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In the realm of financial accounting and analysis, understanding the nuances of asset management, transaction recording, and cash flow is crucial for both theoretical knowledge and practical application. This essay delves into these concepts through a series of answers to an internal assignment for the NMIMS Global Access School for Continuing Education (NGA-SCE) for the December 2019 examination.
Depreciation is a method of allocating the cost of a tangible asset over its useful life. In our case study, we examine the depreciation of an asset with an initial purchase price of Rs. 15,00,000 over four years using the straight-line method at a rate of 20% per annum.
Purchase Price of Asset = Rs. 15,00,000
Depreciation for 1st Year = Purchase Price*Rate of Depreciation
= Rs. (15,00,000*20%)
= Rs 3,00,000
WDV after 1 year of use = Purchase Price – Depreciation for 1st Year
= Rs (15,00,000 – 3,00,000)
= Rs 12,00,000
Depreciation for 2nd Year = Opening WDV for 2nd Year*Rate of Depreciation
= Rs (12,00,000*20%)
= Rs 2,40,000
WDV after 2 year of use = Opening WDV for 2nd Year – Depreciation for 2nd Year
= Rs (12,00,000 – 2,40,000)
= Rs 9,60,000
Depreciation for 3rd Year = Opening WDV for 3rd Year*Rate of Depreciation
= Rs (9,60,000*20%)
= Rs 1,92,000
WDV after 3 year of use = Opening WDV for 3rd Year – Depreciation for 3rd Year
= Rs (9,60,000 – 1,92,000)
= Rs 7,68,000
Depreciation for 4th Year = Opening WDV for 4th Year*Rate of Depreciation
= Rs (7,68,000*20%)
= Rs 1,53,600
WDV after 4 year of use = Opening WDV for 4th Year – Depreciation for 4th Year
= Rs (7,68,000 – 1,53,600)
= Rs 6,14,400
Therefore,
WDV of Asset after 4 year = 6,14,400
Accumulated Depreciation for 4 years = Total Depreciation charged in 4 Year.
= Rs (3,00,000+2,40,000+1,92,000+1,53,600)
= Rs 8,85,600
Profit for Sale of Asset = Sale Price – Closing WDV
= Rs (8,00,000 – 6,14,400)
= Rs 1,85,600
The process of recording financial transactions is foundational to preparing accurate financial statements.
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Mr. Shil's approach to recording his new business's transactions can be summarized in the following steps:
The first step in the accounting cycle is identifying transactions. Companies will have many transactions throughout the accounting cycle. Each one needs to be properly recorded on the company’s books. Recordkeeping is essential for recording all types of transactions. Many companies will use point of sale technology linked with their books to record sales transactions. Beyond sales, there are also expenses that can come in many varieties.
The second step in the cycle is the creation of journal entries for each transaction. Point of sale technology can help to combine steps one and two but companies must also track their expenses. The choice between accrual and cash accounting will dictate when transactions are officially recorded. Keep in mind, accrual accounting requires the matching of revenues with expenses so both must be booked at the time of sale. Cash accounting requires transactions to be recorded when cash is either received or paid. Double-entry bookkeeping calls for recording two entries with each transaction in order to manage a thoroughly developed balance sheet along with an income statement and cash flow statement. With double-entry accounting, each transaction has a debit and a credit equal to each other. Single-entry accounting is comparable to managing a checkbook. It gives a report of balances but does not require multiple entries.
Once a transaction is recorded as a journal entry, it should post to an account in the general ledger. The general ledger provides a breakdown of all accounting activities by account. This allows a bookkeeper to monitor financial positions and statuses by account. One of the most commonly referenced accounts in the general ledger is the cash account which details how much cash is available.
At the end of the accounting period, a trial balance is calculated as the fourth step in the accounting cycle. A trial balance tells the company its unadjusted balances in each account. The unadjusted trial balance is then carried forward to the fifth step for testing and analysis.
Analyzing a worksheet and identifying adjusting entries make up the fifth step in the cycle. A worksheet is created and used to ensure that debits and credits are equal. If there are discrepancies then adjustments will need to be made. In addition to identifying any errors, adjusting entries may be needed for revenue and expense matching when using accrual accounting.
In the sixth step, a bookkeeper makes adjustments. Adjustments are recorded as journal entries where necessary.
After the company makes all adjusting entries, it then generates its financial statements in the seventh step. For most companies, these statements will include an income statement, balance sheet, and cash flow statement.
Finally, a company ends the accounting cycle in the eighth step by closing its books at the end of the day on the specified closing date. The closing statements provide a report for analysis of performance over the period. After closing, the accounting cycle starts over again from the beginning with a new reporting period. At closing is usually a good time to file paperwork, plan for the next reporting period, and review a calendar of future events and tasks.
Cash flow analysis is pivotal for understanding a company's liquidity and financial health. The cash flow statement from investing activities for Alpha Creative Ltd. includes:
The net outflow from investing activities amounted to Rs. 6,37,000, indicating a substantial investment in long-term assets and loans to subsidiaries, partially offset by claims and interest received.
Through a detailed examination of depreciation, transaction recording, and cash flow analysis, we gain insights into the intricate processes of financial accounting and analysis. These concepts not only form the backbone of financial reporting but also provide a framework for evaluating a company's financial performance and decision-making strategies.
An Exploration Through Depreciation, Transaction Recording, and Cash Flow Analysis. (2024, Feb 21). Retrieved from https://studymoose.com/document/an-exploration-through-depreciation-transaction-recording-and-cash-flow-analysis
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