Market penetration is a pricing strategy in which businesses lower their product/service price to enter/penetrate the market. This strategy is usually adopted to enter a new market or tackle competition. Adopting this strategy can reduce profitability, but lower prices are expected to increase market share. Further, the business may need to compromise on per-unit profit,…

Recurring expenses are the ones repeated from time to time. These are the forecasted expenses/cash outflows reflected in the budget. On the other hand, non-recurring expenses are one-time or in-frequent expenses (may not be in the budget), which may be challenging to predict. Please note that the only difference between recurring and non-recurring expenses is…

Financial gearing measures the proportion of debt compared to equity. It’s a tool for determining whether business operations are financed by debt or equity. So, if a large proportion of the business finance comes via debt, the business is considered financially geared, and vice versa. It’s important to note that higher financial gearing drives higher…

Operational gearing seeks to measure the proportion of fixed cost to total operating cost. If the proportion of fixed cost is higher, it signals the business is operationally geared, which is not considered the desired cost structure from a financial performance perspective. Why higher operational gearing is not desirable? Increased business risk—The higher proportion of…

Drawings in accounting refers to funds/money taken by the owner out of the business. This can be taking funds out of business or incurring personal expenses using business resources. It’s important to note that transactions with the owner are recorded in the equity section. Whether funds are deposited or taken out, all transactions with the…

Service rendered means the intangible value provided to customers against a sales invoice. Service sector businesses earn revenue by rendering/providing services to their customers. This term is generally associated with services rendered/provided but not billed to customers. So, the accountant obtains details related to services rendered and sends invoices/bills by copying the details for the…

Long-term deposit is expected to remain in the business financial statement for a longer time. From an accounting perspective, two events require accounting treatment for the long-term deposits, which include recording and disposing of long-term deposits from accounting books.

Accrued wages refer to compensation that remains payable at the end of the accounting period. The labor has been worked but was not paid for it. Hence, the business needs to show this expense in its accounting books to calculate accurate profit/loss for the accounting period. The accrued wages might include salaries, bonuses, commissions, paid…

Retained earnings refer to income/profit carried forward from previous accounting periods. This balance reflects how much the business has earned since its inception (after making dividends/payout) and the current balance attributable to the business owners. Accumulated losses are losses carried forward from previous accounting periods same as retained earnings. This balance reflects the amount the…

Prudence concept means the accountant needs to be pessimistic when showing business financial performance. It’s about being open-minded when recording liability/expenses but critical when recording assets/revenue. This helps ensure adequate financial performance is presented to the business stakeholders.   In other words, the business must be conservative when estimating financial performance. The estimates should be…