Accountancy is the process of communicating financial information about a business entity to

users such as shareholders and managers. The communication is generally in the form of
financial statements that show in money terms the economic resources under the control of
management; the art lies in selecting the information that is relevant to the user and is reliable.
Accountancy is a branch of mathematical science that is useful in discovering the causes of
success and failure in business. The principles of accountancy are applied to business entities in
three divisions of practical art, named accounting, bookkeeping, and auditing.

The systematic recording, reporting, and analysis of financial transactions of a business. The
person in charge of accounting is known as an accountant, and this individual is typically
required to follow a set of rules and regulations, such as the Generally Accepted Accounting
Principles. Accounting allows a company to analyze the financial performance of the business,
and look at statistics such as net profit.

Accounting Equation

The equation that is the foundation of double entry accounting. The accounting equation displays
that all assets are either financed by borrowing money or paying with the money of the
company’s shareholders. Thus, the accounting equation is: Assets = Liabilities + Shareholder
Equity. The balance sheet is a complex display of this equation, showing that the total assets of a
company are equal to the total of liabilities and shareholder equity. Any purchase or sale by an
accounting equity has an equal effect on both sides of the equation, or offsetting effects on the
same side of the equation. The accounting equation is also written as Liabilities = Assets –
Shareholder Equity and Shareholder Equity = Assets – Liabilities.

The break-even point (BEP) is the point at which the cost of producing a product or providing a
service exactly matches the revenue gained from selling that product or service. For example, if a
firm’s total annual costs are £1m and in the same year it generates £1m of revenue, then the firm
is said to have broken-even, as it hasn’t made any more or less than it has invested:
Advantages and Disadvantages of Break-even
Analysis
Break-even is an excellent method of analysing a business. Its advantages are:

 It is cheap to carry out and it can show the profits/losses at varying levels of output.
 It provides a simple picture of a business - a new business will often have to present a
break-even analysis to its bank in order to get a loan.

A break-even analysis can have some disadvantages:

 It assumes that everything produced is sold whereas it is often the case that not all output
will be sold.
 It assumes that all of the output is sold at the same price - often a business will have to
lower its price in order to increase its sales.

Let’s assume that a plant asset has a cost of $100,000 with an estimated salvage value of
$10,000. This makes the depreciable cost $90,000. The asset has a useful life of 5 years or the
production of 100,000 parts. The asset is placed into service on January 1, 2007 and the
company’s accounting year is January 1 through December 31.
Straight-line: Depreciable cost of $90,000 divided by 5 years = $18,000 of depreciation each
year for 5 years.

Units of production: Depreciable cost of $90,000 divided by 100,000 parts = $0.90 per part. In
2007 the company produces 120,000 parts X $0.90 = $108,000 of depreciation. In 2008 the
company produces 300,000 parts X $0.90 = $270,000 of depreciation. Continue until
accumulated depreciation reaches $90,000.

Double-declining balance: Straight-line depreciation rate is 20% (100% divided by 5 years).

Double the straight-line rate is 40% (20% X 2). This rate is applied to the book value of the asset
at the beginning of each year. (Book value is cost minus accumulated depreciation.) For the year
2007 the double-declining balance depreciation is: beginning book value of $100,000 X 40% =
$40,000. In 2008 the calculation is: beginning book value of $60,000 X 40% = $24,000.
Continue until the accumulated depreciation reaches $90,000.

Sum of the years’ digits: Add the digits in the years of useful life: 5+4+3+2+1 = 15. In the first
year (2007) multiply 5/15 times the depreciable cost of $90,000 = $30,000 of depreciation. In
2008 multiply 4/15 times $90,000 = $24,000. in 2009 multiply 3/15 times $90,000, and so on.

Sum of the Years' Digits Method an accelerated method of depreciation which is also
based on the assumption that the loss in the value of the fixed asset will be greater during
the earlier years and will go on decreasing gradually with the decrease in the life of such
asset. The SYD is found by estimating an asset's useful life in years, then assessing
consecutive numbers to each year, and totaling these numbers. For n years:

SYD = 1 + 2 + 3 + 4 + ...... + n

Depletion method of depreciation is especially suited to mines, quarries, sand pits, etc.
According to it the cost of the asset is divided by the total workable deposits. In this way,
rate of depreciation per unit of output is ascertained. Depreciation in any particular year is
charged on the basis of the output during that year.

Example:
A mine was acquired at a cost of $20,00,000 the quantity of minerals expected to be mined
is 5,00,000 tons, the rate of depreciation per unit will be $4 i.e., (20,00,000 / 5,00,000). If
during the year 25,000 tons minerals is extracted, the amount of depreciation will be
25,000 × 4 = $1,00,000.