Accounting Rate of Return

The accounting rate of return, also known as the return on investment, uses accounting information, as revealed by financial statements, to measure the profitability of an investment. That is the ration of the average after tax profit divided by the average investment. The average investment would be equal to half of the original investment if it were depreciated constantly. Alternatively, it can be found out by dividing the total of the investments book values after depreciation by the life of the project. Thus, is an average rate and can be determined by the following equation,

Accounting rate of return = Average income / Average investment

Acceptance rule

Accounting Rate of Return

As an accept or reject criterion, this method will accept all those projects whose It is higher than the minimum rate established by the management and reject those projects which have rate less than the minimum rate. This method would rank a project as number one if it has highest accounting rate of return and lowest rank would be assigned to the project with lowest accounting rate of return.

Evaluation of Accounting Rate of Return

That method may have some merits:

• Simplicity. That method is simple to understand and use.

• Accounting date. The accounting rate of return can be readily calculated from the accounting data; unlike in the net present value and internal rate of return methods, no adjustments are required to arrive at cash flows of the project.

• Accounting profitability. For this method rule incorporates the entire stream of income in calculating the projects profitability.

It is a method commonly understood by accountants, and frequently used as a performance measure. As a decision criterion, however, it has serious shortcomings.

• Cash flows ignored. It uses accounting profits, not cash flows, in appraising the projects. Accounting profits based on arbitrary assumptions and choices and also include not-cash items.

• Time value ignored. The averaging of income ignores the time value of money. In fact, this procedure gives more weight age to the distant receipts.

• Arbitrary cut off. The firm employing that rule uses an arbitrary cut-off yardstick. Generally, the yardstick is the firms current return on its assets (book-value). Because of this, the growth companies earnings very high rates on their existing assets may reject profitable projects with positive net present values and the less profitable companies may accept bad projects with negative net present values.

Accounting Rate of Return
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Non-Profit Organizations and In-Kind Contributions - Accounting

Organizations do not get cash donations only. Many times they get furniture, equipment and other items that are valuable, but are not in form of cash, check or credit cards funds. These types of donations are considered to be in-kind contributions. If an item is expensive, for example ,000 and over, a formal appraisal may be needed, not just for accounting purposes, but for taxes as well. Often enough donors help to pay for the appraisals because they want the deduction in their income tax returns.

Donated in-kind contributions are booked as expenses and revenues. The journal entry is:

Debit Equipment expense-In-kind 3,000

Non-Profit Organizations and In-Kind Contributions - Accounting

Credit Donations- In-kind 3,000

Donated in-kind contributions can also be booked as a debit to assets, in the case of items that can be capitalized, usually expensive things. Depending on the assets, they can be depreciated. The journal entry then would be:

Debit Asset- In-kind 10,000

Credit Donations- In-kind 10,000

The other type of in-kind contribution is related to donated services. Per accounting rules, only professional services can be recognized. For example, if volunteers work at special events as ushers and receptionists, their time is not recognized by accounting. However, if a doctor provides services or a lawyer volunteer his time with professional services, then the time is accounted for using a reasonable hourly rate. For example, a CPA may provide high level accounting services for free and an hourly rate of 0 would be reasonable. If an lawyer provides legal services usually billed at 0/hour, but charging the organization only / hour, the difference- 0- is considered in-kind. The journal entry to book this contribution for 10 hours will be:

Debit Legal expenses - In-kind 1,700

Credit Donations- In-kind 1,700

In order to substantiate in-kind services, the professional could send the non-profit a note with his time spent. The organizations could send the professional a thank you note acknowledging his donated time. Note that services donated are not deductible in income tax returns.

Non-Profit Organizations and In-Kind Contributions - Accounting
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Branches of Accounting, Uses of Accounting and Limitations of Financial Accounting

Accounting vs. Book-keepingBook-keeping concerns itself with the recording (correctly and in a set of books) of those transactions that result in the transfer of money or money's worth. Whereas accounting is comprehensive in perspective. It extends to classifying, summarizing, presenting and even analyzing accounting information .

Accounting vs. Accountancy

Body of knowledge (consisting of principles, postulates, assumptions, conventions, concepts and rules) governing the science of recording classifying and analyzing financial transactions is accounting. Whereas the practice and art of the science of accounting is termed as accountancy.To meet the ever increasing demands made on accounting by different interested parties (such as owners, management, creditors, taxation authorities etc.) the various branches have come into existence. Financial AccountingThe object of financial accounting is to ascertain the result (profit or loss) of business operations during the particular period and to state the financial position (Balance Sheet) as on a date at the end of the period.

Branches of Accounting, Uses of Accounting and Limitations of Financial Accounting

Cost Accounting

The object of cost accounting is to find out the cost of goods produced or services rendered by a business. It also helps the business in controlling the costs by indicating avoidable losses and wastes.Management AccountingThe object of management accounting is to supply relevant information at appropriate time to the management to enable it to take decision and effect control.In this web primer, we are concerned only with financial accounting. The objects of financial accounting as stated above can be achieved only by recording the financial transactions in a systematic manner according to a set of principles. The recorded information has to be classified, analyzed and presented in a manner in which business results and financial position can be ascertained.

Uses of Accounting

Accounting plays important and useful role by developing the information for providing answers to many questions faced by the users of accounting information.

(1) How good or bad is the financial condition of the business?

(2) Has the business activity resulted in a profit or loss?

(3) How well the different departments of the business have performed in the past?

(4) Which activities or products have been profitable?

(5) Out of the existing products which should be discontinued and the production of which commodities should be increased.

(6) Whether to buy a component from the market or to manufacture the same?

(7) Whether the cost of production is reasonable or excessive?

(8) What has been the impact of existing policies on the profitability of the business?

(9) What are the likely results of new policy decisions on future earning capacity of the business?

(10) In the light of past performance of the business how it should plan for future to ensure desired results ?

Above mentioned are few examples of the types of questions faced by the users of accounting information. These can be satisfactorily answered with the help of suitable and necessary information provided by accounting.

Besides, accounting is also useful in the following respects :-

(1) Increased volume of business results in large number of transactions and no businessman can remember everything. Accounting records obviate the necessity of remembering various transactions.

(2) Accounting record, prepared on the basis of uniform practices, will enable a business to compare results of one period with another period.

(3) Taxation authorities (both income tax and sales tax) are likely to believe the facts contained in the set of accounting books if maintained according to generally accepted accounting principles.

(4) Cocooning records, backed up by proper and authenticated vouchers are good evidence in a court of law.

(5) If a business is to be sold as a going concern then the values of different assets as shown by the balance sheet helps in bargaining proper price for the business.

Limitations of Financial Accounting

Advantages of accounting discussed in this section do not suggest that accounting is free from limitations.

Following are the limitations:

Financial accounting permits alternative treatmentsAccounting is based on concepts and it follows " generally accepted principles" but there exist more than one principle for the treatment of any one item. This permits alternative treatments with in the framework of generally accepted principles. For example, the closing stock of a business may be valued by anyone of the following methods: FIFO (First-in- First-out), LIFO (Last-in-First-out), Average Price, Standard Price etc., but the results are not comparable.

Financial accounting does not provide timely information

It is not a limitation when high powered software application like HiTech Financial Accenting are used to keep online and concurrent accounts where the balance sheet is made available almost instantaneously. However, manual accounting does have this shortcoming.

Financial accounting is designed to supply information in the form of statements (Balance Sheet and Profit and Loss Account) for a period normally one year. So the information is, at best, of historical interest and only 'post-mortem' analysis of the past can be conducted. The business requires timely information at frequent intervals to enable the management to plan and take corrective action. For example, if a business has budgeted that during the current year sales should be $ 12,00,000 then it requires information whether the sales in the first month of the year amounted to $ 10,00,000 or less or more?

Traditionally, financial accounting is not supposed to supply information at shorter interval less than one year. With the advent of computerized accounting now a software like HiTech Financial Accounting displays monthly profit and loss account and balance sheet to overcome this limitation. Financial accounting is influenced by personal judgments'Convention of objectivity' is respected in accounting but to record certain events estimates have to be made which requires personal judgment. It is very difficult to expect accuracy in future estimates and objectivity suffers. For example, in order to determine the amount of depreciation to be charged every year for the use of fixed asset it is required estimation and the income disclosed by accounting is not authoritative but 'approximation'.

Financial accounting ignores important non-monetary information

Financial accounting does not consider those transactions of non- monetary in nature. For example, extent of competition faced by the business, technical innovations possessed by the business, loyalty and efficiency of the employees; changes in the value of money etc. are the important matters in which management of the business is highly interested but accounting is not tailored to take note of such matters. Thus any user of financial information is, naturally, deprived of vital information which is of non-monetary character. In modern times a good accounting software with MIS and CRM can be most useful to overcome this limitation partially.

Financial Accounting does not provide detailed analysis

The information supplied by the financial accounting is in reality aggregates of the financial transactions during the course of the year. Of course, it enables to study the overall results of the business the information is required regarding the cost, revenue and profit of each product but financial accounting does not provide such detailed information product- wise. For example, if business has earned a total profit of say, $ 5,00,000 during the accounting year and it sells three products namely petrol. diesel and mobile oil and wants to know profit earned by each product Financial accounting is not likely to help him unless he uses a computerized accounting system capable of handling such complex queries. Many reports in a computer accounting software like HiTech Financial Accounting which are explained with graphs and customized reports as per need of the business overcome this limitation.

Financial Accounting does not disclose the present value of the business

In financial accounting the position of the business as on a particular date is shown by a statement known as 'Balance Sheet'. In Balance Sheet the assets are shown on the basis of "Continuing Entity Concept. Thus it is presumed that business has relatively longer life and will continue to exist indefinitely, hence the asset values are 'going concern values.' The 'realized value' of each asset if sold to-day can't be known by studying the balance sheet.

Branches of Accounting, Uses of Accounting and Limitations of Financial Accounting
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The author is an engineering graduate, B.E.(Hons), and is managing his own software development firm, HiTech Computer Services, that mainly deals in accounting, billing and inventory control software for traders, industries, business houses, hotels, hospitals, medical stores, newspapers, magazines, petrol pumps, automobile dealers, commodity brokers and other business segments, website and web application development for business. The software are available both for intranet and internet. These software are available for download from the website:

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Financial Accounting and Management Accounting - An Overview

This article deals with a brief overview of some of the differences between financial accounting and management accounting systems. But at first let us understand what accounting is.

What is accounting? Accounting may be defined as a system of collecting, summerising, analysing, and reporting in financial terms, information about a business organisation. The business accounting as understood today, comprises of, financial accounting, and management accounting. These two parts of the business system have something in common and there are differences as well.

As a part of the accounting system of business enterprises, these two differ from each other in many respects.

Financial Accounting and Management Accounting - An Overview

The first difference is in its structure or formats of its presentation of information. Financial accounting has a single unified structure of presentation, which means, that the information relating to enterprise business system is presented more or less on a uniform basis. The end products of financial accounting are its three basic financial statements, and these are:

- The balance sheet.

- The profit and loss account/income statement.

- The statement of changes in financial position.

The balance sheet presents the financial position of an organisation at any point of time. The profit and loss statement would contain the organisation's financial performance over a specified period of time, which is usually one year. The inflow and outflow of financial resources of an organisation during a period of time is reported in the statement of changes.

The financial statements prepared are based upon an equation or model, which implies, that all organisations present their financial statements on basis of a uniform structure. This would mean that financial accounting has a unified structure.

Primarily, financial statements are usually meant for people outside the organisation, such as, shareholders, creditors, government, the general public, and like others. These people also get such reports from other organisations, and to maintain uniformity in these statements, financial accounting system uses a unified structure system.

On the other hand, management accounting is mainly concerned with the in-house management. Since the accounting statements are used internally, it varies in structure from organisation to organisation, depending upon the circumstances and requirements of individual use. Therefore, management accounting is tailored to meet the needs of the management of the particular organisation.

The next difference is in the generally accepted accounting principles. Financial accounting is prepared in accordance with the Generally Accepted Accounting Principles, which in short is known as GAAP. Preparation of financial statements following GAAP ensures that the account presentations have been prepared on basis of a norm, as per the general guidelines issued by law.

On the other hand, management accounting is an in-house requirement, and is for the exclusive use of the management of the organisation. These management accounting statements are never made available to the outsiders, and hence could be formulated in the manner as wanted by the in-house management.

The third difference between financial accounting and management accounting is the statutory requirement of preparation of accounts. As discussed above, financial statements are prepared solely for the people outside the organisation, who have interests in the business operation of the organisation. There are shareholders, who would use the information contained in the financial statements, to decide whether or not to invest in the organisation. By law it is mandatory to prepare such statements, and it is a statutory obligation. In fact, the company law not only makes it mandatory to prepare such accounts, it also has laid down the structures, based on which such financial statements need to be prepared.

The fourth difference is the reflection of historical accounts. As mentioned above, there are three types of financial accounting statements that are prepared. Within these three, while the balance sheet and the profit and loss account, report the financial position on a particular date, and the results of operation of the organisation during a specific period of time respectively, the statement of changes of the financial position reports the inflow and outflow of resources during a particular period of time. Therefore, financial statements record historical data. On the other hand, management accounting does not record any financial history of the organisation.

The fourth difference relates to segment reporting. Financial accounting pertains to the business as a whole, though some organisations segment such accounting for its different operating centres. But, as and when the financial statements are presented, it shows the business as a whole. Contrary to this, the management accounting system may present statements in segmented fashion.

Finally, the financial accounting and management accounting differs in respect of their ultimate objectives. Financial accounting is prepared specifically for external reporting, where-as, management accounts are solely for in-house use.

In this brief presentation, it has become quite clear how financial accounting differs with management account preparation. Both of the accounting systems are vital to any business scenario, and are mandatory requirements in a corporate environment.

Financial Accounting and Management Accounting - An Overview
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Generally Accepted Accounting Principals - A Primer

Accountants are the keepers of the standards. They are the ones who make sure that when we look at a financial statement, we can be reasonably that it was built using sound accounting practices and that it is comparable to other audited financial statements for other companies.

That sounds like a daunting task, but never fear. The accounting professional is in business to help you through all this.

The accounting profession is self-regulated. They decide the most appropriate way to record company activity on the financial books of record. They do this through an august board of seasoned professionals, the Accounting Practices Board of the American Institute of Certified Public Accountants (AICPA). This group defines what is known as "Generally Accepted Accounting Principals" or GAAP, which all public accountants must adhere to on behalf of all their clients.

Generally Accepted Accounting Principals - A Primer

The process used to introduce new GAAP or change old GAAP is beyond the scope of this paper, but it is a lengthy process with plenty of review opportunities for all CPAs and business people.

THE PURPOSE OF GAAP

The main purpose of having GAAP is to assure consistency in accounting practices, not only within a company, but across all regulated companies. The SEC requires all publicly held companies to be audited at least annually by a Certified Public Accountant (CPA). The CPA assures the stockholders that they can count on the financial information from the company, because it is in compliance with GAAP.

By preparing all financial information according to GAAP,

o Management can depend on the records and make course corrections for their individual departments or the company as a whole for the betterment of the company.

o Investors and lenders can make sound decisions based on the financial records of the company.

o Stockholders and prospective stockholders get an accurate picture of the company's financial health.

o Stock can be valued fairly on the market

o Deceptive, unfair and even criminal practices are minimized.

PRIMARY PRINCIPLES

The following are some of the primary principles upon which GAAP is built. This is, by no means, a complete description of GAAP, which is very detailed and takes much study to become expert at, but it shows the abiding purpose behind all that detail.

1. Historical Cost Principle: In general, the value of a company's assets is the original cost of those assets less suitable depreciation or amortization. This keeps companies from stating their assets at market value, which is not only difficult to ascertain, but very subjective in nature. Historical cost provides the actual cost which is very objective.

2. Revenue Recognition Principal: This simply states that revenue is recognized when it is earned, which may be a different time than it is received. For example, if your company provides a service at the end of December, but you customer doesn't pay you until January of the following year, your December revenue total will include that amount. January will not, even though that is the month in which you deposited the payment.

3. Full Disclosure Principle: Any information, whether or not strictly financial, that is relevant to the business and may have a future impact, must be disclosed. All transactions must be posted, of course. But even further, this principle provides for disclosure of contingencies. For example, if your company is being sued, the lawsuit must be analyzed for expected chance of loss. This contingency must be disclosed in a footnote of the financial statements. This is to prevent a loan officer or investor from not knowing this possibly impacting information when making decisions regarding investments in or loans to the company.

4. Matching Principle: Put simply, revenue must be matched to the expenses that helped to create it. This is why you have accruals and deferrals. The expenses associated with earning revenue for this period must also appear in this period.

GAAP ASSUMPTIONS

GAAP assumes the following:

1. Going Concern Assumption: The company or entity is a "going concern" and is not likely to end operations in the current year. It is expected to remain in business for the foreseeable future. Any exceptions to this assumption must be disclosed.

2. Economic Entity Assumption: The company is an independent entity and is separate from it's owners.

3. Monetary Unit Assumption: The currency used to measure the entity's financial performance is stable.

4. Periodic Reporting Assumption: Business operations are reported on a regular basis, usually annually. The fiscal year doesn't have to be the same as the calendar year. This is usually set according to the business cycle for the particular company.

Using Generally Accepted Accounting Principles is necessary for all business entities. But you needn't become a GAAP expert yourself. Hire a good accountant. A CPA may be necessary if your company is publicly held, or for loan or business venture requirements.

Generally Accepted Accounting Principals - A Primer
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Your Independent guide to Accounting

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Revenue Accounting

Revenue accounting is the process of receiving, organizing and recording payments and invoicing, recording, tracking, and collecting loans and other types of debt receivable on customer accounts. Revenue accounting provides essential tools for determining and keeping track of the revenue generated.

In business, revenue means the income that a firm actually receives from its activities, especially from sales of products and / or services to customers. Consistent revenue growth is essential for a firm to attract investors to its publicly traded stock. However, revenue is less important than profit to investors. The word 'top line' is also used to represent the term 'revenue,' because in a company's profit and loss account, revenue is usually placed at the top, and all other costs and expenses below that.

'Revenue recognition' is one the four major principles listed in the US generally accepted accounting principles (GAAP). The other three include the 'historical cost principle,' 'matching principle' and the 'full disclosure principle.'

Revenue Accounting

Data capture, preparation, accounting, auditing, reconciliation, management reporting, and interline billing are the main processes involved in revenue accounting. Airline revenue accounting system is a good example. Its objective is to provide scheduled passenger airlines with a computerized solution to cater to the needs of passenger revenue accounting departments.

Revenue accounting has now grown more complex and auditors are now examining financial records in finer details. Unfortunately, many accounting systems do not handle complex revenue processes well because they are designed for simple revenue processes. You can automate revenue accounting by using software packages. They help you mange multiple business models, corporate entities, and currencies.

Revenue Accounting
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Accounting provides detailed information on Accounting, Accounting Software, Accounting Jobs, Accounting Services and more. Accounting is affiliated with Certified Public Accountant.

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What is Accounting Information System?

Accounting information system is a system of records, usually computer based, which combines accounting principles and concepts with the benefits of an information system and which is used to analyze and record business transactions for the purpose to prepare financial statements and provide accounting data to its users. Some accounting information systems are still manual, i.e. accounting records are made with a pen, paper and manual entries into accounting books.

How are Such Systems Used?
These systems can be customized to meet the needs of a business. For example, information technology professionals responsible for business processes and information technology professionals responsible for the accounting information system can work together to develop and implement such a system so that it automatically gets information from other sources already in use by the business. Also, the systems can be set up to feature certain functions that are important to the business and eliminate functions minor to the business.  Information can be automatically fed, or manually fed into a business accounting information system at whatever pace and however often it is necessary.

What are the Benefits of Using Accounting Information System?
Businesses use accounting information systems to make their accounting activities easier, quicker, and more accurate, since accounting records are analyzed and financial statements are prepared within the system, which allows to safe time of employees and avoid mistakes.  Since many accounting information systems are equipped with error-reducing mechanisms and gather information regarding transactions electronically and automatically, data entry and computing errors are rare. Also, as mentioned above, since such systems are often automatically populated with transaction information, many accounting processes are less cumbersome and time-consuming when using such system.

What is Accounting Information System?

Of course implementation of such system requires investment and time to be spent on the implementation, however future benefits are much higher that the expenses incurred. Also to consider whether business needs accounting information system and what kind of system is required thorough analysis of business and accounting processes has to be made to determine precise requirements.

What is Accounting Information System?
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List Of Top Accounting Software For Your Business

Simply put, accounting is the lifeline of a business. Accounting deals with summarizing, analyzing and reporting the financial data and information about a business. An accounting software records and processes the accounting transactions of a business within its functional modules. Financial statements consisting of the balance sheet, profit and loss account, and statement of changes in financial position can be easily prepared with an accounting software.

An accounting software is all about the various functional modules that it has. Some of them are- General ledger which takes care of the company's financial dealings; Accounts Payable where the company enters its bills and pays the money it owes; Accounts Receivable where money received is entered.

The different categories or types of accounting software are as follows:

List Of Top Accounting Software For Your Business

a) Small business/personal accounting software which are mainly meant for home users. They are simple and inexpensive with simple functioning such as management of budgets.

b) Low end accounting software are for small business markets that are capable of serving a single national market. Such software are characterized by 'single entry' products.

c) Mid market accounting software are for companies with large businesses. These software are capable of serving the needs of multiple national accountancy standards and facilitate accounting in multiple currencies.

d) High end accounting software are complex and expensive business accounting software that are also known as Enterprise Resource Planning or ERP software.

However, you have to keep certain things in mind before buying an accounting software, like the prices of the software, its different features, its after-sales support and alike. Most of the accounting software include all the important accounting modules. The more specialized features a software has, the more expensive it becomes. Your software features must be compatible with your business. Also, the after-sales support is important like FAQ package, local service center and others.

There are a lot of top accounting software available in every category. So, it is not easy to select the best ones. Below are top five accounting software in every category.

A. Small business/personal accounting software:

1.ePeachtree (Best Software)

2.MYOB Plus for Windows (MYOB Software)

3.Peachtree Complete Accounting (Best Software)

4.QuickBooks Online (Intuit)

5.Small Business Manager (Microsoft)

B. Low-End Accounting Software:

1.BusinessVision 32 (Best Software)

2.MAS 90 & MAS 200 (Best Software)

3.QuickBooks Pro 2003 (Intuit)

4.ACCPAC Pro Series (ACCPAC International)

5.Vision Point 2000 (Best Software)

C. Middle-Market Accounting Software:

1.ACCPAC Advantage Series Corporate Edition (Best Software)

2.Great Plains (Microsoft) MAS 90 & MAS 200 (Best Software)

3.Navision (Microsoft)

4.SouthWare Excellence Series (SouthWare)

5.SYSPRO (SysproUSA)

D. High-end accounting ERP Market:

1.Axapta (Microsoft Software)

2.e-Business Suite (Oracle)

3.MAS 500 (Best Software)

4.Solomon (Microsoft)

5.ACCPAC Advantage Series Enterprise Edition (Best Software)

In compiling the above list, a variety of factors such as feedbacks from customers, scalability of the software, and after-sales support are used. Also, the different attributes for different categories have been considered like for ERP software, attributes such as manufacturing solution, supply chain solution and database solution. The above compilation may not be all inclusive and some people might choose to differ with it but it is almost near to perfect list.

List Of Top Accounting Software For Your Business
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