Difference between General Ledger and Subsidiary Ledger

Difference between General Ledger and Subsidiary Ledger

General ledger contains all accounts and control account for some transaction. Control accounts basically a summary account for large number of accounts.

Subsidiary ledger contains the individual account of debtor and creditor. Subsidiary ledger is maintained for better management of record because technically it is not feasible for general ledger to have hundred of individual account.

1. Double Entry

General ledger is integral record and forms a double entry cycle. Subsidiary ledger is memorandum record in the accounting cycle.

2. Updating

Subsidiary ledger is updated immediately. General ledger is update on periodical especially for control accounts.

3. Reporting

General ledger provides necessary information for preparation of financial statement on timely bases. Where the subsidiary has no direct role in preparation of financial statement.

4. Control

 Subsidiary ledger provides useful information for tracking and controlling the debtor and creditor. Credit policy control is implemented through subsidiary ledger information. 

Difference between Gross profit and net profit

Difference between Gross profit and net profit

Gross profit is calculated by deducting cost of goods sold from the selling price. Where the net profit is calculated after the deducting the operating expenses i.e. administration, selling and financial expenses from the selling price.

It is important to note that net profit sometime called as operating profit because some organization clubs the selling, administration and financial expense into operating expenses.

1. Production Efficiency

Gross profit is a great measure of production efficiency of the entity. Gross profit ratio of the entity can be compared with another entity gross profit ratio or previous period ratio for measurement of efficiency of the production department.

2. Controlling cost

Net profit ratio is a useful tool to control the performance of selling and administration department.Net profit ratio is compared with other entities and previous year for measuring the performance and necessary control actions. Net profit ratio can be calculated by dividing net profit by sales.

Example of Gross profit and Net profit

	$
Sales	10,000
Less: Cost of Sales	(8,000)
Gross Profit	2,000
Less: Operating Expenses	(1,000)
Net Profit	1,000

Difference between Integrated and Interlocking system

Difference between Integrated and Interlocking system

Integrated and interlocking system is two cost book keeping methods. Interlocking system maintains two set of ledger which allows detail analyses of costs and cost related processes. Integrated system keeps only one set of ledgers and both financial and cost accounting information needs are met from the same books.

1. Duplication of record

In Integrated system there is no duplication of record due to single set of ledgers where in interlocking system there is duplication of record due to two set of ledgers.

2. Cost

Interlocking system require more resources than integrated system. More time is required to maintain the interlocking system similarly interlocking system requires more human effort than integrated system. More resources require more cost therefore interlocking system is deemed to be more costly than integrated system.

3. Detailed analyses

Interlocking system allows more detail analyses of cost and other cost related process. These analyses can be performed without any difficulty and delay due to separate set of ledger.

4. Avoid confusion

Interlocking system creates much confusion due to two set of ledger and too much information is being produced from different record and therefore the information management is more difficult in interlocking system. In integrated system this confusion can be avoided.

5. Computerized environment

Integrated system is the only system followed in computerized environment and detail cost analyses are controlled through coding system (Charts of accounts). Interlocking system has no relevance in the computerized system.

Private Company into Public Company

Reasons for converting from private company to public company

There are mainly two reasons for converting the private company into private company

1.Withdrawal investment from business

 If the owner of the company wants to withdraw it investment from the business this can be done easily by enlisting the shares in stock exchange and then sell some portion of your share. In stock exchange a large number of buyer are available to purchase your share at market price. This provides an opportunity of getting maximum price of your share.

2.Bring New Investment

The other reason may be to bring the new investment into the business. Once the company is registered in stock exchange. The company may offer new shares to the market or to existing shares holder. It is much easier to get new finance for public company than to arrange equity financing for the private company.

3.Public company has more reputation

The other reason is to get benefit from the advantages available to the public company. The first advantage is the public company arranges more finance from the market both from the institution and from the supplier in the form of credit. The second advantage is that public company can apply for big project like construction of power project etc.

In private company risk are shares by few individual and in case of public company the risk is share by large number of shareholder.

Manipulation of profit by misinterpretation of accounting policy

Manipulation of accounting profit by misinterpretation of accounting policy is possible in may ways. The management is in a position to interpret the policy to achieve the desired objective. this is limitation of accounting policies that these have vast scope of interpretation.

The very famous example of misinterpretation of accounting policy is the definition of capital expenditure the management can easily shift a repair expenditure to a capital expenditure by interpreting the accounting policy in a way that support the capitalization of repair expenditure.

The other important example to charge the revenue recognition policy. The management may misrepresent the accounting policy and charge the next year revenue in the current year. for example a telecom company has sold the pre paid card which is still to be utilized and the company charge the whole amount of sale as revenue on the bases of cash received.

Manipulation of accounting profit

Manipulation of accounting profit is possible in many ways. The accounting profit may be manipulated by the changing of accounting policies.The management may get the desired result by framing the policies in a ways that can easily be twisted to change the profit.

The great example of manipulation of accounting profit is change the inventory valuation methods. The different valuation will give you different result because inventory has direct impact on the profit of organization. The increase the closing value of the inventory would result in more profit similarly the decrease in the value of closing stock will reduce the gross profit.

The situation where the prices of inventory is decreasing the management may adopt the LIFO method under which the last inventory is considered to be sold in first place . This provide an opportunity to the management to keep the closing inventory value up.

Manipulation of accounting profit is possible by overriding the accounting policy.The management is always in a position to do that. for example the management may not value the closing inventory at net releasable value despite the knowledge that NRV is lower than cost and need to be valued at NRV.

Sales Tax is Liablity

Sales Tax is a liability because you receive it from your customer . Therefore you are just a collecting agent of sales tax on the behalf of Govt and it is not a direct expenses for your business. Normally the business pay sales tax on purchases and record it as asset and receive sales tax record it as liability and difference between sales tax receive and sales tax paid is deposited into Govt treasury.



Example of Sales Tax

A purchases of 2000 and paid sales tax @ 10 and made sales of 3000 and receive sales tax . what would be the payment of sales tax.


Purchases       2000    Dr.
Sales Tax         200    Dr.
Cash               2,200   Cr.

Entry No 2

Cash          3,300  Dr.
Sales         3,000  Cr.
Sales Tax     300  Cr.


Sales Tax Liability is 300 Cr- 200 Dr = 100 Cr.

Time of recording the Transaction

Time of Recording the transactions

 Normally the transaction is recorded when transaction is complete. The completion of transaction must not be confused with payment. The transaction completion vary from transaction to transaction. The sales is normally recorded when the risk and rewards have been transferred to buyer. The time of completion of a transaction is basically explained in Accounting standards.

The business practices and industry practices may also be helpful to determine the stage of completion of transaction. The transaction must not be recorded when terms are being negotiated similarly transaction must not be enter in the books of accounts where it is expected that no flow of resources will occur inward or outward.

The transaction time recording is a complex issue and require many factors to be considered before the transaction is recorded and every transaction have different rules for recognition.

Journal entry for Provident Fund Contribution

Journal entry for Provident Fund Contribution

There are two types of contribution for provident fund.

Employee contribution

This kind of contribution is normally deducted from salary at the time of salary preparation. The following transaction would be passed.

Salary (Dr)
Provident Fund (Cr)

At the time of transfer of payment from operation account to provident fund account

Provident fund Bank A/C (Dr)
Operation Bank A/C        (Cr)

Employer Contribution

This is the equal amount contributed by employer in provident fund account. The following entries will be passed by the entity while contrition is made to the provident fund account.

Employer contribution (Dr)
Employee provident Fund (Cr)

Provident fund Bank (Dr)
Operational Bank (Cr)

Tax Exemption for Non Profit Organization in pakistan

Tax Exemption for Non Profit Organization in Pakistan

There are two kind of tax exemption available to Non profit Organization .

The first type of exemption means that someone (Donor) pays the donation to non profit organization then he can claim this amount as expense from the tax authorities under the income tax rules. This type of exemption is granted under section 2(36).

The second type of exemption is to exempt Non Profit Organization income from withholding tax. This exemption is deal under second schedule and the non profit organization who has already got the approved NPO status under section 2(36) can apply for this exemption.

Secured and Unsecured Debenture

Secured and Unsecured Debenture

The debenture is an instrument issued by company to obtain long term finance normally for more than ten years. The instrument is issued under company common seal and term of debenture are mentioned at the debenture instrument. The debenture can be classified into two types

1. Secured Debenture
2. Unsecured Debenture

Right Share and Bonus Share

Right Share and Bonus Share

Right share is number of shares issued to the existing share holder at a discounted price and this is method to increase the share capital of the entity and with this right issue the market price of the share are expected to come down to nullify the effect of right issue.


Bonus Share is a replacement of cash dividend . in bonus share no new resources inducted in the operations but the investor are compensated in form of share instead of cash dividend.

Nominal Value and Par Value

Nominal Value and Par Value

The nominal value and par value has the same meanings and these terms can be used alternatively and there is one another term which has the same meaning that is face value. These three terminology is basically used for shares and other financial instrument issued by the company.


The nominal value is the price written on the financial instruments. Normally this is the value at which the instrument issued and it is appearing on the financial instrument. Financial instrument i.e shares or bond may be traded in the market at a market price that is called market value of the share or bond.

Director and Shareholders

 Director and Shareholder

1. Share Holder

Shareholder is an investor in the company . His objective is the maximization by earn dividend and capital appreciation of his share value. The shareholder  may have little skills to manage the business and this may be one of the reason to invest in public companies where more skilled people know as director are available to perform management tasks on behalf of shareholders.

2. Director

Director is managed the business and appointed by the shareholder for a particular periods. The director may be share holder . In some companies major shareholder are director . The director form company and people follow them. In other case company hired director of repute at high remuneration.

Difference between Profit and Dividend

Difference between Profit and Dividend

1.Profit

 Profit is earned by the company during the year and dividend is distribution a percentage of such profit. It is important to remember that company may have profitable operation but he still not paying dividend .

2. Dividend

The dividend payment is a total management decision. in simple words dividend payment is not an obligatory requirement and management may decided to reinvest the profit instead of paying out.
Dividend payment is normally described as percentage of nominal value.

Example of Dividend

Company A has decided to pay 25% dividend . The nominal price of share of A is 100 USD and market value of share is 550 USD.

It means that company has decided to pay 25 USD for per share of investment ( i.e 100 per share)

Reason for Share Price Fluctuation

Reasons for Share Price Fluctuation

The following are important reason for Share price Fluctuation

1. Inflation in the Economy
2. Market expectation about results
3. Political Crises
4. Monetary Policy
5. Major Acquisition or Merger

1.Inflation in the economy :- 

If there is high inflation in the economy . The market expect that Govt is going to control the money supply by enhancing the interest rate on Govt bond . Due to high interest rate the Investment will be transferred to the Govt bond , Therefore , it is expected that in high inflation the share price will come down.

2.Market Expectation about Results 

The market expectation about the performance and results of the organization also play vital role in price fluctuation. A positive expectation will raise the prices of share while a negative expectation will bring the price down.

3.Political Crises 

The political crises will effect the share price adversely . it is almost definite that in civil war or other political crises will bring the stock down.

4.Monetary Policy 

if the Govt introduce the monetary policy to control the money circulation in the economy. Then this situation will lead to lower the price of share while in case of more money supply the price are expected to flourish.

5.Acquisition and Merger :- 

The acquisition and merger will also impact the prices of company. The prices will depends on market expectation about the future performance in case of merger and acquisition.

Reasons for Holding Stock

Reasons for Holding Stock

The holding of stock will result in increase in holding cost , however, an appropriate level of stock is required to be hold by the organization for following reasons.

1.Continuous Production :- 

Sufficient inventory must be available to ensure the continuous production.

2.High Purchase High Discount :- 

Normally a high stock purchase may earn high discount for the organization. The organization must calculate the difference between discount offered and holding cost of inventory.

3.Avoid future Shortages :- 

Sometime future shortage are expected which will result in increase in price of material in future.

4.Seasonal Purchase :- 

Some material has seasonal purchase for example sugar and cotton industry.
Transportation Cost:- The transportation cost reduction is also a primary reason for high stock holding.

5. Take Advantage of Low Price

sometime raw material is available in the market due to market forces or any other reason. Therefore entity would like to take advantage of low price of raw material.