Provision and Contingent Liability difference

Provision and Contingent Liability difference

Provision and contingent liabilities are quite different concept. Provision is liability of an estimated amount, where contingent liability totally depends on future event and may not be regarded as liability unless such event happens. Difference between contingent liability and provision has been explained below;

1.    Past Event

Provision depend on the past event (event has already occurred), where contingent liability may be based on the future event. Examples of past event sales made during year, purchased made during year.

2.    Reasonable Estimates

In case of provision a reliable or reasonable estimate can be made about the liability, where in case of contingent liability such estimate cannot be made. Reasonable estimates for provisions can be made on the bases of relevant historical data, or industry practices.

3.    Recognition

Provisions are recognized in books of account as liability, where contingent liabilities are not recognized in book of account, rather disclosed in financial statement. It is important to note that disclosure is included in the financial statements for user information only and does not affect the financial performance (profit) or financial position.

4.    Examples

Examples of provision are provision for bad debts, provision for warranty against sales made. Examples of contingent liabilities include an outcome of lawsuit filed against company for damages, an expected fine by the regulator of uncertain amount etc.

Gratuity and Provident Fund Difference

Gratuity and Provident Fund Difference

Provident fund and Gratuity is two different king of retirement benefit. In case of provident fund equal contribution is made by employees and employer, where in case of gratuity all contribution is made by employer. Difference between provident fund and Gratuity has been explained in terms of contribution, calculation formula, interest earned, fund management and loan facility.

1.    Contribution

In case of Provident fund equal contribution is made by the employer and employees, where in case of gratuity all contribution is made by the employer.

2.    Formula

Formula for calculating the retirement benefit for provident fund and gratuity has been given below;

Gratuity = Gross Salary Last Year x Number of Year Work

Provident fund = Employer Contribution + Employee Contribution + Interest

3.    Interest Earned

Provident fund is invested in bond or other securities and interest earned is distributed among the employees. Where in case of gratuity, there is no concept of interest sharing.

4.    Fund Management

Provident fund account or fund is managed by independent trust, because provident fund is regarded as employee money or fund, where gratuity is maintained by the company itself.

5.    Loan Facility

Employee can take loan from the provident fund account, where in case of gratuity this facility is not available. Gratuity is only payable in case of termination of service (voluntarily resign, retirement, forced termination)

Right and Bonus Share Difference

Right and Bonus Share Difference

Right issue is a method of raising new capital, where shares are offered to existing shareholder in proportion to their shareholding in the company. On other hand bonus issue is a dividend paid to the shareholder in shape of shares. Difference between right and bonus Shares has been explained below;

1.    Objective

Right share are issued to raise new equity or finance for the organization, where bonus shares are offered in lieu of dividend to avoid cash outflow of dividend. It means bonus share is an alternate to cash dividend and this option may be exercised by companies facing liquidity problems.

2.    Growth Opportunities

Right share may bring growth to the company, because right issue brings new finance to the company and such finance may be utilized in the growth activities. In case of bonus issue, there is no finance generated, therefore no growth opportunity is associated with bonus issue.

3.    Impact on Share Price

in case of right share declines of share price is lower than bonus issue, because right issue bring new finance to the company and such finance would generate more profit for the company, where in case of bonus issue there is no expectation for more profits, therefore share price are expected to fall more sharply in case of bonus issue.

4.    Impact of EPS

Bonus share will have great impact on earnings per share , because the same level of profit shall be shared by more profit , where in case of right share , such impact will be lower, because there would also be increase in the profit with new finance due to right issue.

Branch and Franchise Difference

Branch and Franchise Difference

Branch and franchise are two different concepts of sub offices of the companies. Branch is run by the company itself, where franchise is run by a third party on behalf of the company. The difference between branch and franchise has been explained below;

1.    Operation Responsibility

In case of branch, company is responsible to run the operation within branch, where in case of franchise the day to day operation is run by the third party. This third party is known as franchisee.

2.    Product & Services

In case of branch, product and services both relates to company, where in case of franchise services are offered by third party, where product relates to the company. For example there may be a franchise for a shoe company, where company shoes are sold by the third party (Franchisee).

3.    Financing & Investment

In branch all investment is made by the company, where in case of franchise the investment is made by franchisee in franchise office. The Franchisee shares some percentage of profit for its investment.

4.    Profit

in case of branch profit are not shared with other parties and all profit goes to company, where in case of franchise some profit goes to the franchises against its investment.

5.    Quality of Services

In case of branch quality is directly maintained by the company, where in case of franchise quality is monitored by the company. Franchise may be cancelled for non compliance with Quality rules.

6.    Employees & Staffing

in case of branch employee are directly hired by the company and draw salary from the company payroll, where in case of franchise employee are hired by franchises and such employee has no relation with company.

Interlocking and integrated System Difference

Interlocking and integrated System Difference

Under interlocking system a company maintains two set of accounts, such record is maintain to facilitate costing department for making different costing analyses, where in case of integrated accounting system only one set of account is maintained and same set used by finance and cost department.

1.    Resources & Cost

Interlocking system is more costly because two set of accounts are maintained. In fact such maintenance double the cost of book keeping .These cost include stationary cost, account department staff cost.

2.    Duplication of Work

In Interlocking system two set of record is maintained, and such maintenance requires duplicate records, such duplication can lead to many confusion within organization. It means interlocking system is more complex than integrated system.

3.    Analyses & Costing

Interlocking system was introduced to facilitate cost analyses and management support. Such system does not halt the financial reporting process. It means that interlocking system offer more detailed analyses of cost.

4.    Manual Concept

Interlocking system is manual book keeping concept and has no relevance in computerized environment, where integrated system is the only option. In computerized environment cost accountant and financial accountant can extract required reports.

5.    Complexity

Interlocking system is more complex in nature, because it is not easy to maintain and handle two set of accounts, where integrated system easy to manage & handle.

Loan and Debenture Difference

Loan and Debenture Difference

Loan and Debenture are two different type of debt financing facility available to the companies. The debenture can only be exercised by large companies having good credit rating. The difference between loan and debenture has been explained below

1.    Formal Agreement & Instrument

Loan is obtained through a formal agreement between financial institution and lender, while debenture is an instrument issued by the company to raise the finance.

2.    Determination of Interest Rate

In case of loan the rate of interest is determined by the financial institution, where in case of debenture the rate of interest is determined by the company issuing the debentures.

3.    Security

Loan can only be obtained against some security (pledge asset), where debenture may issued without any security. However, some companies also issue secured debenture (have charge on asset).

4.    Repayment of Debt

Loan is repaid in regular installment as per repayment schedule, where debenture is paid back on maturity.

5.    Trading

Debenture can be traded in debenture market; it means debenture can easily be transferred from one person to another person, where loan being specific agreement between financial institutions and company cannot be traded in the market and therefore cannot be transferred to another person.

Double and Single Entry System

Double and Single Entry System

Double entry system is based on the rules of debit and credit, where single entry system is not a proper system, rather an attempt by the small enterprise to maintain some record of their business. Difference between double entry and single entry system has been explained below;

1.    Standard Rules

Double entry use standard rules for recording the transactions, where single entry system is not rely a system and therefore does not have any standard rules. Under single entry system records are maintained as per understanding of businessman.

2.    Automatic Mistake Identification

With the help of Double entry system some of mistakes can be easily and automatically identified by the double entry system itself, however, this system does not provide ultimate guarantee of accuracy. In case of single entry system, automatic mistake identification does not exist.

3.    Cost

Double entry system is more costly than single entry system. There are numbers of cost associated with the double entry system like cost of finance manger, cost of stationary or cost of accounting software. Due to these costs, single entry system is preferred by the small businesses.

4.    Acceptability

Double entry system is the only system, which has acceptability and recognition all over the world. Single entry system does not have such recognition and acceptability. Therefore double entry system is followed by the companies all over the world.

5.    Financial Reporting

Accurate financial reports can only be prepared by the double entry system. It is not possible to prepare accurate financial reports with the help of single entry system, and report of single entry system cannot be relied, because single entry system by default does not support the preparation of accurate financial statements.

Directors and Shareholders

Directors and Shareholders

Directors and shareholders are holds two different offices in a company. Equity holders invest in business, where director runs the business for shareholder. It means director are employees or agents of shareholders.

1.    Roles & Responsibilities

Directors are responsible for making all major decision to run the business, where equity holder finances the business. It means director run the business on behalf of equity holders. Directors are expected to work in the best interest of equity holders.

2.    Remuneration & Dividend

Director draw salary against services provided to the company. Remuneration and other benefits are fixed in nature and agreed by director and equity holder by a formal contract (job Contract). Equity holder on other hand is entitled to receive divided, which is not fixed in nature.

3.    Appointment & Removal

Directors are appointed by the share holder, while shareholder becomes owner by buying shares. Similarly director can also be removed by the equity holder, while shareholder can leave ownership by selling shares.

4.    Objectives & Interests

Director are more interested in short term boost of profit for salary increment and bonuses, where equity holder are more interested in long term growth and stability, because there investment is at stake.

5.    Risk in Company

Director share lower risk in the company, because at maximum they can lose a job in case of liquidation and can get new job in another company, where risk of equity holder is high, because they can lose their investment.

Internal and External Audit

Internal and External Audit

Internal and external audit are two difference concepts, Internal audit is kind of management controlling function, where external audit is independent opinion over the accuracy of financial statements.

1.    Appointment & Removal

Internal auditor are appointed and removed by the management, where external auditor is appointed by shareholders or equity holders. External auditors are appointed in a shareholder meeting. Internal auditor can easily be removed by management, while external audit can be removed by shareholder with permission of regulator.

2.    Term of Office

Internal auditor term of office is determined by the management, and such term may vary organization to organization, while in case of external auditor, the term of office is not more than one financial year (However, auditor may be re appointed).

3.    Scope of Work

Internal audit scope of work is defined by the management and ordinarily comprise of checking the compliance of financial rules by the finance department, while external auditor scope is determined by external auditors themselves in accordance with the international auditing standards.

4.    Reporting

Internal audit report is addressed to management, where external audit report is addressed to shareholder. Internal audit report content varies organization to organization, where in case of external auditor a standard format and terminology are used.

5.    Independence

External auditor enjoys full independence during the performance of audit, where internal auditors are not fully independent of management. In fact internal auditor is reporting to management against management, and therefore internal auditors are not considered fully independent.

6.    Legal obligation

External audit is a legal obligation, where internal audit is optional. External audit is a legal obligation, because many stakeholders have stakes in corporate business and external audit helps these stakeholders to safeguard their interest.

7.    User of  Report

Internal audit report is only used by the management for taking appropriate control action for non compliance with rules, where external audit report is used by number of user for taking informed decisions.

Par Value and Market Value

Par Value and Market Value

Par value and market value of shares are two different concepts, company receives par value and issue shares at par value, then shares are traded in stock exchange at market value and these both concepts has been explained below in details.

1.    Issue Price

Shares are ordinarily issued at par value. It is important to note that sometime share is issue at below price i.e. discounted price (price lower that par value) and above price at premium price (above the par value).

2.    Price Determination

Par value is determined by the company in accordance of regulator guidelines (if any) and does not change during the life of company, where market price is determined by the market forces in stock exchange and changes regularly.

3.    Trading of Shares

Shares are traded in stock exchange at market price of shares, and par values of shares have no significance or role in the shares trading.

4.    Declaration of Dividend

Dividend is declared in relation to par value. If 20% dividend is declared and par value is 100 rupees, then it means that dividend declared is 20 $.

5.    Books of Accounts

Par value is used to record the transaction in books of account; market value has no role in the transaction recording of shares. The recording of transaction has been explained in detail in my other blog article.

6.    Limited Liability

Limited liability concept in case of companies is associated with par value paid by the equity holder, and limited liability does not calculated in relation to market value.