Accounting convention refers to principles/guidelines generally accepted in areas where clear guidelines are not available via accounting standards. So, an accounting convention is followed to record such transactions in the accounting system. It’s important to note that following these guidelines is not a legal requirement but a general expectation of the stakeholders. Hence, it should…

Performance guarantee means the contractor will ensure the fulfilment of contractual obligations. In other words, the contractor is responsible for complying with the terms and conditions mentioned in the contract. The contractor may be required to arrange a performance guarantee from the employer, insurance company, or bank. It’s a sign for the contract employer that…

Functional currency Functional currency refers to the currency of the primary economic environment. It’s a currency used to execute the business operations. For instance, business operations like selling goods, buying materials, paying expenses, collecting revenue, and other operations are executed using functional currency. In simple words, functional currency is a currency of business operations. Although…

Detailed explanation Monetary unit principle states business events must be measured in monetary terms and recorded in the accounting record. If the business cannot allocate monetary units for the specific event/transactions, it should not be recorded in the financial statement. For instance, your team motivation, leadership charisma, management expertise, customer experience, and service quality can…

Internal sources of finance refers to the process of raising finance from It’s important to note that all of these sources are internal. So, the business has more power to raise funds. Let’s discuss the above financing sources. Raising finance via business owners Raising finance via business owners is about adding share capital. It’s the…

Ex-factory price refers to the price charged by the seller at the factory gate. It’s the price the customer needs to pay for buying and taking the goods out of the factory. It does not include the cost of transportation, customs clearance, export duties, import duties, or any other cost related to goods. As the…

Controllable cost Controllable cost is the discretionary expense incurred by a business. As the name suggests, this expense can be controlled by avoiding additional features and related luxuries. For instance, the airline can avoid entertainment expenses by cutting refreshments for the passengers. Additional discretionary expenses include marketing, training, bonuses, refreshments, utilities, materials, etc. The manager’s…

Target costing refers to developing/manufacturing the specific product, keeping cost under a set threshold. This mechanism of production keeping cost under set boundaries /limits is called Target costing. It helps ensure the product is developed under the desired/target cost. It’s a smart costing technique that starts with market research and involves following steps. Steps of…

The throughput accounting ratio compares Throughput with factory costs. For this purpose, Throughput is calculated by deducting direct material cost from the sales/revenue, the business earns by selling this product. Let’s understand this ratio using the following example. Description Product-A Sales price (A) $20 Direct material cost (B) $10 Throughput per unit =(A-B) $10 Scarce…

Throughput accounting is a managerial accounting tool designed to optimize production plans so that profit is maximized. Profit is maximized by planning product mix so that it generates maximum output by least utilizing limited/scarce resources, which is based on the theory of constraint. Throughput accounting works when we have the the following 2 factors in…