Short-term loans include credit for purchasing fertilizers, seeds, etc. whereas long-term funds include credit offerings to farmers for purchasing lands, etc.

• Central Banks: A central Bank is considered as a lender of last resort. It does not directly deal with the general public; instead, it regulates the functions of the other Banks. They are responsible for controlling inflation, rate of interest, and monetary policy, among other necessary functions in an Economy.

Why is Banking Essential?

• The primary purpose of a Bank is to keep customers Money secured. People find it safe to save Money in Banks as they provide protection.

• Apart from security, it allows interest on savings to their customers. Instead of keeping Money at home, people find it more convenient to save in Banks.

• Banking has become an integral part, as it facilitates advancing loans to different entities. For instance, they offer loans and credit cards to individuals to inflate their purchasing power. They also provide financial advice to its borrowers to aid Business decisions.

There has been a constant evolution of Money and Banking with time. With the ever-increasing demand of customers, new regulations have been implemented in the Banking industry. The value of Money always changes with time, and Banks ensure a smooth flow of Money in the Market.

To get a better and in-depth insight into the Money and Banking project, visit ’s official website today.

is an online learning app that helps students to understand detailed concepts with ease. Money and Banking are essential topics in the CBSE Curriculum of schools. In Class 11th and 12th, this Chapter is categorized under the Commerce stream. It is an important Chapter. In addition, it helps in laying a strong foundation for the students who want to pursue their careers in the field of commerce and Banking.

 

In order to understand the complex topics included with the Chapters of CBSE Class 12th Economics, students are advised to consider the introductory Chapters equally important. For instance, if you will comprehend the definition of Money at a deeper level then it will be much easier to understand the related topics like Money supply in the upcoming Chapters. 

For the students who wish to appear for the competitive exams in the future, Money and Banking is specifically important for them. 

Types of Money

Once you are familiar with the definition of the term- Money the next step involves learning the types of Money that come with it. It is an important question that is apparent in its repetition among the previous year’s question papers. 

According to the Economists, Money can be categorized into four types-

1. Fiat Money- It consists of the type of currency that is legally issued by the government. In simpler terms, it does not involve physical commodities like gold and silver. Examples of fiat Money include- the US dollar, the euro, and the pound.

2. Commercial Money- It is the type of currency that is generated by commercial Banks. Commercial Banks are responsible for making Money by providing loans. It can be in any form like personal loans, mortgages, etc. In simpler terms, the amount of Money that is produced by the commercial Banks is called commercial Money. 

3. Fiduciary Money- Are you aware of what a cheque is? Well, it is one of the primary examples to understand fiduciary Money. A cheque is defined as a means of payment between the payer and the payee which is based on the trust between these people rather than any official involvement of the government. To put it simply, Fiduciary Money is the type of currency that involves Money based on the trust between the payer and the payee. 

4. Commodity Money- As the term describes, is defined as the type of Money that is based on the value of a commodity. These commodities hold an inner value of their own. It varies from commodity to commodity. Instances of Commodity Money include- Gold, silver, copper. 

There are several modes of financial transactions. The previous methods mainly focussed on cash transactions. Cash was mainly used as the preferred mode in exchange for goods or services. However, in recent times, there has been the introduction of several negotiable instruments (NI), which has eased out the transaction process. Several countries have devised their own negotiable instrument laws. Let us know the definition of negotiable instruments or the meaning and kinds of negotiable instruments in detail.

What is a Negotiable Instrument Meaning?

Talking about negotiable instrument meaning, the first things that come to our mind are bills and cheques. The best way to define negotiable instruments is to consider them as anything that possesses monetary values. Additionally, such instruments must also be transferable between individuals. Therefore, the two main characteristics of negotiable instruments are financial value and ease of transfer. Like many other countries, India also had the Negotiable Instruments Act being validated in 1881. It is mainly devised to govern the use of such documents in transactions. The Indian negotiable instrument act identifies each of such documents individually and has separate rules for each of them. The act defines the list of negotiable instruments in India consisting of promissory notes, bills of exchange, and cheques. Although another form of payment method called hundis is prevalent in India, it is not considered in the Indian negotiable instrument act.

What is the Negotiable Instrument Act? 

To know what is negotiable instrument act, we need to understand them based on our country. According to the Indian negotiable instrument act 1881, negotiable instruments can be anything that has a monetary value and are transferable. It enlists cheques, exchange bills, and promissory notes, but excludes hundis, a common means of monetary transfer prevalent in some parts of India. The law considers each of these negotiable instruments separately and has defined rules for each of them. Any other instrument can be considered to be negotiable if it qualifies to some basic criteria. For example, the mode of the transaction will be considered under the NI act if they can be transferred by endorsement or delivery. It must also give the right to sue to the holder if there are some means of discrepancies in the transaction.

Similarly, there are negotiable instruments laws in other countries. Singapore has devised laws for Singapore instruments with meaning related to the economy of the country. 

What is the Meaning and Kinds of Negotiable Instruments? 

As discussed earlier, any instrument that has a financial worth and can be transferred is called a negotiable instrument. However, if we define what is NI act, then these attributes are not taken into consideration. Rather these constants are considered to be in relation to the act. Therefore, the act did not provide a clear, defined description for negotiable instruments, but has followed an inclusive approach in describing them. 

According to Section 13 (1) of the NI Act, the list of negotiable instruments in India includes bills of exchange, promissory notes, and cheques that are deemed payable to the bearer or to order. Therefore, the negotiable instruments act notes consider only these three types of NI. 

Just like other properties have financial values, negotiable instruments also have monetary worth. One only has to pay monetary support to the owner in order to purchase it. 

Therefore the main properties of a negotiable instrument are:

• The negotiable instrument has to be freely transferable by a simple delivery process or by endorsement followed by delivery.

• If the name of the sellers of the instruments is defective, it should not affect the person who buys these instruments by trusting them.

• The holders can sue the instruments upon themselves.

Effect of the Negotiable Instrument Law

The ‘Nemo dat quad non-habet’ is considered as one of the essential principles related to transferring property. Such a maxim indicates that the person can pass the best title related to property transfer. Therefore, the owner of the property has the sole power to transfer it, and any transaction being made not by the owner is considered to be void.

However, the negotiable instrument meaning provides an exception to this law of transferring property. Here, any person can acquire a NI from a seller who does not possess them. The only rule pertaining to NIs is that it must be transferred due to bonafide reasons.

Management can be defined as the process of designing and nurturing an environment in an organization in which individuals, usually working in a group/groups, accomplish defined objectives efficiently. The functioning and success of an organization depend upon the existence of good management. The management architects the ways to achieve the goals and ultimate optimization of resources at a minimal cost. The following article aims to describe the importance of management, objectives of management in business studies, the answer of ‘explain the importance of management’, aims and objectives of management, and what is the importance of management, etc. in a vivid manner. 

What is Meant by Management? Explain the Importance of Management.

Management is the total of all the activities that ensure the smooth and efficient running of a business or non-profit organization. The importance of management is that it arranges all the four factors of production, i.e., men, materials, money, and machines, assembles and organizes them, and effectively integrates them to achieve group goals that are usually pre-determined.

Explain the Importance of Management

To explain the importance of management in the present business scenario, the following points have to be taken into account:

• It directs and unifies group efforts towards a common organizational goal.

• The managers foster a good organizational climate by establishing an effective grievance handling system, reward system, and problem-solving system, etc. 

• The ultimate function of the management is to maximize the organization’s profit by reducing the cost of production. This is nothing but productivity enhancement. 

• It faces competition strategically.

• It makes proper use of scientific and technological advancements to devise an appropriate growth strategy for the enterprise. 

• The management creates and maintains a good organizational structure and adapts to exciting new opportunities from time to time. 

•  It acts as a creative force and adds value to every element of organizational functioning.

Therefore, a dynamic, learning-centric organization is only created with the help of efficient management. All the above points summarized the answer to what is the importance of management. 

Management is a wide and endless concept. But, it has some levels which make it even easier to be understood. Below are the different levels of management :

Levels of Management

1. Top Management: It is related to setting basic goals or objectives and Expanding or contracting activities. Top management include Owners, Shareholders, Chief 

executives etc.

2. Upper Middle management: It contributes to activities like 

• Installing different departments

•  Designing operating policies and routines

• Assigning duties to their subordinates

Upper middle management includes Production executives, sales executives, etc.

3. Middle Management: Middle management works on 

• achieving coordination between different parts of the organization

• conducting training for employee development

• building an efficient company team spirit

Middle management includes Branch Managers, Superintendent, etc. 

4. Lower Management: The role of lower management is to supervise workers, impart instruction and develop/improve work methods operations.

Lower management includes Foramen, Supervisors or charge-hands, etc. 

5. Operating Force of Rank and file workmen: Its role is to work independently or under the guidance of a ‘supervisor’. 

The Operating Force consists of Rank and file workmen, Skilled and Semi-skilled workers, etc. 

Along with this, different areas of the management field require differently characterized management. So, management has various characteristics.

Characteristics of Management

1. Setting goals for organizations and firms

2. Management is a transformation process

3. Management is decision making

4. Management is a profession

Objectives of Management in Business Studies

There is a huge importance of management in business studies. Broadly, the objectives of management in business studies can be divided into three categories- organizational, social, and personal.

Organizational Objectives

Social Objectives

• To operate in an environmental-friendly manner

• To produce quality goods at reasonable rates

• To create employment and generate income

Personal Objectives

Overall, management aims to uplift the work quality and utilization of resources and assets in an efficient way to get the maximum output out of it.

Taking a micro view at the objectives of business management, they can be explained as below:

1. Surplus Creation: In the event of production, the management must aim towards surplus creation which then can be used to increase profitability. 

2. Optimum Utilisation of Resources: All the resources of an enterprise- men, machines, materials, and money- must be utilized in an economic way to earn profits that are sufficient to fulfil the interest of stakeholders- proprietor, employees, customers, associates, government and society. 

3. Market Creation: A stable market has to be created by the organization to sell the produced goods or services.

4. Ensuring the Sustainability of the Business: The business model must be devised in such a way that it can sustain itself on its own. It is then up to the management to plan its growth and long-term profitability. 

The other objectives of business management are producing more value for customers by ensuring a regular supply of goods and services, maintaining discipline and morale of the employees, mobilizing the right talent within the organization, improving overall performance, and minimizing all elements of risk. 

Styles of Management

Also, different ‘styles’ of management can also be understood as their types. Management styles are the ways by which a manager works to fulfil the task. Management style can depend on management, industry, country, culture, etc. 

Some of the management styles are: 

• Autocratic management styles follow a one-way approach i.e, ‘from bosses to employees. It has some subtypes named authoritative, persuasive, and paternalistic.

• Persuasive management style – In this, the manager convinces and motivates the team to work on the plan and makes them believe that the plan is worth working on. In this, there is no order given from the manager or workers. This style is good to build and maintaining trust between the company employees. This style requires good communication skills and convincing ability.

• Democratic management styles – In this, the manager motivates and encourages employees or workers to give input during decision-making and planning processes, but the final decision still remains in the hands of the manager. This communication goes both ways, and it increases team comprehensiveness.

• Laissez-faire management styles – In this, the staff is trusted to do their work without any supervision, and the decision-making and problem-solving related to their work are done by themselves. Hence, in this style of management, every employee or worker acts as their own manager and manages their work. 

Skills Required for Management

Management skills refer to those qualities and abilities that a person should acquire while working for an organization of managing a task.

Some of the common management skills include :

1. Planning: Planning is the ability to organize an event within a given limit of time and within a given limit of resources or money. Planning consists of understanding the task and setting achievable goals and that too within the deadline. 

2. Communication: Communication means the exchange of thoughts and ideas. Hence, it is a significant part of management because good communication is beneficial for strategy making and planning the tasks.

3. Decision-making: A good manager should have excellent and bold decision-making skills. It is because management is the core that decides the output or benefit after doing any task. Hence, one should have an intelligent and good decision-making mentality to be a good manager.

4. Problem-solving ability: While managing a task, things don’t work out as planned most of the time. During this course of time, problem-solving skills are a must for being a good manager.

5. Motivation and good leadership quality

Therefore, management skills are a set of abilities that include delegation, smart working, and punctuality. Management skills make a manager stand out professionally.  

Importance of Management in Society

The importance of management in society can be explained by the very fact that society forms the external environment of the enterprise. Therefore, it has certain responsibilities towards it. These are:

• Creating employment and generating income

• Not causing harm to the environment

• Ensuring the upliftment of society by indirectly fostering a learning environment.

• Facilitating infrastructure development 

• Meeting the demands of society by producing value-added products/services

The importance of business management in management studies is immense. It furnishes the students with the knowledge of management science and trains them to take critical responsibilities of running a business when they join an organization.

The expression ‘audit’ generally refers to the financial statement of a company’s expenses. It is an essential aspect that every corporate entity must take into consideration. An audit is the examination or checking of account books to make sure that all departments are following the procedures and responsibilities that are allotted to them. There are various types of audits conducted in banks, companies, or other organizations. Concerning other types of audit in India, a management audit is a new concept borrowed from the USA. The sole aim of this audit is to help the company in profit maximization by focusing on the improvement of efficiency.

Types of Audit in India

There are generally two types of audits in India.

• Statutory Audits

• Internal Audits

Statutory audits are prepared to inform the Indian government regarding the condition of the finances of the concerned company. Such audit reports are prepared by independent auditors (to ensure fairness and accuracy) in the manner that is prescribed by the government.

 

Types of Statutory Audits that are common in India are given as follows.

An internal audit is performed by the employees of the concerned company on behalf of internal management to analyze the efficiency of the company and its finances. Indian Companies Act governs the public and private companies and audits of banking companies and provides provision for an internal auditing system. 

Except for external audits and internal audits, the following types of audits are also prevalently used.

• Bank Audit

• Insurance Audit

• Government Audit

• Management Audit

()

What is a Bank Audit?

A bank audit is a regular activity that is performed to inspect the financial activities of institutions to make sure that they are following the rules and regulations as prescribed by the statutes. An accounting expert, who is also known as a bank auditor, is appointed for the audit of banking companies. Bank audits can be either internal audits or external audits. 

The emphasis on the audit of a banking company is based on compliance. The object of a bank audit is to find out if the financial activities of the institution are fair, legal, and complete. The main aim of the bank audit is to conduct an independent inspection of the bank’s performance, controls, and information systems. Various examinations are carried out on the systems, the findings are generated as well and auditors suggest some possible reformative actions that the bank should take. 

Types of Bank Audits

There are many types of bank audits. Some of them are as follows.

• Risk-based internal audit

• Concurrent audit

• Statutory audit and tax audit

• Credit audit

• Stock audit

• Snap audit

• Forensic audit

• RBI Inspection System audit

• Foreign exchange

  

The bank audit unveils the infringements of rules or regulations governing financial institutions and failures in compliance with the institution’s policies. Bank auditors look for the main set of issues so that they can come up with profiting suggestions. Their discoveries are documented and noted on file by the bank.

Risk-based internal audit is a type of bank audit that recognizes risks, such as:

• Finance risk

• Expenses risk

• Functioning risk

• Consistency risk

• Strategic risk

• Goodwill risk

• Credit risk

• IT and cyber risk 

Government Audit

There is the same provision for government auditing as there is for the audit of banking companies, organizations, and institutions. The central government and state government both are audited respectively. 

The Comptroller and Auditor General of India (CAG) is the authority to keep a keen eye on the following. The Comptroller and Auditor General of India make sure that financial transactions done by the central and state government are implemented accurately and with the proper authorization. The main emphasis is given to the expenses done by governments.

Insurance Audit

Sec 12 of the Insurance Act, 1938 provides that the financial statements of an insurer have to be audited annually by an auditor. The audit of insurance companies is to be done by an independent auditor, whose duty is to inspect the policies, liabilities, risk evaluation, and several other financial records of the company. It is one of the most important types of audits in India.

The audit of insurance companies is conducted to make sure that proper insurance rates and premiums are being given. Despite that, the insurance auditor must keep a check on quality control between insurance companies and customers. 

Solved Example

Q1. Name some essential points involved in an Insurance Audit?

Answer: The following are the essential points in the audit of insurance companies.

Hence, it is clear that there are various types of audits in India such as insurance audits, government audits, bank audits, etc. 

Did You Know?

Statutory audits are performed in India for each fiscal year which is from April 1 to March 31, not as per the calendar year.

Management audits have been introduced recently and it is a new concept in India. The idea of a management audit has originated in the USA.

IRS Tax Audit

IRS tax audit is an external audit that helps to find out if the tax returns filed by your business are correct or not. It is performed by a person who is not connected to your business in any way. It helps to determine if the tax payments made by you are accurate or not. IRS tax audits can be done in three different ways. It can be done digitally, on your company premises, or over the phone. 

Financial Audit

IT is the most common type of audit. Every business must conduct a financial audit as it helps to ensure that the information given in the financial statements is correct. Auditors verify the financial details of business related to revenue, assets, and expenses. Financial audits are useful for shareholders and investors who can make a decision on the final outcome of a financial audit report. 

Operational Audit

Operational audits are done to know the effectiveness of the operating systems of a business. This audit is done by an internal team but some businesses also opt for an external team of auditors. It helps to uncover ineffectiveness and wastage in a business. It also helps to determine the use of resources to meet business goals and identify how improvement can be made in the business operations.

Compliance Audit

A compliance audit is an audit conducted by educational institutions and industries where regulation is required. It helps to determine if the business is complying with internal and external regulations or not. It can be done for different departments. Compliance audit helps to reveal if the business is complying with the regulations such as proper working conditions or not. 

Information System Audit

An information system audit is done to know if your business is using the best security practices so that an external entity such as a hacker may not get access to your business data. It includes checking if the best practices are being used by your business to make sure the proper functioning of the IT systems in the business. It also helps in determining the data processes and accuracy of data from these systems.

Perpetual Inventory System Accounting

The meaning of perpetual inventory is that it deals with the record of the physical quantities of the stocks and its valuation. There are two principles to determine the inventory of a firm, which are the periodic inventory system and the perpetual inventory record system.

 

Perpetual Inventory System Meaning

The perpetual inventory system records the stocks continuously. Under the perpetual inventory system, the inventory gets recorded after each issue or receipt or purchase of the raw materials, work in progress, final goods, etc. The perpetual inventory system cost of goods sold are updated on a day to day basis.

For ensuring the accuracy of the perpetual inventory transactions, the physical counts of the inventory are carried out many times in a year. This ensures that the inventory is cross-checked and the validity and the accuracy of the perpetual inventory accounting is checked as well. According to the perpetual inventory system, the value of the closing stock is determined by the cost of goods that are issued and the cost of goods that are sold. The equation given below refers to the closing inventory valuation.

Opening Stock (known value) + Purchases during the year (known) – COGS (known) = Closing Stock (balancing figure)

Advantages of a Perpetual Inventory System

The advantages of the perpetual inventory record system are given as follows:

1. It helps in avoiding the time-consuming practices of the regular stock taking. According to the perpetual inventory management system, the stocks are counted only a few times in the year.

2. The management keeps a daily record of the valuation and quantity of the closing stock which helps in the distribution and the production management.

3. There is also a system of internal check which dissuades misappropriation or thefts. The records of different departments like stores, purchases, and manufacturing are checked against each other.

4. There is no requirement to halt the process of production for taking physical stock count often. 

Periodic Inventory System

According to the periodic inventory system, the verification of the inventory is carried out by the physical count of the inventory on a given date. Hence, for determining the closing stock the physical count of the inventory including the weight, numbers, etc. are taken. Firms usually tend to carry this out around the end of the accounting year.

The valuation of the inventory or the closing stock is done with the help of either of the inventory pricing methods like Average Cost, FIFO, LIFO, etc. In this method, the cost of the goods sold are calculated using the following equation:

Opening Stock (known value) + Purchases during the year (known) – Closing Stock (counted) = COGS (balancing figure)

Disadvantages of the Periodic Inventory System

The disadvantages of the periodic inventory system are mentioned below:

1. Firms tend to do a physical count more than one time in a year and generally make quarterly or monthly installments that need frequent inventory counting.

2. For carrying out a physical count, the normal manufacturing and several other activities are suspended which eventually leads to losses for the firm or business.

3. COGS is regarded as a balancing figure which means that it cannot be accounted for the losses due to any kind of damages or abnormal losses.

4. The periodic inventory system also does not provide any kind of inventory control systems or methods.