Team Sponsorship: Advantages and Disadvantages
In the previous articles, we have already come across the concept of team sponsorship. We have seen how teams can sell different types of sponsorships in order to raise money. This definitely ends up increasing the cash flow as well as the return on investment for the team. It also generally provides a positive return […]
The Financial Independence Retire Early (FIRE) Movement
In the previous article, we learned about financial freedom or financial independence. However, in the traditional financial planning world, financial freedom was only considered to be a goal that is to be reached towards the end of one’s career. The general opinion was that financial freedom has to be reached when a person has attained […]
Working Capital to Sales Ratio – Meaning, Formula, Assumptions and Interpretation
Formula Working Capital to Sales Ratio = Working Capital / Sales Meaning Stating the working capital as an absolute figure makes little sense. Consider two companies, both having the same working capital of USD 100. While one company uses this working capital to generate sales of USD 500, the other uses the same amount as […]
Stock Valuation – The Discounted Cash Flow Approach in Detail
In the past article we have seen how Discounted Cash Flow (DCF) is the most appropriate method of stock valuation because it is rational and objective. Now, it is time we have a look at the details of this model. Present Value of Expected Future Cash Flows The basic of this model seems to be […]
Precedent Transaction Analysis
Investment bankers use several different types of methodologies while arriving at the valuation of a company. One of the most commonly used analysis is called precedent transaction analysis. What is Precedent Transaction Analysis? Precedent transaction analysis is a relative valuation methodology, just like comparables analysis. This means that these methodologies do not derive the value […]
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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