Accounting Foundations and Cost Analysis

Business and Accounting Terminology

Term	Meaning
Asset	A present economic resource controlled by the entity as a result of past events, such as cash, receivables, property, or equipment
Liability	A present obligation whose settlement is expected to transfer an economic resource, such as a loan or account payable
Equity	Residual interest in assets after deducting liabilities
Revenue	Income arising in ordinary activities, such as service charges
Expense	Consumption or loss of economic benefits in earning revenue
Profit / net income	Revenue and other income less expenses for the period
Capital	Funds or other resources contributed by owners
Dividend	Distribution of eligible profit to shareholders
Working capital	Current assets minus current liabilities; a net measure of short-term liquidity committed to operations

Core business terms

Caution

Key Formula — Fundamental accounting equation

$$\boxed{\text{Assets}=\text{Liabilities}+\text{Owner's equity}}$$

Every recorded transaction preserves this equality, although it may change two or more components.

Term	Meaning
Debit (Dr)	Left side of an account; normally increases assets and expenses and decreases liabilities, equity, and income
Credit (Cr)	Right side of an account; normally increases liabilities, equity, and income and decreases assets and expenses
Journal	Chronological record in which transactions are first entered
Ledger	Classified collection of individual accounts to which journal entries are posted
Fiscal year	Twelve-month reporting period; Nepal’s government fiscal year runs from Shrawan through Ashad
Accrual basis	Recognizes economic events when earned or incurred, not only when cash is received or paid
Cash basis	Recognizes transactions when cash changes hands

Essential accounting vocabulary

Cost Classification

Classification by behavior

Type	Behavior	Example
Fixed cost	Total remains constant as activity changes within a relevant range; fixed cost per unit falls as volume rises	Building rent, salaried supervision, insurance
Variable cost	Total changes in proportion to the activity driver; per-unit amount is constant under the model	Direct material, usage commission
Mixed / semi-variable	Contains both fixed and variable components	Utility or telecom bill with base charge plus usage

Cost behavior within the relevant range

Caution

Key Formula — Linear cost model

$$TC=FC+VC=FC+vQ,$$

where $FC$ is total fixed cost, $v$ is variable cost per unit, and $Q$ is output. The model is valid only over its stated relevant range and period.

Classification by function and traceability

Function	Coverage	Example
Production / manufacturing	Costs of creating the product or operating the productive service process	Material, factory labor, network operations
Administrative	General management and office support	Office rent, administration salaries
Selling and distribution	Demand creation, sales, and delivery	Advertising, commission, transport
Finance	Cost of obtaining and managing funds	Interest and financing fees

Cost classification by organizational function

Direct cost: can be economically traced to a particular cost object, such as a product or project. Indirect cost: supports several cost objects and must be allocated using a defensible cost driver. Direct does not necessarily mean variable, and indirect does not necessarily mean fixed.

Break-Even and Contribution Analysis

The break-even point is the activity level at which total revenue equals total cost, so operating profit is zero.

Caution

Key Formula — Break-even formulas

Let unit selling price be $P$ and unit variable cost be $v$. Unit contribution margin is $CM_u=P-v$, and the contribution-margin ratio is $CMR=(P-v)/P$. Therefore

$$\boxed{BEP_{\mathrm{units}}=\frac{FC}{P-v}}, \qquad \boxed{BEP_{\mathrm{sales}}=\frac{FC}{CMR} =\frac{FC}{1-v/P}}.$$

[!NOTE]

Example — Break-even quantity and sales

Suppose fixed cost is Rs. 200,000, selling price is Rs. 50 per unit, and variable cost is Rs. 30 per unit. Then

$$BEP_{\mathrm{units}}=\frac{200{,}000}{50-30}=10{,}000\text{ units},$$$$BEP_{\mathrm{sales}}=10{,}000\times 50=\text{Rs.~}500{,}000.$$

At that volume, revenue and cost are each Rs. 500,000. Each additional unit contributes Rs. 20 toward profit, assuming price and unit variable cost remain unchanged.

Break-even chart for the worked example

Tip

Exam Focus — Break-even assumptions

State that price, unit variable cost, total fixed cost, product mix, and relevant range are treated as stable. Break-even is a planning model, not a guarantee of demand or cash availability.