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What is the definition of value added in accounting:

 For getting better understanding of "Value Added in Accounting" we should understand term value added and accounting separately.

First of all let's see term value added. In very simple language value added refers to the creation of utility to a particular product and service. For example: We can see a tree in the forest that have some specific value to the nearby public but when after cutting this tree some furniture or related items are made by a company then we can say that some value is added in that raw material.

In other words, value added refers to the wealth creation by the organisation for its stakeholders during a particular period of time or it refers to the difference between value of output and value of inputs. 

Thus whenever any raw material is made usable for consumers through adding some other materials or efforts then additional monetary value of these efforts or some material is known as value added.

As we know that accounting is the process of identifying, recording, classification, summarizing and interpretation of business information.So value added in accounting is a system of recording of value added to a particular product or service.

There are two concept of Value Added in accounting;

  • Gross value added
  • Net value added

Let's understand each point one by one.

A. Gross Value Added: Gross value added refers to the amounts that are arrived before making treatment of depreciation amount. We can calculate gross value added by the firms or enterprise as follow;

Sale + Other receipts from services - cost of materials and services.

B. Net Value Added: Net value added refers to the amounts that are arrived aftermaking treatment of depreciation amount. We can calculate net value added by the firms or enterprise as follow;

Sale + Other receipts from services - cost of materials and services - depreciation.

OR

Gross value added - amount of depreciation.

Till now we have understand basic concept of value added. So now lets' see how this value added is calculated.

There are two method of calculation of value added in accounting;

  • Additive method and;
  • Subtractive method.

Now let's focus on each method one by one.

A. Additive method: Under this method value added is calculated by adding all types of value added distributed to the various stakeholders of the business enterprise such as; wages & salary given to the employees, taxes paid to the various government, interest paid to the long term loan providers, dividend paid to the real owner of the business and retained earnings of the enterprise etc.

B. Subtractive method: Under this method value added is calculated by subtracting cost of the product and services from the sale amount of the product & services. Thus it refers to the net receipts or net value added of the business. 

1. Concept And Meaning Of Value Added Statement (VAS):

Concept and Meaning of Value Added Statement:

Value added statement (VAS) is a financial statement of an enterprise, that is prepared for recording the monetary aspect of value added (created) and apportionment of this value added to the stakeholders of the enterprise such as; employees, shareholders, directors, government and other connected & interested groups etc.

In other words we can say that value added statement (VAS) is prepared to maintain the record of all value created by the business enterprise and utilization & distribution of that value. This statement gives desired information to the management, government and other stakeholders time to time.

2. Value added statement: Accounting Theory & Statement:

Value added statement is very useful statement for an enterprise. This statement can be prepared in two formats, one in horizontal format or second in vertical format. But now a day's most of the business units prepare their value added statement in vertical format because this format is accepted by the government and approved by the apex accounting body of concerned country. Apart from this value added statement in vertical format is accepted globally and serves the uniform motive of the stakeholders.

Now let's see the standard format of value added statement.

Value Added Statement

(For the year ending 31st March.........)

 

Amount ($)

Amount ($)

1. Source of Value Added:

 

 

Sale

 

...............

Less: Cost of material & services

 

 

a. Consumption of raw material

 

 

b. Consumption of stores

 

 

c. Increase in the value of inventory

 

 

d. Interest paid to bank

 

 

e. Provision for bad and doubtful debts

 

 

f. Auditing fees

 

 

e. Other miscellaneous manufacturing expenses

 

 

 

 

 

Value added by the manufacturing activity of the business

 

...............

Add: Other receipts

 

...............

 

 

 

Gross value added

 

...............

Less: Amount of depreciation

 

................

 

 

 

Net value added

 

................

 

 

 

2. Application of Value Added:

 

 

 

 

 

1. Salary & wages paid to the employees

 

.............

2. Bonus paid to the employees

 

.............

3. Gratuity paid to the employees

 

.............

4. Other monetary benefits given paid to the employees

 

.............

5. Salary paid to the directors

 

.............

6. Commission and other benefits given to the directors

 

.............

7. Corporate tax paid to government

 

.............

8. Wealth tax paid to government

 

.............

9. Income tax paid to government

 

.............

10. Other taxes paid to any type of government 

 

.............

11. Interest paid on borrowed funds

 

.............

12. Interest paid to financial institutions or banks

 

.............

13. Preference dividend paid

 

.............

14. Equity dividend paid

 

.............

15. Amount trferred in general reserve

 

.............

16. Amount trferred in Fixed assets replacement reserve

 

.............

17. Amount to deferred tax account

 

.............

18. Amount as retained earnings

 

.............

Total

 

.............

As we see format of the value added statement. We realize that there are various sources of value added and application of value added.

After entering the relevant values in the format we will reach at the equal total of both parts; sources of value added and application of value added in every condition for getting true and fair value added statement.

If total of both parts differ in any condition that me there are some mistakes committed whether it is principle based or calculation based.

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