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.

http://faoblog.com/final-accounts-understanding-key-statements-4/

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.

Direct items:

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.

Indirect items:

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?

Mohit Gupta