Financial Concepts for Loans and Real Estates

If you are struggling with your debts, then you may benefit from financial support.

Many organisations offer free financial support to people finding their finances difficult to manage. One example of this support is help with budgeting.

Budgeting is all about understanding and managing your finances – in other words, keeping control of your monthly income (the money you earn/receive) and expenditure (the money you spend/pay out).

Your total income should include everything you earn/receive: your salary, benefits, grants, etc. Your total expenditure should include your ‘priority’ debt repayments – for example, your mortgage/rent payments – and your day-to-day living expenses. You should not include payments to your ‘non-priority’ debts (credit cards, store cards, etc.) at this point.

Once you have noted down your total income and total expenditure, you should be able to work out your disposable income. This is done by simply subtracting your total expenditure from your total income. Your disposable income is the amount of money available for non-priority debt payments and, if there is any left over, for saving and non-essential spending.

Now that you have your disposable income, you should make a list of all your non-priority debt repayments (unsecured loans, credit cards, etc.) and ask yourself: Is it enough to cover all the repayments?

If it isn’t, then you really should consider seeking further financial support to help you address the problem. You may be advised to look into a professional debt solution.

Even if you do find that your disposable income is enough to cover the cost of servicing your debts, you may save yourself a lot of money in interest if you ‘overpay’ your monthly payments – in other words, make more than the required minimum monthly payment.

If you can do this, you’ll clear your debts faster – and that means you’ll pay less interest in the long run.

Financial planning is a process by which funds required for each course of action is decided. It must consider expected business scenario and develop appropriate course of action. A financial plan has to consider capital structure, capital expenditure and cash flow.

Steps in financial planning:

1) Establish corporate objectives: Corporate objectives could be grouped into qualitative and quantitative. For example, a company’s mission statement may specify “create economic value added”. But this qualitative statement has to be stated in quantitative terms such as a 25% ROE or a 12% earnings growth rates. Since business enterprises operate in a dynamic environment, there is a need to formulate both short run and long run objectives.

2) Next stage is formulation of strategies for attaining the objectives set. In this condition connection corporate develops operating plans. Operating plans are framed with a time horizon. It could be a five year plan or a ten year plan.

3) Once the plans are formulated, responsibility for achieving sales target, operating targets, and cost management bench marks, profit targets, etc. is fixed a respective executives.

4) Forecast the various financial variables such as sales, assets required, flow of funds, cost to be incurred and then translate the same into financial statements. Such forecasts help the finance manager to monitor the deviations of actual from the forecasts and take effective remedial measure to ensure that targets set are achieved without any time overrun and cost overrun.

5) Develop a detailed plan for funds required for the plan period under various heads of expenditure.

6) From the funds required plan, develop a forecast of funds that can be obtained from internal as well as external sources during the time horizon for which plans are developed. In this connection legal constrains in obtaining funds on the basis of covenants of borrowing should be given due weight age. There is also a need to collaborate the firm’s business risk with risk implications of a particular source of funds.

7) Develop a control mechanism for allocation of funds and their effective use.

At the time of formulating the plans certain assumptions need to be made about the economic environment. But when plans are implemented economic environment may change. To manage such situations, there is a need to incorporate an inbuilt mechanism which would scales up or scale down operations accordingly.

After a huge discussion on financial chapter we have come to “Standard Costing” chapter to discuss about it. About it management says that it is the standard costing is an important tool to planning and cost control.

Objectives of Standard Costing:

Meaning of Standard Costing

Nature of Variance Analysis

Calculate Variances

According to the ICMA, London Standard Cost is, “the pre-determined cost based on technical estimate for materials, labour and overhead for a selected period of time and for a prescribed set of working conditions.”

You should know that Standard Cost is different from “Estimated Cost” and it express what should be the cost, in advance of actual production.

Along with we should know about Standard Costing also. The definitions of Standard Costing also look from ICMA, London, “the preparation of standard costs and applying them to measure the variations from standard costs and analyzing the causes of variations with a view to maintain maximum efficiency in production.”

Standard Costs involves in:

a. Ascertainment of standard costs for each element costs – material, labour, overhead
b. Use of standard costs as a guide and measure of actual costs
c. Measurement of actual costs
d. Comparison of actual costs with the standard costs
e. Measurement and analysis of deviations of actual costs from standard costs

After having understood about the standard costs we should proceed with Variance Analysis. According to the MBA book of SMU variance is, “the difference between a standard cost and the actual cost incurred during a period.

In the variance analysis mainly two elements involved which are:

Measurement of individual variances and
Identification of causes of each variance

We can illustrate here some formula about variance:

Material usage variance = (Standard Quantity – Actual Quantity) x Standard Price

[MUV = (SQ –AQ) x SP]

Computing mix variance:

Material mix variance = [standard cost of standard mix] – [standard cost of actual mix]

Or

[Standard mix – actual mix] x standard rate per unit

Or

[Revised standard mix of actual input – actual mix] x Standard price.

I think now all the things are clear about the standard costs and variance from the financial book. I have already explained the entire chapter before much clearly with some example. I think to publish here about some new chapter of finance and loans also.

Before proceeding to the budgetary control we should explain 1st budget. According to ICMA London Budget has been defining as, “A financial and/ or quantitative statement prepared and approved prior to a defined time of the policy to be pursed during that period for the purpose of attaining a given objective.”

Budgets mainly work for:

Preparing statement in terms of money or equivalent of money

It is for prior to a future period of time

The objectives to be attained and the policies to be adopted are laid down in advance.

Like it about the budgetary control ICMA London writes, “The establishment of budgets relating to responsibilities of executives to the requirement of a policy and continuous comparison of actual with budgeted results either to secure by individual action the objectives of that policy or to provide a basis for its revision.”

Now, we will define alls along with one – budget, budgeting and budgetary control:

About it we will look some references from MBA books of SMU, “Budget is the target or the objective of each section of an organization. Budgeting is the process of preparing the budgets. Budgetary control is the technique and process of fixing the targets, preparing the budgets and using them as an effective tool of planning and control.”

Most simply now we can define the objectives of budgetary control as:

Planning the policies

Coordinating activities

Controlling costs

Increases efficiency

Like this there involves some steps also in budgetary control are:

Preparation of organization chart

Establishment of budget centers

Appointment of budget committee

Preparation of Budget Manual

Determination of Budget Period

Determination of Key Factor or Budget Factor

After the huge discussion about budgetary control we can know about its some limitation also which are:

Its limitations show that it is changeable.

Budgets may kill managerial initiative.

About it people says that it is costly and time consuming. However, it is decisive chapter about accounting. For more details read continuously the financial blog, I will write the chapter with more examples.

The fund flow occurs in a business when a transaction results in a change in the amount of fund. We can say it is a technical device which designed to highlight the changes in the financial condition of a business enterprise between two balance sheets.

Objectives of Funds Flow Analysis

Meaning of fund flow statement

Objectives of Fund Flow statement

Compute Fund from Operations

Here we will take a definition from Robert Anthony about fund flow, “the Fund Flow Statement describes the sources from which additional funds were derived and the uses to which these funds were put.”

Fund Flow Statement known as different names also:

Fund Statement

A Statement of sources and uses of fund

A statement of sources and application of fund

Where got and where gone statement

Inflow and outflow of fund statement

Main objectives of fund flow statements are:

Helping to understand the changes in assets and asset sources which are not readily evident in the income statement or financial statement

To inform as to how the loans to the business have been used

To Point out the financial strength and weaknesses of the business

In the steps of fund flow statement preparation, involves:

Changes in working capital (taking current items only)

Adjustment of profit and loss account

Preparation of accounts for no-current items

At last we can say it was easy methods of Funds Flow Analysis after having study the chapter of Financial Statement analysis. I will further discuss it with some examples also in the financial blog.

Is financial statement analysis is only the analysis of facts, figures and statistics? I think financial statement analysis is proceeding from ratio analysis. So, here we should decide some objectives of the chapter.

Objectives of Financial Statement Analysis:

Meaning of Ratio Analysis

Steps in Ratio Analysis

Classification of Ratio

Merits and Demerits of Ratio Analysis

Compute the Different Ratios

At 1st we will discuss about ratio analysis. Normally, ratio is known as the relationship between two or more variable expressed in:

1. Percentage
2. Rate
3. Proportion

In another word we can say that ratio analysis is the important technique of financial analysis.

There are some steps also which involves in the ratio analysis:

a. Collection of information, which are relevant from the financial statements and then to calculate different ratios accordingly.
b. Comparison of computed ratios of the same organization or with the industry ratios.
c. Interpretation, drawing of inference and report-writing.

There are some formulas of Balance Sheet Ratio Analysis:

1. Current Ratio

Current Ratio = Current Assets/Current Liabilities

2. Quick Ratio

It is also known as liquid ratio or acid test ratio

Liquid Ratio = Quick or Liquid Assets/Liquid or Current Liabilities

= Current Assets – (Stock and Prepaid Expenses)/Current Liabilities-Bank Overdraft

3. Net working capital Ratio

Net working capital is used to measure company’s liquid position.

Net working capital Ratio = Net Working Capital/Net Assets

4. Proprietary Ratio

Proprietary Ratio = Shareholder’s Funds/Total Assets or Total Resources

5. Capital Gearing Ratio

Capital Gearing = Fixed Interest Bearing Funds/Equity Share capital

6. Debt Equity Ratio

Debt-Equity Ratio is calculated as follows:

Debt-Equity Ratio = External Equities/Internal Equities

Debt-Equity Ratio = Outsiders’ Funds/Shareholder’s Funds

As a long-term financial ratio it may be calculated as follows:

Debt-Equity Ratio = Total Long-Term Debts/Total Long-Term Funds

Debt-Equity Ratio = Total Long – Term Debts/Shareholders’ Funds

Here I want to share some important terms which will define the ratio:

Net profit ratio is used to measure the overall profitability and hence it is very useful to proprietors.

A higher working capital turnover ratio shows that there is low investment in working capital and vice-versa.

Ratio analysis is a very important and useful tool for financial analysis.

It helps the management accounting of business concern in evaluating its financial position and efficiency of performance.

Management accounting is not only for the record keeping but also it has broader aspects. The managers use the financial statements as resources to make decision in the field of accounting. About the management accounting we can take a look from MBA book of SMU, “Management accounting is the process of identifying, measuring, accumulating, analyzing, preparing, interpreting and communicating information that helps managers to fulfill organizational objectives.”

Here with the definition of management accounting we can say it is for the fulfill of organization objectives by the managers to use all the financial statements and resources.

Objectives of Management Accounting:

Scope of management accounting

Need for financial statements analysis and inter-firm comparisons

Relevance of cost analysis – overhead analysis, job cost analysis and process cost analysis

Relevance of marginal cost and C.V.P. analysis for short-run decision-making

We should know that all the management process single and most upper goal is decision making. So, decision-making is known as the nucleus of management process. Here we will look a chart to understand of decision-making process:

Meaning and Scope of Management Accounting:

About the meaning of management accounting Charles T. Horgren writes, “Management accounting is the process of identifying, measuring, accumulating, analyzing, preparing, interpreting and communicating information that helps managers to fulfill organizations objectives.”

As I have already mentioned that management accounting is not only the process of keeping records. Records keeping is the process of data accumulation however management accounting is the decision making process. So, the management accounting scope has broader then financial statements and record keeping.

About the evaluation of management accounting the history says that it comes with the industrial revolution from the 18th century. Management accounting is the results of capitalist system.

Management accounting has been divided into four parts – book keeping, financial accounting, accounting and cost accounting and social responsibility accounting.

Like this management accounting has one more main part that is MIS (Management Information Systems). MIS for management accounting is most important process because it collects data and gives the right way to analysis that data to take good decisions by managers.

At last we can give some facts which are necessary in functions of management accounting:

Formulation of a business plan

Implementation of the plan

Designed to achieve the goals of the plan

Formulation of business plans

These are the main function of management accounting an organization. However, we have already discussed on the management accounting chapter. Now, I think I will cover some more facts in the next chapter of financial management accounting chapter.

1st thing is trail balance purpose. It is prepared to check not only arithmetical accuracy of ledger balances but also to take an overview of the operations of the business as on a particular date. It is prepared on the basis of weekly, monthly, quarterly, half yearly and yearly. A trail balance contains the elements of financial statements – assets, liabilities, equity, income and expenses.

How to Prepare Trail Balance

I will give an example of trail balance preparation. We make an assumption that the capital of M/s XYZ as on 1st August 2006 was Rs. 1, 05,000 then the format will be:

Trail Balance As on 31st August, 2006

This is not solved. It is only format of trail balance sheet.

Final Accounts

Final accounts popularly known as the profit and loss account and the balance sheet are together called the final accounts.

Now, I want to let you know about the terms of trail balance and final accounts.

Error of Principle is the term of balance accounting and it is known as a principle and concepts. It is an error and it is committed because of lack of proper knowledge of accounting principles or concepts of finance.

Like it there are some more – error of omission, error of commission, compensation error, trading account, profit and loss account, profit and loss appropriation account, balance sheet, suspense account, gross profit and net profit. These terms are commonly known for trail balance and final accounts chapter. I will write about in the further chapter as more details.

After having completed primary books chapter now we will discuss here about secondary books from the financial accounting chapter. We already have known the nature, works and format for primary books so; I think here we should start with the introduction of secondary books in the chapter.

When we discussed about secondary books, a question comes in our mind that what is the need of secondary book? Here is the definition of secondary books from the MBA books, “To generate information out or raw data, these are to be classified in such a manner that necessary information is readily available. It calls for identifying the nature of various transactions recorded in the primary books and giving an appropriate name to an identical class of transactions and, finally, re-recording the transactions in another set of books according to the defined class. That ‘another set of books’ is called secondary books. It is ‘secondary’ because transactions are recorded for a second time.” I think now it is clear that secondary book is needed for record primary second time.

In another word we can say secondary book is a ledger book. About the work of secondary book mainly it is defined for salary account and whatever you spent in a financial account has been recorded in secondary book. In the term of secondary book we can say ledger is a set of accounts which is defined as per the requirements of an organization.

Types of Secondary Books

After the introduction of secondary books we have to read about it types. Secondary books broadly have divided into two parts – Main Ledger and Subsidiary Ledger. In the last Subsidiary ledger has been divided into three parts – General Ledger, Debtors Ledger and Creditors Ledger. Here is a diagram which will clear you about the types of secondary books:

Here is most important ledger is “General Ledger” because it is self sufficient in the terms of all entries. All the data of primary books has been entered in the general ledger of secondary books. However, Debtors ledger has separate accounts for each customer to show the transactions. Similar to it creditors ledger has a separate account for each supplier to show the transactions.

Do you know the need of subsidiary ledgers? It is for reducing the burden on the main ledger.

In the secondary books there are some more things which have to study us that are – account, sundry debtors account, sundry creditors account and balancing.

At last, the chapter secondary books is full of the example of all the entries format however all the format will be published by me further.

In the 1st chapter of financial accounting we already have discussed about the financial terms and definition. Here in the second chapter of financial accounting I have to clear and define about the primary books.

Primary book is a first entry or prime entry book of financial accounting. It is known as journals also. Primary books the process of transaction which happens 1st time during the buy and sell.

Objectives of Primary Books:

Ground Rules of Journal Entry

Various Types of Journals

Cash Book

These are three main elements of primary book which we will know after studying the chapter of primary books.

I will explain some rules of Ground Journalisation here which are:

1. Increase in assets and decrease in liabilities (also equity) = Debit
2. Decrease in assets and increase in liabilities (also equity) = Credit
3. Expanses and losses = Debit
4. Income and Gains = Credit

For the format of typical journal we normally use this:

Types of Journals

Journal can be defined as:

1. Purchases Day Book: the book records credit purchase of merchandise.
2. Sales Day Book: it records credit sale of goods.
3. Return Outward Book: The book records goods returned to the supplier(s).
4. Return Inward Book: It records good returned by the customer(s).
5. Bills Receivable book: the book records bills accepted by customers.
6. Bills Payable Book: the book records bills raised by suppliers.
7. Cash Book: The book records cash (and bank) receipts and payments.
8. Journal Proper: the book records all residual transactions.

Now, here I will give you some look of the journal book format which is necessary for primary book.

Purchases Day Book Format:

Sales day book, Return Outward book and Return Inward Book format are the same from purchase day book format.

So, I am going to let you know about the Bills Receivable book format now. Here is the format:

Bills Payable Book format is also similar to above but there are some differences also which are:

Cash Book Format

In the last journal proper: it is known as orphan entries. If the transaction does not find a place in any of the above mentioned seven books then it will be recorded in the journal proper. In the journal proper the events are included:

1. Credit purchase and sale of assets.
2. Opening entries
3. Adjustment and Rectification Entries
4. Closing Entries

These are the primary knowledge of primary book entry in the financial accounting book which is on based on my own experience.