Final accounts – an understanding – Key statements
In the Learning & Development group, I left you with a thought as to what direct and indirect expenses / incomes were.
The direct and indirect concept helps you define what items will be almost directly proportional to your business volumes, and which will not really behave in this manner.
When a purchase is made, we have
- cost of the product,
- transportation costs,
- taxes paid
- warehouse cost of stocking
- insurance on transportation, warehouse
These will directly be related to the product, will have a proportional element.
There will be an accounting department / administration / HR, where
- expenses will be fixed,
- will need to be incurred
- Not dependant on the volumes
These are called indirect expenses.
The profit and loss statement can be restricted to just items which are indirect in nature.
For trading entities, it is called a trading account and for manufacturing entity it’s called a manufacturing account.
What about income and expenditure account / the receipt and payment account?