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Module 1: Profit and loss statements

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XSIQ
*

Accounting - Classification

Classification

The benefits of classification may be linked to departmental Profit and
Loss statements. [1]They include:

* enables assigning of responsibility to department managers

* measures performance of particular departments

* helps recording - specialised journals save time and effort

* assists control - performance figures may be compared with budget
figures

* provides information for decision making

Benefits of classifying the balance sheet include:

* identifies relative liquidity [2]of assets

* shows assets in need of depreciation and illustrates carrying cost [3]
of assets

* assists calculation of working capital

The question as to the benefit of preparing accounting reports more
frequently than once a year has appeared in past papers. Reasons include:

* assists planning and control by enabling comparisons with budgeted
figures

* business can respond more readily to both favourable and unfavourable
trends in its operations

* to help in making of policy decisions; for example, a change in prices

* more effective monitoring of the performance of the business

The repairs department may be retained despite what appears to be a
relatively poor performance because:

* after sales service attracts customers to the business to buy bicycles

* people may buy bicycles if they discover their current bicycle is
beyond repair

* repairs take up a share of overhead expenses such as rent

* the resources for repairs may not be used profitably somewhere else in
the business

It may be inappropriate to allocate cleaning according to floor space
because:

* the difficulty in cleaning the respective floor space may differ

* cleaning may involve more than cleaning the floor

Contribution margin [4] is the difference between sales revenue and the
direct costs associated with earning that revenue.

Four items likely to be regarded as 'general expenses' may be chosen from:

* security

* accounting fees

* electricity

* telephone

* managers salary

* various finance expenses

* office expenses

The general journal entry would be:

Drawings
200

Cleaning

200

Correcting entry

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Links:
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[1] http://alison.com/#
[2] http://alison.com/#
[3] http://alison.com/#
[4] http://alison.com/#