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What are Final Accounts?

What are Final Accounts?
What are known as Final Accounts? Trading, profit & loss account and balance sheet, all these three together, are called as final accounts. Final result of trading is known through Profit and Loss Account. Financial position is reflected by Balance Sheet. These are, usually, prepared at the close of the year hence known as final accounts. They serve the ultimate purpose of keeping accounts. Their purpose is to investigate the consequence of various incomes and expenses during the year and the resulting profit or loss. 1. Trading and Profit and Loss A/c is prepared to find out Profit or Loss. 2. Balance Sheet is prepared to find out financial position of a  concern. Trading Account Trading refers buying and selling of goods. Trading A/c shows the result of buying and selling of goods. This account is prepared to find out the difference between the Selling prices and Cost price. Profit and Loss Account Trading account discloses Gross Profit or Gross Loss. Gross Profit is transferred to credit side of Profit and Loss A/c. Gross Loss is transferred to debit side of the Profit Loss Account. Thus Profit and Loss A/c is commenced. This Profit & Loss A/c reveals Net Profit or Net loss at a given time of accounting year. Trading Profit And Loss CMD from knoxbusiness Balance Sheet Trading A/c and Profit & Loss A/c reveals G.P. or G.L and N.P or N.L respectively; besides the Proprietor wants i. To know the total Assets invested in business ii. To know the Position of owner’s equity iii. To know the liabilities of business. Definition of Balance Sheet The Word ‘Balance Sheet’ is defined as “a Statement which sets out the Assets and Liabilities of a business firm and which serves to ascertain the financial position of the same on any particular date.” On the left hand side of this statement, the liabilities and capital are shown. On the right hand side, all the assets are shown. Therefore the two sides of the Balance sheet must always be equal. Capital arrives Assets exceeds the liabilities. BUY “ACCOUNTING CONVENTIONS AND CONCEPTS” OBJECTIVES OF BALANCE SHEET: 1. It shows accurate financial position of a firm. 2. It is a gist of various transactions at a given period. 3. It clearly indicates, whether the firm has sufficient assents to repay its liabilities. 4. The accuracy of final accounts is verified by this statement 5. It shows the profit or Loss arrived through Profit & Loss A/c. PREPARATION OF FINAL ACCOUNTS Preparation of final account is the last stage of the accounting cycle. The basic objective of every firm  maintaining the book of accounts is to find out the profit or loss in their business at the end of the year. Every businessman wishes to find out the financial position of his business firm as a whole during the particular period. In order to accomplish the objectives for the firm, it is essential to prepare final accounts which include Trading, Profit and Loss Account and Balance Sheet. It is mandatory that final accounts have to be prepared, every year, in every business. Trading and profit & loss accounts are prepared, after all the accounts have been completely written and trial balance is extracted. Before preparing final accounts, it becomes obligatory  to scritinize whether all the expenses and incomes for the year for which accounts are prepared have been duly provided for and included in the accounts. Form of Final Accounts: There is a standard format of final accounts only in the case of a limited company. There is no fixed prescribed format of financial accounts in the case of a proprietary concern and partnership...
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Solvency Ratio or Leverage Ratio

Solvency Ratio or Leverage Ratio
SOLVENCY OR LEVERAGE RATIOS Long-term solvency ratios analyze the long-term financial position of the organization. Bankers and creditors are interested in the liquidity of the firm, whereas shareholders, debenture holders and financial institutions are concerned with the long term prosperity of the firm. There are thus two aspects of the long-term solvency of a firm. Ability to repay the principal amount when due Regular payment of the interest.  The ratio is based on the relationship between borrowed funds and owner’s capital it is computed from the balance sheet, the second type is calculated from the profit and loss a/c.  The various solvency ratios are  Debt equity ratio Debt to total capital ratio Proprietary (Equity) ratio Fixed assets to net worth ratio Fixed assets to long term funds ratio Debt service (Interest coverage) ratio  1.  DEBT EQUITY RATIO OR EXTERNAL – INTERNAL EQUITY RATIO Debt equity ratio shows the relative claims of creditors (Outsiders) and owners (Interest) against the assets of the firm. The relationship between borrowed fund and capital is shown in debt-equity ratio. It can be calculated by dividing outsider funds (Debt) by shareholder funds (Equity)   Ebt equity ratio = Outsider Funds (Total Debts) /  Shareholder Funds or Equity (or) Long-term Debts / Shareholders funds  Shareholders fund = Preference capital + Equity capital + Reserves & Surplus – Goodwill & Preliminary expenses  Outsiders funds = Current liabilities + Debentures + Loans The ideal ratio is 2:1. High ratio means, the claim of creditors is greater than owners and vice-versa  2.  DEBT TO TOTAL CAPITAL RATIO Debt to total capital ratio =  Total Debts / Total Assets  3.  PROPRIETARY (EQUITY) RATIO This ratio indicates the proportion of total assets financed by owners.  It is calculated by dividing proprietor (Shareholder) funds by total assets. Proprietary (equity) ratio = Shareholder funds / Total Tangible assets The ideal ratio is 1:3. A ratio below 50% may be alarming for creditors, because they incur loss during winding up. 4.  FIXED ASSETS TO NET WORTH RATIO This ratio establishes the relationship between fixed assets and shareholder funds.  It is calculated by dividing fixed assets by shareholder funds. Fixed assets to net worth ratio =  Fixed Assets X 100 / Net Worth The shareholder funds include equity share capital, preference share capital, reserves and surplus including accumulated profits.  However fictitious assets like accumulated deferred expenses etc should be deducted from the total of these items to shareholder funds.  The shareholder funds so calculated are known as net worth of the business. 5.  FIXED ASSETS TO LONG TERM FUNDS RATIO Fixed assets to long term funds ratio establishes the relationship between fixed assets and long-term funds and is calculated by dividing fixed assets by long term funds. Fixed assets to long term funds ratio = Fixed Assets X 100 / Long-term Funds 6.  DEBT SERVICE (INTEREST COVERAGE) RATIO This shows the number of times the earnings of the firms are able to cover the fixed interest liability of the firm.  This ratio therefore is also known as Interest coverage or time interest earned ratio.  It is calculated by dividing the earnings before interest and tax (EBIT) by interest charges on loans. Debt Service Ratio = Earnings before interest and tax (EBIT) / Interest...
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Game Theory

Game Theory
Game theory and strategy What is Game Theory: Set of concepts designed for decision making in situations of competition and conflict under specified rules. The prisoner’s dilemma: The prisoner’s dilemma is a canonical example of a game, analyzed in game theory that explains why two individuals might not cooperate, even if it appears that it is in their best interest to do so; Albert W. Tucker formalized the game with prison sentence payoffs and gave it the “prisoner’s dilemma” name. To solve many practical problems that are encountered in economic, military or other disciplines, one has to deal with situations in which there are two or more conflicting parties striving for the same objective and the outcome of each action of one party depends solely on the opposite parties choice of a course of action. As we all know only one horse can win the race ultimately and the other parties only can prolong the race or see to that they make every possible move to delay the opponent’s success.  So, what’s this game theory all about? This is a special mathematical method that was evolved mainly to analyze conflict situations where the number of competitors is finite, each participant has a definite set of actions to choose and there is a conflict of interest between the competitors. So it helped the participants to reach a decision that would put them in the winning post. This theory has spilled its implications on business situations where success is the motto and conflict and competition the order of the day. Only the best among the best survive. Darwin’s theory, “Survival of the fittest” applies not only to biological organisms but also to business organizations which are also abuzz with activity. Chance Moves: Games like chess, checkers are played according to a definite set of rules laid down and these game patterns has inspired business persons to introduce strategies in business, where the concentration is mainly focused on the chance moves that defeats the opponent. Big business corporates mainly concentrate on the strengths and weaknesses of their competitors to have an edge over them. A real game is controlled and regulated by the statutory rules to be followed but a business game involves lot of killer instincts and intuitions combined with rational thinking and logic. Optimal Strategy: The first party always puts himself in the shoes of the other party and tries to perceive how the other party would react in a particular situation. Although the aim is to win, choosing the optimal strategy is what matters. It will at least keep you in bay. Precise solutions can be arrived at if you plan your game fittingly. The anticipation and thrill that is involved in a strategic game is matchless.  We witness a lot of firms imitating what the leader of the market does. The risk is borne solely by the firm introducing the change and the firm takes the major share of profit as it is the pioneer and if it loses the next strategic move is planned for. For a company with sound financial position, the chance move is worth giving a try, head or tail doesn’t matter. The stalkers are benefited by the waiting period during which they come to know of the pros and cons of the strategy employed by the leader. Games are played in the true spirit of sportsmanship, but a business faces cut throat competition. There is no space for any courtesy or liberal approach. If you are quick enough to pick the pulse of the people by gauging their preferences, analyzing the market conditions and employing timely strategies you will at least survive in...
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