Takaful - The Concept

Takaful means, mutual protection, and joint guarantee. It is a concept of mutual solidarity and brotherhood along with mutual indemnity in case of loss. Takaful system operates on the principles of;

• Brotherhood
• Mutual Assistance - Taawun
• Donation - Tabarru

The above-named principles are appreciated, approved, and encouraged by Shariah. Takaful is a risk management system that works on the basis of Islamic principles eliminating the elements of interest (Riba). Under Takaful, the risk is shared collectively by a group of participants contributing to a single common pool of funds and agree to jointly guarantee themselves against damage or loss to any one of them as defined in the agreement.

Takaful is operated on the basis of shared responsibility, brotherhood, solidarity, and mutual cooperation. Taawun (Mutual Assistance) is a core element of Takaful and it forms the basis of many Islamic practices.  

Takaful from Holy Quran,

"Help each other in righteousness and piety and do not help each other in sin & aggression"

Accounting Equation & Double Entry System

 What is the accounting equation? The accounting equation equates Capital is equal to Assets minus Liabilities. If we put it in the form of an equation it will be as 

Capital = Assets - Liabilities.

This forms the basis of all accounting and the double-entry system works around it and the business transaction are recorded in the books of accounts accordingly. This recording of double-entry in the books of accounts is commonly known as Book Keeping. Before we move on to that how the double-entry system works we need to understand the meaning of the above terms.

CAPITAL: It is also known as Share Holder Equity or Owners Equity. The objective is to finance or invest in a company or a business concern for its overall operation and growth. Capital normally comprised of 1) Owner's equity and  2)  Debt equity. Owner's equity is the capital that is initially invested in the company and the investor owns the company whereas debt refers to the loan and other credits and that need to be repaid in future operations of the company in the form of interest.

ASSETS: Property owned by a business having value and worth is known as a business asset of the company. Business assets can be grouped as 

> Fixed assets: can be used for a longer period and it is intended to produce further goods and semifinished goods. It covers property, plant, and machinery, equipment, furniture and fixtures,  vehicles, and transport. It can not be converted into cash immediately. 

> Current assets: It can be converted into cash immediately and it covers inventories, cash, bank cheques, receivables, short term deposits, marketable securities, stocks, prepaid expenses, and short term investments. 

> Tangible assets: All the fixed assets and current assets can be grouped under tangible assets.

 > Intangible assets: It covers all the intellectual property, goodwill, copyrights, trademarks, designs, patents, brands, franchises, licenses, trade secrets, and reputation.

LIABILITIES: Business liability represents the debts of the firm or company. Business borrowings create business liabilities. It covers bank borrowing, short-term loans, overdrafts, supplier credit, credit purchases, and mortgages all represent business liabilities. All the business payables are business liabilities. Business expenses also create liabilities like taxes payable, salaries payable, and bills payable. It can be grouped in balance under Long term liabilities and Current Liabilities.

The above equation must remain in balance and it represents all the items of the balance sheet. To keep it in a balanced position a system has been devised know as Double Entry Bookkeeping. Business transactions are recorded through journal entries having a minimum double impact to maintain the balance. For example, initial cash investment is made in a company it will increase the shareholder equity (Capital)  on one hand and an increase in the asset (cash) on the other hand. 

Capital = Assets - Liabilities

Shareholder Equity =   Cash - with no change in the liabilities 

 10,000 = 10,000 - 0

10,000 = 10,000  The equation is balance because of the double impacts of the transaction. 

These double impacts of the transaction are known in accounting parlance as "Debit" and "Credits". Before going into that how debit and credit affect the accounting equation, we need to discuss two major accounts: Revenues and Expenses. It can be best explained by given examples. Suppose a company provide a service of Rs 15,000 and gets cash

Capital = Assets - Liabilities

Equity = Cash - No change in liabilities

15,000 = 15,000 - 0 The equation is balanced again with no impact on the liabilities. If the company does not get the cash the equation will be 

Equity = Receivables - No change in liabilities

15,000 = 15,000 - 0

 Here the revenue is directly taken as an increase in equity and similar expenses are taken as a decrease in equity. For this income statement is drawn showing revenues and expenses and we shall discuss it in detail when discussing financial statements. 

How the Debit and Credit affect the accounting equation....is explained as under

  

         

Inventory Management & Controls.

Business inventory is the most critical phenomenon which needs close monitoring any mismanagement can result in major business losses. Since overstocking can block your capital funds/investments and under stocking can result in your production hold-ups. 

For successful inventory management, we need to have installed a purchase plan ensuring the continued supply of the raw material and related items to be used in the production, any delay can spoil the production schedules. The objective is to assure that the items are available when needed. Due to the escalating production costs and storage costs, the most common strategy adopted by the company management is JIT ( Just in Time) where a company plan to receive the items when needed. The deliveries are planned according to the sales forecast available with the management. Inventory and reorder levels are maintained and provision for buffer stock is also provided for critical load and items. The objective of these checks and controls is to minimize the cost of production and enhancing the company's profit. Sometimes inventory management gets difficult to control when your business is growing and handling of inventory is increased manifold.  

Various checks and controls are placed to ensure a smooth flow of inventory without any hang-up when making a purchase plan after taking into consideration the below factors. The use of technology makes things easier.   

> Re-Order Level: It is the inventory level at which a company places a new order or starts a new manufacturing run. It is calculated as 

Reorder level = Lead time in Days x Daily average usage.

Lead time means the time it takes the supplier or the manufacturing process to provide the ordered units. 

Daily average usage is the number of units consumed on a daily basis

If a company is holding safety stock, then the reorder level will be 

Reorder level = Lead time in Days x Daily average stock + Safety stock

Safety stock is the stock held by a company in excess of its requirement for Lead time. Safety stock is maintained to protect the risk of stock out. It is calculated as under ;

Safety stock = (Maximum Daily usage -Average Daily usage) x Lead time

> Economic Order Quantity (EOQ): It is the most appropriate quantity a company manages to purchase with the minimum involvement of below costs.

• Ordering cost
• Holding cost 
• Storage cost

By using the above controls the inventory is tracked, received, stored, and shelved in the warehouses and it keeps your business running and orders selling.

What is ERP ?

 

ERP stands for Enterprise Resource Planning. It is software developed to manage and control business flow and activities in real-time. In modern business management, the entire activities involved the following business resources

> Finance Resource Management

> Human Resource Management

> Supply Chain Management

> Customer Relationship Management

> Manufacturing Resource Planning

A modern business enterprise cannot afford any mishandling of the above resources. ERP has been designed to consolidate and gather the business data in one suite in an integrated structure. Software comprising related applications automates business functions such as sales, production, quote management, accounting, and personal data of the employees of an enterprise or an organization.      

In the modern hi-tech era business transaction and activities have increased manifolds and the escalating costs of all the resources have almost made it difficult to survive. The software includes various modules covering financial management, accounting, cost accounting, inventory management, contact management, It also covers that how the business life cycle goes within an enterprise. It mainly manages the central database of a setup and generates analytical reports for the respective departments involved in business activities helping an effective decision making.  

Basic Accounting Concepts

To understand how accounting works we need to assimilate certain concepts forming the basis of all accounting practices all over the world.

Accrual Concept of Accounting: Under this concept, revenue is recognized when earned, and expenses are recorded when occurred irrespective of whether received or paid. This follows the matching principle, expenses and revenue should be recognized under the same accounting period.  The auditor will only certify such financial statements following the same principle.

Conservative Accounting Approach: It requires that all the company accounts be maintained and prepared when there's a reasonable certainty that the revenue and gains will be realized and all probable losses and expenses will be recorded when they are discovered or incurred. This concept tends to draw more conservative financial statements. 

Going Concern Concept: A concern or a company is a going concern when it will continue its operations in the foreseeable future. It will not liquidate or forced to discontinue or stop the operations due to any reason. The financial statements are prepared on the same principle.  

Consistency Concept: It means that all the business transactions and events, once chosen or adopted to record the data must follow the same accounting methods in the following accounting years or periods. Financial statements prepared for multiple periods, under this principle can be comparable and are more reliable. 

Economic Entity Concept: It means the business finances should be maintained separately from the owner, shareholders, partners. By doing so, the intermingling of personal and company transactions can be avoided and personal transactions will not appear in the company's financial statements.

Matching Concept: This concept matches the expenses incurred in one accounting period against the revenue of the same accounting period or we can say the expenses are recognized against the revenue of the same period. There is no deferral of expense recognition under this concept and nothing is reported into a later period. It ensures a viewer of company's financial statements that all the aspect of a transaction has been recorded in the same accounting period.

Matereality Concept: It concerns the relevance of information and the size and nature of the transaction that is reported in the financial statement. The objective is to provide guidance to the accountant to prepare a company's financial statements that will not affect the decision making the shareholder or investor.      

Accounting and Business

Accounting is something relating to the business when strictly talking in a professional sense. Recording of the business transactions, summarizing the recorded data and subsequently reporting it in the form of financial statements covering a stipulated accounting period. Analyzing the reported data to evaluate the business performance also forms part of the accounting process. 

Initially, accounts of an organization were maintained manually and there was no concept of accounting software. The transactions were recorded manually after organizing the data in chronological order involving various types of vouchers with the respective nature of the transaction e.g cash vouchers, bank vouchers, and journal vouchers commonly known as Voucher System. It is a method of cash/bank disbursement by authorizing and approving the payment to the payee and mentioning the account head/title to be charged on it. All the business transactions were controlled and managed to ensure whether all such transactions have been properly checked and approved by the approving authority.    

The rapid development of technology has made a tremendous impact on the prevailing business sector and the data management systems. Most of the performing business organizations switched their business activities to computerized data management and started working in a more efficient manner. This introduced accounting software transforming all the manually operating accounting systems to electronic data processing management.