Showing posts with label Finance. Show all posts
Showing posts with label Finance. Show all posts

Advantages Of Flexible Budget

Accounting , Business
Some of the notable benefits or advantages of flexible budget can be pointed out as follows:

1. Range Of Activity

Generally, static budget is prepared for single level only, but flexible budget is prepared for a range of activity. This is one of the major advantages of flexible budget.

2. Easy Comparison

Flexible budget helps to compare actual output, cost or performance with standard or budgeted output, cost and performance.

3. Cost Control

It can be used as a effective tool for cost control because flexible budget reacts to adverse situation.

Static budget is based upon assumptions, judgment, estimates and approximations. But flexible budget is prepared on the basis of knowledge and principles.

5. Flexibility

It is more flexible than static budget. It can be modified or changed according to the market situation and environment.

6. Performance Measurement

Flexible budget helps to measure managerial and operational performance.
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Disadvantages Of Budgeting

Accounting , Finance
Major limitations or disadvantages of budgeting can be pointed out as follows:

1. Based On Estimation

Budget is prepared on the basis of approximation, estimates, assumptions and judgment. So, it may lack accuracy and reliability.

2. Cost And Time Consuming

It takes more time, effort and cost to prepare budget for large sized organizations.

3. Less Flexibility

It is less flexible in nature and cannot be changed easily according to the market situation and environment.

Budgeting may demotivate employees due to the lack of participation. It may create behavioral problems. 

5. Conflict

There is a high chance of conflict because of lack of coordination among employees and coordination between, units, departments and branches.
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Advantages Of Budgeting

Accounting , Finance
The main benefits or advantages of budgeting can be pointed out as follows:

1. Goal Achievement

Budgeting provides guidelines to achieve operational and financial goals of the organization.

2. Better Coordination

It helps to maintain better coordination by linking organizational objectives and available resources in order to achieve the goal.

3. Guidelines

Budgeting provides guidelines or road map for better performance.

4. Better Decision Making

Budgeting helps the management to take wise decisions by providing proper guidelines and direction.

5. Resource Utilization

It promotes proper utilization of resources (material, labor and capital) to increase productivity and profitability.

6. Motivation

It motivates the management and employees which leads to better performance and job satisfaction.

7. Performance Evaluation

It helps to evaluate the performance of different units, departments and employees in the organization.

It helps to maintain better communication between the management and the subordinates.

9. Increase Efficiency

Because of motivation, coordination and better decision making, it helps to increase efficiency of the organizational activities. 

10. Corrective Action

It regularly monitors the progress of organizational activities and provide tool for corrective action when needed.
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Advantages Of Value Engineering

Accounting , Business
The main benefits or advantages of value engineering can be highlighted as follows:

1. Cost Reduction

Value engineering helps to reduce the cost of production without reducing the quality of the product.

2. Improved Quality

It helps to improve product quality and design to attract more customers.

3. Customers' Satisfaction

It helps to increase customers' satisfaction by fulfilling their expectations and needs without increasing the cost.

4. Simplify The Process

Value engineering simplifies the production process by eliminating unnecessary functions.

5. Higher Profit

Business firm can make more profit because of lower production cost and higher sales volume.

6. Resource Utilization

It promotes proper utilization of resources to enhance production process.
advantages of value engineering

7. Modernizing

Value engineering focuses on modern, cheaper and efficient techniques and approaches to improve the productivity.

8. Standardization

It gives emphasize on the standardization of firms' products and services.
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Advantages And Disadvantages Of Sinking Fund

Accounting , Business
Merits Or Advantages Of Sinking Fund

The main advantages of maintaining sinking fund can be pointed out as follows:

1. Replacement Of Asset

Sinking fund helps the company to replace its fixed assets by providing adequate fund.

2. Redemption Of Bond

It provides fund to redeem preference share, bond and other forms of long-term loans.

3. Improve Goodwill And Faith

It helps to maintain goodwill and faith of the company and also helps to maintain future credibility.

4. Encourage Investment

It encourages the investors to invest in the firm because of its goodwill, faith and credibility.
advantages-disadvantages-sinking-fund

5. Financial Stability

Sinking fund promotes financial stability of the business firm.

Demerits Or Disadvantages Of Sinking Fund

Some of the major drawbacks or disadvantages of sinking fund can be pointed out as follows:

1. Reduction In Profit

It reduces the profit to be distributed as dividend.

2. Complexity

It is very complex to maintain sinking fund accounts.

3. Difficulty

Although sinking fund provides fund for the replacement of old assets, it is very difficult to estimate the required amount for new assets/
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Advantages And Disadvantages Of Receipt And Payment Account

Accounting , Business
Merits Or Advantages Of Receipt And Payment Account

The main advantages  of preparing receipt and payment account can be pointed out as follows:

1. Proper Recording Of Cash Transactions

Receipt and payment account records all the cash and check receipts and payments occurred during the period properly.

2. Provides Summary

It provides a summary of all cash receipts and cash payments incurred during a period at a glance. 
advantages disadvantages receipt and payment account
3. Verification Of Cash Book

It helps to verify the cash book of the business firm. So, it ensures the accuracy of company's cash book.

Demerits Or Disadvantages Of Receipt And Payment Account

Major drawbacks or disadvantages of receipt and payment account can be highlighted as folows:

1. No Disclosure Of Profitability

Receipt and payment account cannot disclose accurate profitability of the firm.

2. No Accrual Basis

It does not show cash receipts and payments on accrual basis. 

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3. No Non-cash Transactions

Receipt and payment account fails to show non-cash transactions of the firm.

4. No Surplus Or Deficiency

It records cash and check transactions of the firm but does not disclose the surplus or deficiency of the business during the period.
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Advantage And Disadvantages Of Secret Reserve

Accounting , Business
Benefits Or Advantages Of Secret Reserve

The main advantages of creating secret reserve can be pointed out as follows:

1. Covers Future Loss And Contingencies

Creation of secret reserve helps the organization to cover future contingencies, liabilities and unknown losses.

2. Provides Financial Stability

Secret reserve helps to maintain good financial health of business because it provides financial stability by covering unexpected losses and liabilities. 

3. Internal Financing

It may be used as the source of internal financing to retain assets and other properties.

4. Additional Working Capital

Secret reserve helps to improve operational efficiency of the firm by eliminating the inadequacy of working capital by providing additional funds.

5. Image And Goodwill

It helps to maintain image and goodwill of the business and wins the public confidence. 
advantages disadvantages secret reserve
6. Equalization Of Dividend

It helps to equalize the rate of dividend which gives positive message to the shareholders.

Drawbacks Or Disadvantages Of Secret Reserve

Some of the major disadvantages of secret reserve can be pointed out as follows:

1. False And Inaccuracy

It ignores accounting norms and standard by providing false and inaccurate financial data.

2. Misuse Of Fund

There is a high chance of fraud and misuse of secret reserve by the top level management.

3. Less Profit

Creation of secret reserve decreases the amount of actual profit of the firm. So, shareholders may be disappointed.

4. Borrowing Problem

Secret profit lowers the net profit of the firm. Due to poor profit condition, banks and other financial institutions hesitate to provide loan.

5. Decrease In Share Value

Share value decreases because of  secret reserve which is not good for the shareholders and business.
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Advantages Of Petty Cash Book

Accounting , Business
The main benefits or advantages of  petty cash book can be pointed out as follows:

1. Relief To Cashier

Petty cash book relieves the main cashier because it is prepared by the petty cashier. Main cashier can focus on other major financial transactions of the business.

2. Systematic Recording

It records all the minor expenses of the business properly and systematically and provides information quickly when needed.

3. Assists Controlling

It helps to control tiny expenses of the organization by making comparison between the petty expenses of two periods.
advantages petty cash book
4. Time And Labor Saving

Petty cash book saves the valuable time of main cashier because it is maintained by the petty cashier. Because of scientific recording, it is labor saving also.

5. Minimization Of Errors

Petty cash book helps to minimize errors and frauds because it is checked regularly and reported timely.

6. Preparation Of Main Cash Book

It facilitates preparation of main cash book quickly and easily by minimizing the number of small cash transactions.

7. Division Of Labor

Petty cash book promotes division of labor in the business organization
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Advantages And Disadvantages Of Double Entry System

Accounting , Finance
Advantages/Merits/Benefits Of Double Entry System

Major advantages of double entry bookkeeping system can be highlighted as follows:

1. Systematic And Scientific Method

Double entry book-keeping is scientific and systematic system of recording the financial transactions of the business. It is guided by specific rules, principles and techniques.

2. Complete System Of Accounting

Double entry system records both aspects (debit and credit) of each transaction. So, it is a complete system of book keeping.

3. Suitable For Large Companies

It is suitable for large business companies with large volume of financial transactions and resources.

4. Ensure Arithmetical Accuracy

Trial balance is prepared under double entry system. Therefore, it ensures arithmetical accuracy of accounting records.

5. To Obtained Profit Or Loss

Profit or loss of a company can be obtained by preparing profit and loss account at the end of the accounting period.

6. To Know The Financial Position

Balance sheet is prepared at the end of the year. It helps to know the actual financial position of the business.

7. Helps Decision Making

Double entry system provides provides financial data, profit, loss and financial position of the business firm. So it helps the management to take appropriate decision for the betterment of business.

8. Comparison Of Results

Financial results of current year can be compared with the result of previous year which helps the management for future planning.
advantage disadvantage double entry system
Disadvantages/Limitations/Demerits Of Double Entry System

The main drawbacks or disadvantages of double entry book-keeping system can be pointed out as follows:

1. Complex System

Double entry book-keeping is complex system of recording the financial transaction of business. It requires complete accounting knowledge to maintain the books of accounts. It is not easy to understand this method of accounting.

     Also Read:

2. Time And Cost Consuming

It requires more time to record financial transactions in the books of accounts. It requires more money to install and maintain double entry book-keeping in the organization. So, it consumes more time, money and effort as compared to single entry system.

3. Unsuitable For Small Firms

Double entry system is nor suitable for small business organizations having less number of financial transactions and resources.
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Advantages And Disadvantages Of Internal Check

Accounting , Business
Advantages/Merits Of Internal Check System

Main advantages of internal check system can be studied as follows:

1. Division Of Work

Internal check ensures proper work distribution to the employees. Accounting and operational works are distributed according to the qualification, skills and experience of the employees.

2. Easy Location Of Errors

Internal check system helps to discover errors and frauds very quickly because errors of one staff is detected by another. So, errors and frauds can be prevented before the audit.

3. Greater Efficiency

Internal check helps to increase efficiency of the employees which leads to higher productivity.

4. Preparation Of Final Accounts

It makes possible to prepare final accounts of the company (trading account, profit and loss account and balance sheet) in short time which facilitates final audit.
advantages disadvantages of internal check
5. Helpful For Auditor

Auditor can conduct final audit in short time with less effort because there is no need to examine all the accounting records in details.

6. Suitable For Large Business

It is very suitable for large business firms with many staffs, large financial transactions and large resources.

Disadvantages/Demerits Of Internal Check System

Some notable drawbacks or disadvantages of internal check system can be highlighted as follows:

1. Not Suitable For Small Firms

Internal check requires more effort, more time and more staffs. So, it is unsuitable for small business organizations having less transactions and resources.

     Also Read:

2. Creates Confusion

Internal check may create confusion among the staffs which may lead to conflict.

3. Decrease In Work Quality

Auditor completely depends on internal check while conducting final audit. It may decrease the quality of his work.

Pros And Cons Of Internal Check In Short

Pros:
- It promotes division of work
- It makes easy to locate errors, frauds and loopholes
- It boosts employee efficiency which helps to improve productivity
- It is helpful for final audit

Cons:
- It consumes extra time and cost
- It is not useful for small organizations
- It may create misunderstanding, confusion and conflict among the staffs in the firm
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Advantages Of Audit Note Book

Accounting , Business
Some of the notable advantages or merits of audit note book can be pointed out as follows:

1. Helps Preparing Audit Report

Audit note book helps the auditor to prepare final audit report of the business.

2. Future Reference

Audit note book provides past business information to the audit staff. So, it can be used as future reference.

3. Helps New Auditor

Audit note book records all the weakness, errors and difficulties of previous year. So, new auditor can easily understand the complexities of the business.

Audit note book helps the auditor to measure the working efficiency of his/her audit staffs.

5. Legal Evidence

Auditor can present audit note book as legal evidence in the court if he has been accused of negligence or misfeasance.
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Advantages Of Auditing

Accounting , Business
Main advantages or benefits of auditing can be highlighted as follows:

1. Detection And Prevention Of  Errors

Auditing identifies accounting errors and frauds in the books of account and helps to prevent such errors and weakness in the accounting process.

2. Helpful In Obtaining Loan

Audited reports of previous period are required to obtain loan from banks and other financial institution. So, audit is helpful in obtaining business loan.

3. Accessing Tax Liabilities

Audited reports are easily accepted by tax authorities. So, audit is useful to access tax.

4. Maintenance Of Account

Regular auditing gives moral pressure to the employees of the accounting department. It helps proper maintenance of books of accounting. So, audit is very helpful for up-to-date accounting.

5. Increase Goodwill

Audit helps to increase goodwill of the firm. It also helps to increase public image.
advantages of auditing
6. Easy Comparison

Auditing facilitates comparison of accounts of different periods which helps the management to know the current position of the business.

7. Increase Operational Efficiency

Valuable suggestions and instructions provided by the auditor helps to increase operational efficiency of the business.

    Also Read: 

8. Helpful In Future Planning

Audit helps the management to make future plans and policies. Past audited statements are useful in planning and decision making.

9. True Profit Or Loss

Auditing helps to disclose true profit or loss of the business by which the management and other users can know the  financial position of  business.

10. Claim Settlement 

Audit helps to settle claims (retirement or death) among business partners.
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Disadvantages Of Indirect Taxes

Accounting , Business
Major drawbacks or disadvantages of indirect taxes are as follows:

1. Unfair/Regressive

Both rich and poor people have to pay same amount of tax because taxes are included in the price of the products and services. So, poor people have to may more amount of their income as tax. So, indirect taxes are regressive and unfair in nature.

2. No Civic-consciousness 

Tax payer does not feel the burden of taxes as they are wrapped in the purchase price. So, it lacks civic-consciousness. 

3. Restrict Free Trade

Free trade may be restricted due to high export and import duties.

Higher tax rate increases the price of the products which may lead to inflation.

5. Harmful To Industries

Cost of production will be high if raw materials and machinery are highly taxed. It reduces the competitive capacity of industries.

6. Burden For Poor People

Indirect taxes reduce the saving capacity of poor people. So, these taxes are not suitable for households and low-income groups.
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Advantages Of Indirect Taxes

Accounting , Business
Major benefits or advantages of indirect taxes can be pointed as follows:

1. Convenient To Pay

Indirect taxes are imposed while purchasing goods or services. Taxes are already added in the price of the product. So, the 'Pre-coated' tax makes convenience to both the tax payer and the administration.

2. Broad Based

Since tax is wrapped up in the price of goods and services they are imposed on all people (i.e rich, poor, young, old etc.). So, indirect taxes have wider scope than direct taxes.

3. Economical

These taxes are easy to collect. It takes less effort, less time and less cost to collect tax. So, indirect taxes are economical in nature.
advantages indirect taxes

4. Flexibility

Indirect taxes are more flexible than direct taxes. Tax rates can be easily changed by the authority as per the nation's requirement.

     Also Read: 

5. No Tax Evasion

As we know that taxes are included in the purchase price of the product, there is no chance of tax evasion.

6. Limits Harmful Consumption

Harmful products such as tobacco, alcohol and intoxicants are heavily taxed by the state. It helps to limit the consumption of such products.
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Disadvantages Of Direct Taxes

Accounting , Business
Major drawbacks or disadvantages of direct tax can be pointed out as follows:

1. Chance Of Evasion

There is high chance of tax evasion. It is very easy for the people to evade tax by submitting false income report. Corrupted administration also plays significant role in tax evasion.

2. Inconvenience

It is inconvenient for the taxpayer to follow different process and filling different forms to pay tax. It is also inconvenient to make proper record of payment.

3. Discourage Investment

Higher tax rate reduce the saving capacity of the people. Low saving affects investment capacity. So, direct taxes adversely affect the capital formation.

              disadvantages direct taxes

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4. Reduce Motivation

High tax rate demotivates people to work hard and make more money. It hampers their ability and effectiveness at work.

5. Discourage Entrepreneurs

Entrepreneurs are discouraged to commence business because of direct taxes. It negatively impacts nation's business environment. 
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Advantages Of Direct Taxes

Accounting , Business
Merits or advantages of direct tax can be expressed as follows:

1. Simple To Estimate

One notable advantage of direct tax is its simplicity. Direct taxes are very simple to estimate and easy to understand. Tax amount can be calculated without any complication.

2. Ensures Fairness

Fairness is another benefit of direct taxes. Higher tax rate is imposed for high income groups and lower for lower income people. So, it ensures fairness, equality and justice according to the level of income.

3. Transparency/Certainty

Direct taxes are transparent in nature. Both tax payers and receivers (government authority) are certain about the rate and amount of tax to be paid.
advantages direct taxes

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4. Less Costly

Generally taxes are collected at the source which saves both time and money. So, direct taxes are economical in nature.


5. Elastic 

Tax rates can be increased or decreased by the government as per the need of the country. So, direct taxes are elastic in nature.

6. Revenue For Government

Direct tax is a major source of government revenue. It is highly productive and very important for economic development. 
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Advantages Of Cost Volume Profit Analysis

Accounting , Business
Main benefits or advantages of cost volume profit (CVP) analysis can be studied as follows:

1. Decision Making

CVP analysis helps the management to make sound decision regarding distribution channel, make or buy decision, pricing, production method etc. by showing the relationship between cost, volume and profit.

2. Fair Pricing

Cost volume profit (CVP) analysis helps to fix optimum price of the product and services by comparing the competitor's product price. 

3. Determination Of Break Even Point

CVP analysis helps to calculate the break even point at which total revenues are equal to total costs.

4. Determination Of Margin Of Safety

CVP analysis helps to determine the margin of safety (position above the break even point).

5. Profit Planning

CVP analysis assists management in profit planning by estimating the profit at different output levels.
advantages of cpv analysis
6. Cost Control

CVP analysis is an effective tool to control unnecessary production and distribution costs.

7. Budgeting

Management can prepare budget on the basis of CVP analysis because it provides relevant data and information about cost, volume and profit.

8. Product Selection

Cost volume profit analysis helps to select the most profitable product by analyzing the relationship between revenues and costs.
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Advantages And Disadvantages Of Absorption Costing

Accounting , Business
Benefits Or Advantages Of Absorption Costing System

The main advantages of absorption costing system can be studied as follows:

1. Fair Pricing

Absorption costing covers both variable costs and fixed costs while determining the cost of unit of a product. So, it is suitable method to determine the fair price of product and services.

2. Importance Of Fixed Cost

Absorption costing system  recognizes the importance of fixed manufacturing costs and treats them as product cost.

3. Easy To Operate

Absorption costing system of product costing is simple method which can be installed and operate easily without any complication. It consumes less time and costs to operate.

4. Accurate Profitability

Absorption costing system helps to determine accurate profitability in the case of seasonal production and sales.

         Also Read: 

5. No Separation Of Costs

There is no need to separate costs into variable costs and fixed costs in this system.
advantages disadvantages absorption costing

6. Preparing Final Accounts

Absorption costing helps to prepare income statement and final account of the company.

Drawbacks Or Disadvantages Of Absorption Costing

Main disadvantages of absorption costing system can be expressed as follows:

1. Not Suitable For Decision Making

Absorption costing does not provide detailed information about fixed and variable costs. Therefore, it may not be useful for management for planning and decision making purpose.

2. Not Suitable For Flexible Budget

Flexible budget cannot be prepared with the help of absorption costing because it does not make distinction between fixed and variable costs.

3. Artificial Profitability

In absorption costing, more profit can be shown by moving fixed manufacturing costs from income statement. It misleads the users.
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Disadvantages Of Inadequate Working Capital

Business , Finance
Major drawbacks or disadvantages of inadequate working capital can be highlighted as follows:

1. Lack Of Solvency

Inadequate working capital creates problem for making payment of salary, wages and short-term liabilities of a firm. It weakens the solvency position of the company.

2. Liquidity Problem

A firm cannot maintain proper liquidity because of the shortage of working capital.

3. Opportunity Loss

A business firm may lose new opportunities due to insufficient amount of working capital. Business expansion is also impossible.

4. Damage Goodwill

A firm fails to meet its financial obligations due to inadequate working capital. It affects or damages the goodwill of the firm. 

5. Inefficiency

A firm cannot utilize its fixed assets and other production facilities effectively because of the shortage of fund. So, production process will be disturbed and leads to inefficiency.
disadvantages inadequate working capital
6. No Discount

It is impossible to purchase raw materials and other requirements in bulk quantity because of poor liquidity. So, opportunity of trade discount and cash discount cannot be availed.

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7. No Attraction Of Investors

A firm cannot attract investors and lenders due to poor liquidity and solvency position.

8. Low Rate Of Return

Due to inadequate amount of working capital, a firm cannot function properly. It leads to low rate of return on investment.
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Advantages Of Adequate Working Capital

Business , Finance
Main benefits or advantages of maintaining adequate level of working capital can be explained as follows:

1. Maintains Solvency

Adequate working capital ensures smooth operation of business activities without interruption. Because enough working capital strengthens the solvency position of the firm.

2. Maintains Goodwill

Maintaining adequate working capital facilitates prompt payment of short-term liabilities. Timely payment of raw materials, salary and other overheads helps to maintain the goodwill of the company.

3. Discount Facility

Bulk purchase of raw materials is possible because of sufficient working capital. Because of large volume purchase and prompt payment, the firm can avail of the discount facility.

4. Maintains Liquidity

Sufficient working helps to maintain proper liquidity in the business. 

5. Regular Supply

Regular supply of raw materials and accessories is possible due to adequate working capital. It ensures regular production without a break.
advantages adequate working capital


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6. Loan Facility

Adequate working capital helps the company to obtain loan from financial institutions. Banks and other financial institutions provide loan on the basis of solvency, liquidity and goodwill of the company.

7. Face Crisis

Maintaining adequate level of working capital helps the business firm to survive at the time of crisis and emergencies. 

8. Increase Efficiency

Sufficient working capital ensures smooth operation, maintains solvency and increases the goodwill. These factors create high morale which helps to increase efficiency of the firm.
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