Need for Good Relationship Between Finance and Accounts Fields

Finance and accounting are deeply interconnected business disciplines. While finance focuses on sourcing and managing corporate capital, accounting handles the systematic recording and tracking of funds secured or utilized. Because of this interdependence, seamless collaboration between both departments is essential.

The Finance Department relies heavily on data recorded by accounting personnel to prepare its financial statements and strategic reviews. Conversely, the accounting department utilizes the frameworks and guidelines established by financial managers to record transactions in a very concise format for the overall benefit of their company.

So, Finance and Accounts are the dual pillars of any organisation.

Better administration is possible through linking of Finance & Accounts
Finance and Accounts need to work together for better administration of the company. In many companies, the Finance Manager is entrusted with the responsibilities of both the Finance and Accounts departments, in which case he needs to be both an MBA and a Chartered Accountant. He will supervise or work alongside the Accounts Managers and Accounts Officers in controlling the Accounts and Finance wings. He will guide them in the proper maintenance of account books and records and in the preparation of the company's final accounts and financial statements. He can prescribe various formats for providing accurate information and work out the financial ratios and other inputs to the management for better governance of the business. So, a good relationship between Finance and Accounts is necessary.

Efficient management of Working Capital is possible
Finance professionals can manage the company's funds and working capital efficiently if they are closely linked to the accounts department. Because the accounts department maintains records of all expenses, it can provide the information in whatever form the finance manager may require, enabling finance professionals to gather accurate, concise information when preparing various statements for management. As a result, the finance department will be better positioned to determine how much funding each process and activity of the business requires and to procure the necessary working capital for the company in a timely manner.

Preparation of Budgets and Fund Flow Statements
The finance department needs to prepare budgets and Fund Flow/Cash Flow statements on a monthly and annual basis to better administer the Company's funds. To do this, they need to study past trends and determine the amount of expenditure incurred for each activity. This information is available with the accounts departments, as they keep the accounts. With proper cooperation from the accounts personnel, the finance department can prepare more accurate budgets and Fund Flow statements, thereby providing management with more accurate knowledge for governing the business.

Profit maximization and growth are possible
Improved relations and cooperation between Finance and Accounts lead to the growth of the company and profit maximization. By keeping accurate records, the accounts team can provide more reliable information at every stage of the business, across different time periods and under varying circumstances, as required by the finance team for their studies. Together, these departments can produce highly detailed and sensitive information for management to control expenses at every stage of the product, thereby identifying wastage and excessive spending. This helps remove bottlenecks in activities, leading to efficient production and growth of the company, yielding profits.

There can be many more areas where both accounts and finance need to cooperate in their functioning. For example, investments by the company or the issue of shares and debentures for the raising of working capital, valuation of company property for any purposes, or facing legal suits and litigations - all these areas require cooperation and a good relationship between the finance and accounts departments.

So, it is evident that a good relationship between finance and accounts is crucial for the financial health and growth of a company.

Finance Management and The Duties of a Finance Manager

Finance Management is a wider term that deals with accounting, economics, and financial matters. To manage finance is to have a clear vision of all financial matters involved in the job, to be able to foresee and plan things, to keep accounts and statistics of all figures involved in the project, to economise applications and resources, and to be able to create funds and project the results through budgets and forecasts. All these capabilities, in a nutshell, are known as financial management.

Finance Manager
A Finance Manager is one who is entrusted with the financial matters of an organisation. He guides the management in resolving all financial issues of the company, besides complying with all statutory & financial requirements of the Company Law Board.

Duties and Responsibilities of a Finance Manager

• A Finance Manager is the head of the finance department, including accounts, costing, and budgeting departments of a company.
• He is to oversee and guide the accounts officers of all the above wings and act as a coordinator and head of them.
• The Finance Manager is directly under the management of the company and is responsible for all functions of the wings under him.
• He is expected to ensure that all funds are utilised properly for the benefit of the company.
• He takes financial decisions in consultation with the management and board of directors of the company.
• He supervises all the accounts and gets the Balance Sheets and Profit and Loss Accounts prepared regularly by the due date.
• He will oversee internal auditing and is responsible for timely and proper auditing of accounts by Statutory auditors and AG auditors.
• He scrutinizes the monthly Cash Flow Statements and Budget Reports and provides the same to management.
• He is required to provide all managerial information statements and reports as and when required by the management.
• He guides the management in all financial matters and keeps them in touch with the progress of the company.

Important Functions of Finance Manager

Understanding Industry
A Finance Manager must, first of all, have full knowledge of the activities of the industry or business in which he is dealing. He should know the processes involved in the business and their financial implications on the business. Unless he is fully aware of the dealings, he will not be able to manage the financial activities of the business.

Procurement of Funds 
Financial management requires timely procurement and the creation of funds for business activities. He should be well-versed in the various options available for raising funds and should be able to make sound decisions regarding arranging funds either through the issue of shares and debentures or through loans from banks and financial institutions, etc.

Allocation of Funds with Prudence
The procured funds need to be wisely distributed among the various requirements of the business. He should be able to assess the importance and urgency of the situation among the various demands placed before him and allocate the funds carefully and wisely so that all requirements are met and the operations of the business are not affected by a lack of funds.

Profit Maximisation

Profit maximization is one of the most important functions of a finance manager. A finance manager should aim to earn or increase the business's profit. To this end, he needs to minimize production costs by identifying points of excessive expenditure and waste in the processes. Further, he should study the markets regarding supply and demand conditions and efficiently manage stocks and sales to meet the circumstances.

Capital Management
The Finance Manager should be well acquainted with the capital market, its swings, and the factors that cause them. He needs to stay in touch with the latest trends in stocks and manage the company's stocks and shares accordingly by engaging in buying and selling activities strategically. His decisions can affect the capital involved very sensitively. So he needs to be very careful and smart. Distribution of dividends may sometimes be shifted to investing in new stocks and shares instead of paying dividends, so as to increase share capital and thereby returns to the shareholders.

What is Depreciation and How to Calculate Depreciation?

Definition and Meaning of Depreciation

Depreciation means a decrease in value. As and when we use goods, they undergo wear and tear. Thereby, their value begins decreasing gradually. Even with the passage of time alone, they can lose their value, whether put to use or not. This notion of loss in value needs to be added to expenses in the accounting books to recover/adjust the loss from sales.

Definition:

Depreciation is the portion of value that an asset loses each year due to wear and tear, usage, or obsolescence, irrespective of whether it is used.

It is the process of transferring the cost of the asset into expenses over its lifespan.

Need for Charging Depreciation

• As capital is invested in procuring the assets, it needs to be recovered through the sale price of your product. But it is a known fact that whenever you sell assets, they fetch lower prices. 
• So, the depreciation value is to be added to the cost of production in determining the sale price of the product. By charging depreciation, you are recovering the value of the assets proportionately each year throughout their expected lifespan. If the asset is sold within its lifespan, the difference between the remaining value of the asset and its sale proceeds is treated as a loss on sale of assets. 
• The written-off cost serves as an offset needed while replacing the asset after the completion of its useful life so as to project a good picture. 

How to calculate Depreciation

Depreciation is normally calculated by spreading 95% of the asset value throughout its estimated lifespan.

5% of the asset value is kept in books as salvage value, which supposes that you can recover at least 5% of the asset when you sell it in any future years. No asset can be reduced to zero value, as it is generally considered that it has some value even after complete erosion.

There are different methods of calculating depreciation as per practices prevalent in different countries and even in different companies.

In this article, I am dealing with the calculation as per the Companies Act in India

Depreciation as per Companies Act 2014 (Schedule XIV of 1956)

As per Schedule XIV of the Indian Companies Act, 1956, depreciation is to be calculated in two methods:

Either the straight-line method or the written-down value method.

Under this Act, all assets are classified into different groups and rates are fixed based on the lifespan of each group. The major classifications of assets are as follows:

• Land
• Roads
• Buildings
• Furniture
• Office Equipments
• Vehicles ( Light or Heavy)
• Plant & Machinery

Besides the above groupings, there are many subgroupings under each category with some variations in the rates. 

Further, under Plant & Machinery, calculations are to be made based on their single shift, double shift or triple shift workings using their corresponding rates.

The rate charts are available at Schedule XIV of the Companies Act, 1956 (amended in 2014), which get updated as and when changes are made to it.

Straight Line Method of Depreciation

Under the straight-line method of depreciation, depreciation is calculated each accounting year at the same amount as per the Depreciation Rates Schedule of the Companies Act applicable for that Assessment Year. Each accounting year, the depreciation is calculated on the original gross value of the asset. As rates are fixed, the depreciation amount will be the same for each and every accounting year (provided the Gross value of the asset remains the same and if no additions are made during that year). If additions are made, the amount will increase pro rata.

While making depreciation calculations on additions made during the year, if the addition is made in the first half of the year, the full amount of depreciation will be charged for the whole year on that item.

If the addition is made in the second half of the year, only half the amount of the depreciation will be charged for that asset in that year.

Illustration for Depreciation Calculated at SLM method

Asset	Value	Rate %	Depreciation (2011-12)	Depreciation  (2012-13)	Depreciation (2013-14)
Building	500000	5	25000	25000	25000
Furniture	100000	10	10000	10000	10000
Machinery	1000000	15	150000	150000	150000
Cars	300000	10	30000	30000	30000

In the example above, no additions are included. If there is an addition during the year, you will need to add additional columns for Addition and Total Value. Depreciation will be calculated separately for the opening balance and the addition, and the total depreciation will be shown in the depreciation column for that year.

Written Down Value Method of Depreciation (WDV method)

In this method, depreciation is calculated each accounting year based on the asset's net value. The net value of an asset is the amount remaining after subtracting its accumulated depreciation. Each year, you deduct the depreciation amount from the asset's value and then calculate depreciation on that net amount. So, you will be taking the asset's net value as your opening balance for calculating depreciation, as opposed to the SLM method, where you always take the asset's original gross value as your opening balance.

In this method of calculation, the depreciation amount will be higher in the beginning years and lower at the end period of the asset. The depreciation rates will be higher in this method, but the number of years of the asset's life will be the same. 

Since you are calculating the depreciation on a diminishing value basis, the total amount of depreciation charged on any asset during its lifespan will be the same as that charged on the SLM method. 

So, in both methods, the ultimate residual value will remain more or less the same at the end of its lifespan.

Calculation of Depreciation under WDV method

Asset	Value	Rate %	2011-12 Deprecn.	2011-12 WDV	2012-13 Depr.	2012-13 WDV	2013-14 Depr.
Building	500000	5	25000	475000	23750	453250	22663
Furniture	100000	10	10000	90000	9000	81000	8100
Machinery	1000000	15	150000	850000	127500	722500	108375
Car	300000	10	30000	270000	27000	243000	24300

I hope the concept is clear with the help of the above illustrations. You may express your doubts, if any, in the comments section so that I can clear them.

Elasticity of Supply: How to Calculate Elasticity of Supply? and Factors Influencing Elasticity

What is Elasticity?
Elasticity refers to the adaptability of something to changes. It is the flexibility of something in response to changes in other circumstances or factors affecting its performance or existence.  

For example, the elasticity of underwear. 

The wear fits the body of certain fatness and dimensions. The grip of the elastic expands or contracts according to the dimensions and thickness of your waist or body. This ability to adapt to changes is called elasticity.

The performance of anything, whether a product or service, depends on many related circumstances or assumptions. If those circumstances or conditions change, the performance or efficiency of that product or service also gets affected. So, it is elastic to those situations.

Elasticity of Supply

Elasticity of supply is the responsiveness of supply to changes in the prices of those goods or services.

Suppliers generally increase their supplies when the price of their product increases and contract their supplies when prices decrease. Further, supplies are increased to meet increased demand, and vice versa. 

 

Elasticity of Supply is abbreviated as Es.

It is also known as price elasticity of supply (abbreviated as PES) whenever the supply is elastic to price changes.

How to Calculate Elasticity of Supply

Elasticity is measured in terms of the ratio of changes in prices. It is expressed as the ratio of the percentage change in quantity supplied to the percentage change in price.

PES or E_S   = (%change in supply quantity)/(%change in price), i.e., the percentage change in supply quantity is compared to the percentage change in price, and their ratio is known as the PES.

Example:

Suppose the price of potatoes increases from Rs.20 to Rs.25 a kg and the resulting supply increases to 1000 kg from the previous supply of 500 kg. 

Now, the elasticity in supply is calculated as follows:
PES = {(1000 - 500) / 500 x100} ÷  {(25 - 20) / 20 x 100} = {(500/500) x 100} ÷ {(5/20) x 100} 
So percentage change in supply = 100 and percentage supply in price = 25
So PES = 100 ÷ 25 = 4

There are 4 kinds of elasticity in supply.

• If the increase in supply is greater than the increase in prices, it is known as high elasticity of supply. (It is always greater than one (PES > 1)).
• If the increase in supply is very small compared with the increase in prices, it is known as low elasticity of supply. (It is always less than one (PES < 1)).
• If there is no change in the quantity supplied despite an increase in prices, that condition is termed non-elasticity of supply. (The ratio is always zero (PES = 0)).
• When the percentage changes in price and supply are equal, it is known as unitary elasticity. (PES = 1) 

Factors Influencing Elasticity of Supply

There are many factors influencing elasticity of supply. Some of them are narrated below.

• Ability: Your ability to switch over to the production of those affected goods: If you can produce the increased-price commodities, you can supply more quantities immediately.
• Time factor: The availability of time for producing those goods or procuring them from other places can also influence the supply of those goods.
• Availability of resources and factors of production: If all the factors of production are easily available to produce that commodity, you can increase the supply easily.
• Nature of commodities: Perishable goods are more elastic as compared to durable goods because of their preservation and maintenance from rot and destruction. 
• Transportation facilities or mobility: If you are able to transport or move the goods easily, you can increase their supply drastically.

Supply and Demand and Factors Affecting Supply and Demand

Supply and Demand are the two major forces influencing the markets and economic conditions of any country. The whole economy is based on the interactions of these two major factors. They are closely interrelated with one another, and changes in one can drastically influence the other.

Supply and Demand: Meaning and Significance

Supply and demand denote the activities of producing or procuring goods or services and making them available to the market for sale on one hand, and the requirements or demands placed by potential buyers of those goods and services on the other hand. Each demand requires a supply, and each supply should find a demand. This chain of supply and demand is a never-ending process that determines market conditions at any particular place or time.

Understanding Supply and Demand
As you already know, supply is the quantity available in the market at a particular price that buyers may be willing to pay.

But, normally, any stock of goods in a market can be considered as supply, regardless of their price variations and quality variations. This is because they are potentially saleable at any time.

Demand refers to the want of customers who are intending to buy goods. They have the money and want to buy goods using that money.

Definition of Supply

Economically, supply can be defined as the quantity of any product that a seller offers for sale at a particular price at a particular time or within a given period of time. 

So, it is not the simple availability of commodities but the willingness of suppliers to sell that matters. If a supplier is not willing to sell his product, it can't be treated as an available supply.

Factors Influencing Supply

Some of the important factors affecting supply are as follows:

• Price: It is an important factor that influences the quantity supplied in any market. Producers of goods and services often try to sell their products at the highest possible prices, and they tend to increase supply when prices are high and reduce it when prices are low. This may sometimes lead to hoarding and black marketeering of goods, which will be discussed later.
• Cost of Inputs: is also a major deciding factor in determining the supplies available at any point in time or place. If the cost of inputs in producing the goods is low, they will be produced in large quantities. As a result, supplies will also increase drastically. Otherwise, when inputs are expensive, production and supply will be lower.
• Prices of Related Goods: can also affect the supply of a particular good. If the supplier deals in two or more goods and finds out that certain other goods he is dealing with are more profitable, then he may reduce the supply of the less profitable item and increase the supply of more profitable items to earn more income.
• Demand also controls supplies. Excessive demand will automatically require more and more supply. If there is a decrease in demand, naturally, the supply of that good will get restricted or decreased.
• Competition in markets influences your supplies. When there are many choices of alternative goods that satisfy the same need, buyers can shift to low-priced goods, and your goods will not be demanded. So, you will be forced to decrease your supply.
• Tastes and Likes: of consumers or potential buyers can also influence the supply of goods and services. If people like a particular product or brand and are willing to pay more to obtain it, then the supply of that product needs to be increased in the markets to meet their requirements. So, consumers' tastes and preferences will definitely give rise to more supply of those products in the market.
• Technology also plays some role in determining the supply. Use of advanced technology in production methods facilitates increased production at reduced costs and thereby makes more supply available at reasonable prices.
• Government interference can also affect supply to a large extent. Government policies may restrict production and supply of certain products by banning those items or imposing heavy duties and taxes.

Demand 

Demand occurs whenever a need is felt for procuring goods or services. Wants create demand, and you try to satisfy those wants by procuring goods and services.

But you should note that every want may not necessarily create demand. It depends on some circumstances.

Definition of Demand

Demand can be defined as the quantity of products demanded and bought by customers or potential buyers at a particular price through a given period. It is the demand backed by the purchasing power of the person demanding it. A simple want or desire is not a demand.

Factors Affecting Demand

Some of the important factors influencing demand are discussed below.

• Abundance: Certain varieties of goods and services can stimulate demand if they are available in abundance as compared to those in short supply. For example, if you put up stalls at roadside or at exhibition grounds, people will flock in to buy the goods.
• Price Factor: Price controls demand for goods. Cheaper goods attract more demand as compared to highly priced goods and services.
• Changes in Tastes: One's taste in goods can shift the demand from one type of good to another one.
• Prices of Related Goods: Substitutes and complementary goods can affect the demand for original goods or services. You can easily shift to cheaper substitutes or quality goods.
• Advertisement and Media: Product advertisements and articles can inspire changes in consumer behaviour and thereby shift in demand.
• Income of Consumers: The potential customer's income plays a good role in controlling their demand for goods as they have to adjust their consumption according to their income.
• Climate conditions or seasonal changes also affect demand. During summer, people like to wear cotton clothes, whereas in winter they need woollen clothes. Demand for raincoats and umbrellas can increase too much.
• Economic instability of the country can also lead to many deviations in demand for goods due to fear of price rises or short supplies.
• An increase in population can also affect demand as there will be more buyers for the same quantity of supply.