Accounting: Difference between

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Wednesday, 12 November 2014

Difference between allocation and apportionment

1. Allocation

Overhead Costs which are directly identifiable to a cost center are directly allocated. It is important to note that allocation is concept of overhead and must not be confused with the direct measurement.

There are different methods of allocation the cost which i.e. usage , time spent, machine hour etc.

2. Apportionment

Overheads which are not directly identifiable are first charged to general overhead and then those general overheads are apportioned on appropriate bases i.e. area, machine hour etc, then service department apportioned cost are apportioned among production department and finally the production overhead both allocated and apportioned are absorbed using absorbing rate.

Tuesday, 11 November 2014

Difference between Short and long term investment

There are different approaches of classification of investments. Here we have explained the most common approaches.

1st Approach

Generally the investment cover a period of less than twelve month is known as short term investment and an investment of more than 12 months is termed as long term investment.

2nd Approach

Some business further classify the investment into three categories short term, medium term and long term investment covering a period of two to five year , five to ten year and more than ten year respectively. It is important to remember that any investment less than twelve month is deemed to cash or bank equivalent.

1st Approach
Investment Classification	Period
Short-term Investment	Less than 12 months
Long term Investment	More than 12 months

2nd Approach
Investment Classification	Period
Short term Investment	1 to 5 years
Medium Term Investment	5 to 10 Years
Long Term investment	More than 10 Years

Difference between equity and capital

Capital and equity term are normally interchangeable used therefore some time equity capital term is also used in place of equity or capital. Equity and capital represent the investment made by the equity holder of shareholder to receive the dividend. However there is slight difference between these two terms.

Capital

Capital is basically an original investment made be the equity holder and amount of that capital always appear under the heading of issued or paid up capital. Capital is credited for new investment and cash or bank is credited.

Equity

Equity is basically a residual interest means that capital plus accumulated profit or less accumulated loss. Equity figure give an idea that how much amount will be distributed among the equity holder in case of liquidation. Equity is more like a disclosure of the net investment.

Example of equity and Capital

	$
Equity
Issued Capital 100,000 @ 10	1,000,000
Accumulated Loss	(250,000)

	750,000

Difference between Normal and Abnormal Loss

Normal and abnormal loss concept are associated with processing costing.

Normal Loss

Normal loss is a loss which is very much expected in the industry. This is inherent loss of the industry and it cannot be avoided. Normal loss represents the practice environments where all input cannot be perfectly equal to the output. Normal loss varies from industry to industry.

Normal loss is not valued in the process costing and value of normal loss is adjusted in output i.e. normal loss is born by the output.

Abnormal Loss

Abnormal loss is a loss which is over and above the normal loss. Abnormal loss is specifically tracked in process costing to investigate the reason and appropriate control.

Abnormal loss is valued and separately charged unlike normal loss it is not adjusted against output rather a spate account of abnormal loss is opened to account for abnormal loss.

Difference between General Provision and Specific provision

Provision is an amount which is charged to current income statement as expenses and appear in balance sheet as liability and any future loss is settled against this liability. Therefore provision is basically creation of a liability which is to be settled against future loss.

General Provision

General provision is amount which is set a side by the entity to cover the future loses.General provision is suitable option for high risk business.

Specific provision

Specific provision are kept against the specific expected loss which can be reliably measured at the date of provision. Example of specific provision include provision for bad debt and provision for against a dispute.

Example of Provision

ABC company has a dispute with on copy right and legal expert see little chance of wining the case in court of law. Legal expert estimated a 200,000 then ABC is required to create a provision of $ 200,000.

Income Statement $ 200,000 (Dr)
Provision for Fine $ 200,000 (Cr)

Difference between Contribution and Profit

Contribution

Contribution is calculated by deducting variable cost from the selling price. Contribution is important decision making tool and used in several quantitative technique like break even point, margin of safety etc. .

Profit

Where profit is calculated is by subtracting the full product cost from the selling price.profit also provide management to valuation of stock and setting product price.

Difference between Capital and Working Capital

Capital is amount paid by the equity holder at the time of subscription. In simple way capital is the investment of the equity holder or share holder in the company. Where the working capital is the amount available to run the operations.

1.Paid up capital

The investment is represented by the heading paid up capital and it is normally reported at the top of financials statement.

2.Capital Required

Normally big portion of the Capital investment is invested in the purchase of fixed assets i.e. Machinery, building etc and remaining portion is kept for the operations.

Working Capital

1.Reporting and presentation

Working capital is not reported in the financial statement rather it is calculated for financial management. Working capital is calculated by the following formula

Working Capital = Current Asset – Current Liabilities

2.Operation

Working capital is required to support the operations. Working capital is an important measure of the operation efficiency and liquidity position of the entity.

3.Ideal Working Capital

Working capital requirement vary business to business. Standard rule for the minimum capital requirement may be expressed in term of current ratio i.e. Current assets divided by current liabilities.

A company must have at least 1:1 current ratio and a ratio of 2:1 is deemed to be health one for a business smooth operations.

Difference between cost and Management Accounting

Management accounting and cost accounting both provides useful information to the management for performing the management functions effectively and both are interlinked in many ways. However Management accounting is deemed to be a wider scope than cost accounting. The main difference between two branches is as under.

Cost accounting

1. Cost of Manufacturing

Cost accounting mainly deals with cost of manufacturing and details analyses of these costs.

2. Stock valuation

Cost accounting provides useful information about for cost valuation and thus plays a vital role in the preparation of final account as stock valuation is one of the primary areas of financial results.

3. Setting price

Cost accountant provides management useful information about the product total price and hence facilitates management in setting an appropriate selling price of the product.

4. Cost controls

Cost accounting provides useful and details information about different cost involved in production process and this information helps the management for cost controls.

5. Reporting

Cost accounting provides useful information for the preparation of annual financial statements. These include cost of goods sold and stock valuation.

Management accounting

1. Decision Making

Management accounting provides useful information to meet decision making need of management.

2. Comparison

Management accounting compares the actual results (variance analyses) with expected results and different control actions are initiated by management on the bases of variance analyses.

3. Planning

Management accounting deals with future cost and future planning i.e. budgeting

Difference between Franchise and branches

1. Operation

Branches operation is carried out by the entity itself. In Franchise the operation is carried out by other party. However franchisee uses the methods and process of the franchiser.

2. Investment

In Branches the investment is made by the entity where in franchise the investment is made by the franchisee.

3. Employee

In Branches the employees are at the payroll of the entity where in case of franchise employee cost are born by franchisee.

4. Profit Sharing

In branch system there no profit sharing as operation is conducted by entity itself. franchise arrangement some portion of profit is share with franchisee.

5. Quality

In branches quality is directly controlled by the entity while in franchise arrangement quality is maintained through monitoring.

Difference between Prime cost and Factory Cost

Prime cost

Prime cost basically consists of direct cost of product i.e. direct material, direct labor and direct expenses. Prime cost directly varies with the level of activity and it is very important in decision making process.

As prime cost directly traceable to product it is therefore allocated to the product instead of apportionment.

Factory cost

Factory cost is calculated by adding the factory overhead to the prime cost. Factory cost is important for the purposes of stock valuation and setting price. Factory cost takes into account all cost related to production.

Difference between Right and bonus share

1. Issue

Right shares are issued to existing shareholder as proportion to shares held by them. When bonus share are issued as dividend to the shareholder.

2. Resource Generation

Right share are issued to generate funds for operation. Where the bonus share did not generate any further fund. Bonus issue just divided the existing share capital.

3. Existing number of share

Right and bonus both increase the total number of share.

4. Share price

Right share does not impact the share price because the right share normally issue at price lower than market price. Bonus share also impact the share price because now more shares will share the dividend in future and this will decrease the share price.

5. Earnings per share

Right and bonus share both reduce the earning per share due to number of share increase in both cases. However in case of right share chance of reducing earning is less than bonus share because right share is supported by resources which may be used to earn additional profit.

Direct cost and indirect Costs

1.Tractability

Direct cost is directly traceable to a product where the indirect cost is not directly traceable to product.

2.Allocation

Direct cost is directly allocated to the product where the indirect cost is apportioned to the product using absorption rate.

3.Classification

Direct cost mainly classified as direct Material, Direct labor and direct expenses. Similarly the indirect cost can also be classified as indirect material, indirect labor and indirect expenses.

4.Reporting

Direct cost is reported as prime cost where when indirect cost added with the direct cost then it becomes the factory cost.

Difference between Revenue and Income

Difference between Revenue and Income

1.Meaning

Revenues and income both have the same meaning in business language and both are gross inflow of economic benefit. Which term to be used depends on the nature of business and normal industry practice?

2.Business Income

Revenue is basically a business term and can be used only for business income where income can be used both for business income and non business income i.e Salary income, Dividend income.

3.Net inflow

Net flow of economic benefit is calculated by deducting the relevant business expenses from revenue and income. Net inflow in case of revenue is known as profit where in case of income it is called net income.

4.Nonprofit organization

Nonprofit organization always uses the term income instead of revenue because nonprofit organization are established for a charitable purpose and not to earn profit therefore it is not appropriate the profit related terminology in nonprofit organization.

Examples of revenues

Famous example of business income normally expressed with income heading is dividend income, interest income, royalty income. The famous example of revenue is sale of goods.

Difference between Income and profit

1. Meaning

In business the term income and profit has different meaning and cannot be interchangeable. Income is gross inflow of economic benefit (Cash) where the profit is net inflow of economic benefit.

2. Net inflow

Net income is net inflow of economic benefit and calculated after deducting the relevant expense from the income which was incurred to generated income. Profit or net profit is net inflow of economic benefit in case revenue or sale.

3. Different business

Normally in services industry and the terminology of income and net income is used income is the gross inflow and net income is net inflow of cash.

In trading of good and industry the term revenue and profit are used instead of income and net income. Revenue is the gross inflow of economic benefit and profit is net inflow of economic of benefit.

Examples of profit

Mr. A has made a sale of $2000 and his expenses during the year were $ 1700.

Solutions

Profit is $ 300 ($ 2,000- 1,700)

Examples of profit

Mr. A has earned a commission of $2000 as property agent and his expenses during the year were $ 800.

Solutions

Income is $ 1200 = ( $ 2000- $ 800)

Difference between chart of accounts and account

1.Definition

Account represents an individual a head in the accounting system i.e income, liability, asset or expense. Where the charts of account is a complete list of all accounts maintained in accounting system.

2.Purpose

Account is a used for basic classification of transaction at first place. Where the charts of accounts are used to enter and track the transaction and manage the presentation of information.

3.Books of account

Account is a primary part of books of account where the charts of account are not part of books of accounts.

4.Mandatory

An account is a mandatory requirement of the accounting system and financial statement cannot be prepared without account where the chart of account are not mandatory requirement and financial statement can still be prepared without chart of accounts.

5.Trial balance

Account balance summary appear in the trial balance and each account has a relevant code written at the start.

6.Presentation

The account is presented in T shape also known as T account where the chart of account are presented and maintained as list of accounts.

Example of Account

Sales Ac

Date		Amount Dr	Date		Amount Cr
10 /10/2012				William	1000
	Balance	3000		Cash	2000

Example of chats of accounts

4100 Salary

4200 Rent

5100 Sales

Difference between Director and Shareholder

1.Management

Director is responsible for management of the entity where the equity holder is not involved in the management of the entity.

2.Knowledge and experience

Director is supposed to have sufficient business knowledge to carry out the management effectively whereas equity holder needs not to have such knowledge and mainly relying on director expertise to run the business.

3.Minimum Number

A company has a minimum number of directors as prescribed by the regulator while the maximum number is also mentioned in articles of association. Equity where there is no maximum number requirement for equity holder.

4.Remuneration

Director is paid for the management in the form of salary and other benefits where shareholder is not entitled for any such benefits.

5.Dividend

Director is not paid any dividend for unless and until they hold some shares in the entity. Where the share holder are entitled for dividend.

6.Appointment

Director are appointed or elected by the shareholder in a general meeting where the equity holder becomes by purchasing shares.

7.Cession of office

Director can be removed by equity holder where share holder cannot be removed however he can sell his share his share any time as per his discretion.

8.Liability

Director has no liability in case of liquidation unless they hold .shareholder liability is limited to the par value of shares.

Difference between Internal and external audit

1. Appointment

Internal auditor is appointed by the equity holder in the general meeting. Internal auditor is selected by the management.

2. Term of office

External auditor is normally appointed for one financial period and then may be reappointed. Internal auditor is appointment is regulated by appointment contract which may vary company to company.

3. Reports

External auditor reports are issued to public and it is public information where the internal audit report is presented to management and it is not published with annual account.

4. Independence

External auditor enjoy total independence from the management where the internal auditor are not fully independent and management has control and exercise some influence on the auditor.

5. Scope of work

External auditor scope of work is defined by the regulator or statue where the internal auditor scope is defined by the management.

6. Removal

Internal can normally be removed by the management while the external auditor once appointed cannot be removed unless the completion of auditor.

7. Form and format of report

Content and format is decided by the management or internal auditor as per convenience however the external audit report content is decided by auditing standard and regulator.

8.Mandatory

External audit is almost mandatory around the globe however the internal audit are mandatory in some countries.

Difference between Ledger and account

1. Purpose

Ledger is a place where the accounts are consolidated the main reason is maintaining to save cost and improve account management. For example if organization has one hundred expenditure accounts it is not possible to maintain one hundred register for those account.

Account is first stage classification of accounting transaction. Account is used to classify the transaction of same nature in one place. For example sales account contains sales record similarly purchase account is used to accumulate the purchases of the entity.

2. Preparation of financial statement

Ledger has not direct role in the preparation of financial statements rather it just facilitate management to extract the summary of account for the preparation of financial statement.

3. Classification

Ledger is basically a book which contains different account. Ledger is a register which contain the different individual accounts. Ledger can be divided into two main categories general ledger and subsidiary ledger. Ledger itself not an account but contains number of accounts.

Difference between Market value and par value

1. Determination

Par value is determined by the management at the time of issuance after considering the relevant guideline and prevailing laws issued by the regulator. Market value is determined by market and depends on number of factors.

2. Issue Price

Share is issue at par value and market value has no role at the time of issue.

3. Trade

Share are traded in the stock exchange at market price and issue price has no role in the trading of stock exchange

4. Dividend Declaration

Dividend is based on the par value. Market value has no relevance in dividend declaration. For example company announces a 10% dividend having par value 100 and market value 1200 of its share. it means that company is going to pay a dividend for $ 10 per share i.e. 10% of 100

5. Dividend effect

Declaration of dividend has no effect on the par value. Market price tends to rise or decline at dividend declaration. if dividend declared is more than market expectation the share price will rise in the market otherwise it will decline.

6. Premium and discount

Share may be issued at a price above the par value or below par value know as premium or discount. The share cannot be traded at discounted market price of premium market price.

Difference between Cash flow and Discounted cash flow

Cash flow

Cash flow basically a financial statement item which explain the how cash is generated and how it was spent during the period.

Discounted cash Flow

Discounted cash flow is tool of decision making for investment and it takes into account future cash flow and net present value of those cash flow are calculated for investment decision. A investment is accepted if net present value of investment is more than zero.

1. Bases of preparation

Cash flow is prepared on the historical information. Where discounted cash flow takes into account future cash flows information.

2. Reporting

Cash flow is an integral part of financial statement where the discounted cash flow prepared to serve the management need for decision making.

3. Techniques

Cash flow is prepared as per guideline of international accounting standard. Discounted cash flow is prepared in a form and format which facilitate decision making.

4. Level of expertise

Cash flow preparation does not require a deep knowledge of accounting and can be prepared without any difficult. Discounted cash flow requires a deep understanding of underlying concept and different qualitative techniques and formula.