Real-Time Liquidity – Meaning, Importance and Challenges
The liquidity management paradigm in the commercial banking industry has undergone a drastic change. At one time, liquidity management was driven by constraints such as cut-off times and end-of-day processing. However, with the passage of time, the industry has witnessed continuous technological advancement. The industry now has the infrastructure as well as the regulatory mechanism […]
Why Startup Companies are Staying Private?
Once upon a time, a successful IPO was considered to be a transition point for a startup company to be recognized as a full-fledged public company. The goal of every startup company was to finally go public on a reputed stock exchange. The only startup companies which did not want to go public were the […]
Finance Functions – Investment, Financial, Dividend and Liquidity Decisions
The following explanation will help in understanding each finance function in detail Investment Decision One of the most important finance functions is to intelligently allocate capital to long term assets. This activity is also known as capital budgeting. It is important to allocate capital in those long term assets so as to get maximum yield […]
The Objectives of Reorganization
After a firm has filed for bankruptcy, the court provides relief against creditors and even further lawsuits. However, this is a temporary situation. According to the court, the next step for the business is to re-organize itself. Now, reorganization is a broad term that could mean different things to different people. There have been bankruptcy […]
Sources of DIP Financing
As mentioned in the previous article, the financing required by companies in order to keep their operations afloat after filing bankruptcy is known as DIP financing. With regard to DIP financing, there is a standard market for lenders who offer DIP financing. There are investment bankers who specialize in helping clients obtain DIP financing. However, […]
The double entry system of bookkeeping is said to have revolutionized growth in modern business. It is only because businesses are able to keep track of their growing scale of transactions efficiently that they grow further. This has been facilitated by a well designed, error preventing accounting system called the double entry system. Here are more details about this system:
In a double entry bookkeeping system there are two sides to every transaction. The sides are equal in magnitude i.e. the debits must always equal the credits.
When a firm grows beyond a certain size it has to use double entry system of accounting. This is both because it is mandated by law as well as because it is the most efficient system.
Double entry accounting system keeps a record of all major accounting transactions. These could be transactions outside the firm with third parties. Or they could be intra firm transactions where raw material has now been converted to Work In Progress (WIP). By making sure every record about credit as well as intra firm transactions is being accounted for, double entry system provides the most accurate record.
As the scale of a business grows, it becomes more prone to clerical errors. A clerk accounting for a large number of transactions all day is bound to make some mistakes. However, the double entry system does not allow these mistakes to have a cascading effect. This is because the system is constantly checking whether total debits equal total credits. When they are not, accountants know they are dealing with an error. They can then find out the error, correct it and then move forward. This saves a lot of time and builds incredible accuracy in the system.
However the double entry accounting system is not 100% error proof. There is a possibility that an entry may have been completely omitted or that there may have been compensating errors done while passing the entry.
Just like reconciliation, when a business grows, more and more responsibilities need to be entrusted to workers. Many times this leads to frauds by the workers as they embezzle cash and make use of resources for personal benefits. However, the double entry accounting system, when used correctly prevents such situations from arising. The system has strong inbuilt controls to avoid misuse of any resources.
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An Overview of Contracts and Why They are Important to Business and Society
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