Purchases are expense or inventory

Purchase is basically an inventory and therefore debit in the books accounts. The purchases then charge to the income statement at the period end . There are two ways of charging purchases to expenses one is directly charged to profit and loss at the period end and adjusted by the physical inventory count by debiting inventory and crediting profit and loss at the period end. The other way is to charge the purchases to stock account and stock account regular charged cost of good sold when the goods are sold. The stock account is showing the stock in hand figure at all time.


The purchases account maintained separate from the inventory account because the inventory basically represent the unsold good in hand where the purchases account shows the whole purchased made during the year. Therefore the purchases is basically an inventory but will be expense out either during the period or at end of the period and unsold purchases will form part of closing inventory.

Reasons for Holding Money

Reasons for Holding Money

The money may earn more profit for the organization. Therefore money must be invested but reasonable amount of money is required to be hold for following reasons.

1. Smooth Operation of Business :- The smooth operations of business need funds.

2. Unplanned expenditure :- There must be sufficient fund available to meet some emergency funds requirement.

3. Opportunity of investment :- Sometime a good investment opportunity is available at a lower rate . This opportunity can only be availed if some liquid funds are available.


The surplus fund available after taking into account above mentioned factor must be invested in a project which have a positive NPV.

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

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.

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.