Finance Numericals

Real rate of return: A real rate of return is a rate of return which give returns value after adjusting all the related information or factors which helps to calculate return on investment. The other factors are tax, inflation rate etc. It provides correct value of return on investment. This rate helps to decide whether it is beneficial to invest in that project for investor or not. Formula: Real rate of return = [(1+nominal rate) / (1+inflation rate)] -1 Nominal rate of return: A nominal rate of return is a rate which doesn’t adjust any further information or you can say it does not include other factors which affects the return on investment. It does not help to make a correct investment decision.   The rate tells how much investor approximately earns annually on investing in a project. Formula: Nominal rate of return = Market value – Original investment value / Original investment value Example:   M

  Cash accounting is used when only cash transactions occurred in a company. It does not include any credit transactions. It is the simplest method to record transactions in a book of accounting. It does not include outstanding expenses, prepaid expenses, unearned income etc. But it does not provide accurate picture of a company. It also cannot help to predict the future trends. It is beneficial for those business enterprises which are small in size and sales volume are low. In Accrual accounting transactions are recorded when expenses recognize and revenue recognize. It doesn’t matter cash received or paid at that time or not.   It is widely used in comparison to cash accounting. It includes outstanding expenses, prepaid expenses, unearned income, cash sales, income received in advance etc. It provide more accurate picture of a company. It is used internationally. Bills payable and bills receivables both are included in it. Let’s differentiate between Accrual accounting vs. Cash a