Costs and income of enterprises (175305)

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1 Economic essence of costs and income of enterprises

Resources of income for enterprises

Income allocation

Types of costs

2 Main ways of decreasing the costs Main ways of increasing the income


The list of used literature


Any company or organization, regardless of ownership (private or public) in the implementation of its activities receives some income. The relevance of this topic is that in conditions of market relations incomes of enterprises and organizations have direct relevance to the budgetary system of the Republic of Kazakhstan.

The purpose of this paper is to explore the nature of income and costs.

The methodological basis was: Internet information sources, the book of domestic author.

Kazakhstan economy is market type of economy. Kazakhstan was the first country among CIS that received a status of country having market economy from the Ministry of Trade, USA. In 2000 this fact was confirmed also by European Union.

The economy started to change since 1991 after the collapse of Soviet Union. In 1990s many banks gave loans to people and organizations without knowing how to receive them back and according to what conditions it should be done. Today the situation is completely different: they know how to deal with loans business but there is no high demand especially after everybody felt the financial crisis and the crisis in construction sphere. Nowadays many enterprises pay special attention to the analysis of income and expenditure and their comprehensive characterization as many of the business people understood the importance of making, keeping and proper spending of money. Consideration of this issue is essential for the proper functioning of enterprises and organizations subordinated to the market laws. Right management decisions can be made only on the basis of clear understanding of income and costs question. Making the right decisions will lead the enterprise to financial independence and prosperity.

This paper gives information about resources of income, income allocation and types of costs in the section of “Economic essence of costs and income of enterprises”. It may be useful for entrepreneurs of small and medium enterprises, students of economic and financial departments of universities and colleges.

The problems of profit maximization and costs minimization are also considered in this paper. These topics are always very topical, because the main target of any enterprise is to maximize profit. How to do it? One of the ways is minimization of costs. Strive to minimize costs - not to act against the interests of business for avoiding costs. This should be solved by finding the best possible optimal ratio of revenues and expenses. The ways to minimize costs are given in the “Main ways of decreasing the costs” section.

Another topicality of this paper is the fact that income and costs (besides the financial results such as profit and expenditures) are the most important indexes of the enterprise’s activity and main elements in the report about financial results. Financial results of the enterprise are found by comparing income and corresponded costs. That is why a proper understanding of income allocation and what types of costs there are, is crucial for the successful management of the enterprise.

1 Economic essence of costs and income of enterprises

Any enterprise’s target is to make profit. In order to make it a company should understand where comes from the income and where goes out costs. Knowing the resources of income and types of costs will allow the enterprise to manage them successfully, which means it will be able to make profits. Companies and enterprises in different fields are part of whole economy. Active and profitable companies rise economic activity and contribute to the development of national economy. Big companies become bridges between countries and states.

Any enterprise has to have a system of accounting, managing and planning of costs and resources to finance its activities. Systems are constructed on the basis of income and costs.

Resources of income for enterprises

To define resources of income for enterprise all activities should be divided into:

- main and operational activities (production and selling products and services);

- financial activity (taking loans and giving them to other enterprises; enterprises’ taking part in activities of other companies; operations of enterprise on the financial markets, differences in exchange rates etc);

- extraordinary items (operations that are not usual to activities of the enterprise).

This division of activities is very important as it allows to define what part of income was received from main activity, what part was received from other sources such as those that are unusual for a particular enterprise’s activities and cannot be considered as some constant source of income.

So, in the system of financial management it is required to have following rates indexes:

Income and profit indexes:

a) net income from selling of products (providing services) – is gross revenue from sales minus value added tax, excise tax, returned products and price discounts. This index is the real base for further counting of profit index and evaluation of profitability;

b) gross profit from sales – net income from sales minus production expenditures of sold goods.

This index allows to analyze the effectiveness of production activity of the enterprise;

c) profit (loss) from main activity (operational profit or operational loss) – gross profit from sales minus management costs and sales costs. This index reflects the influence of management and sales costs to financial sales result;

d) profit from financial activity – balance of income and cost in hand by financial activity. This index is needed for defining the profit from production and economic operations including such sources of profit as receiving interest and dividends, operations with foreign currency etc.

e) profit from ordinary economic operations – sum of profits from main economic operations and profit from financial activity;

f) extraordinary profit;

g) profit (loss) before taxes. This index is the point from which the accounting profit transmits into taxable profit.

Accounting (or reported) profit – is the profit, which was counted in accordance with requirements of book keeping. Main target is to define the accounting profit – to show the effectiveness of enterprise’s activities for reported period.

Book keeping is made for gathering and analyzing information about income and costs of the enterprise and about net result of activities for making management decisions in future periods. After the target was achieved the result (profit before taxes) should be adjusted in accordance with tax law of the country. So, the taxable profit is accounting profit, that was recounted in accordance with tax law requirements;

h) net profit (net loss) – profit after taxes. In conditions of market economy it is the most important index of enterprise’s activity. This index is always at the center of attention for managers and financial markets. The existence of the enterprise, working places for its employees, paying the dividends are depended on dynamics of net profit (

Income allocation

The rights and opportunities of allocation and using of the income are very important for any enterprise because income is the main source of financial, production and social development, financial development of its employees.

The system of income allocation and utilization should stimulate further development of current particular type of business and expansion to new directions. It should also increase the interest for making more money

The order for income allocation and utilization for commercial enterprise are defined by the methodology of income that is accepted in particular society at this stage of its development

Current order of income allocation corresponds to current stage of market relations development, thus an enterprise should take part in forming the state budget. The rest part of the income should be allocated between owners and investors of the enterprise. If there were other financial resources the income should be allocated between them either in accordance with concluded agreements.

State influence on the choice of directions of net profits is made through taxes, tax exemptions, and economic sanctions.

Such system of income allocation began in 1964 in the Soviet Union. The system passed through three stages of development. The essence of the reform of income allocation is an ongoing decentralization of exemption of enterprise income in favor of the state and reduction of financing enterprises from the state budget. The current system of income distribution or allocation of domestic enterprises began to perform the same function as was adopted in developed countries in the West.

Thus, the transition to a market economy in Kazakhstan the system of income assigning focuses on the current overseas system.

Common to all businesses regardless of ownership and types of activity is the distribution of profits in accordance with the statute and the collective agreement for the following purposes:

1) payments to the budget;

2) contributions to the non-budgetary funds established by a decision of the Government or local authorities;

3) the formation of the accumulation fund;

4) establishment of a fund of consumption;

5) charitable purposes;

6) other purposes (saving for the purchase of property, etc.).

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