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Category: Accounting

Extensive information about Accounting procedures and more can be found in the archives within the
website as both a guide and an aid to better understand the application of Accounting in the business
industry.

    accounting-practise-preparing-balance-sheets 20 Jul

    Accounting Practise: Preparing Balance Sheets

    The preparation of balance sheets is one all accountants should master as an accounting practise, since this process is one that will require performing frequently. Balance sheets can be considered amongst one of the major financial statements that are produced after all. If you are beginning with basic accounting practise, here’s what you should know about the process:

    Accounting balance sheets represent the financial position of a corporation at a specified end of a certain date- all transactions spanning through the set end date is recorded and reported. Accounting balance sheet information allows creditors to keep track of what the corporation currently owns, and what it still owes to other relevant parties. This is also the information required by bankers to gauge if the corporation qualifies for more credit or more loans. As basic accounting practise, focus on three important aspects in the overall formula used- Liabilities, the Owners’ Equity as well as Assets. The total amount of assets a corporation has is equivalent to the sum of both it’s liabilities and the Owners’ Equity.

    Assets

    Assets are resources the corporation acquires through the process of transactions. These resources typically own future economic value that allows accountants to measure and express through dollars. Assets can also include costs that are paid in advance but not expired, for example: Advertising services. Asset accounts typically contain debit balances, where contra assets contain credit balances.

    Liabilities

    Otherwise known as corporate obligations, these are currency owed to the company’s creditors for transactions. Liabilities are either treated as a contributing source of a corporation’s assets, or a claim against the corporation’s assets. They can also be the currency that is received in advance for future products or services. These liability accounts usually contain credit balances, whereas those with debit balances are referred to as contra liabilities.

    Standard accounting practise allows corporations to term liabilities as commitments (where liabilities are only considered on balance sheets when the services/goods are received), potential liabilities ( product warranties, loan guarantees, lawsuits) and long-term liabilities ( loans that are paid through monthly payments over a period of time).

    Owners’ Equity

    The Owner’s Equity or Stockholder’s Equity is used when referring to the corporation’s book value, where the asset amounts reported are a sum between the equity as well as liability amounts. Depending on the nature of the corporation, different terms apply- sole proprietorships make use of the Owner’s Equity where Stockholder’s Equity is often used for corporations with multiple stockholders. Both accounts should normally carry credit balances.

    An owner’s equity is typically represented with either two or three accounts on the accounting balance sheet. A stockholders’ equity however, would be represented in a section of the balance sheet through considerations like treasury stock, accumulated comprehensive income, paid in capital, and retained earnings. Revenues earned and gains typically increases the owner’s equity while expenses and losses causes it to decrease. For corporations performing services and increasing assets, the equity increases when the service revenue account is closed at the end of the year.

    These are the accounting basics to keep in mind when preparing balance sheets. Different accounts contain different sectors to refer, doublecheck and report on. Make sure to pay attention to these details when preparing your balance sheets and use the notes or foot notes section of balance sheets to inform or address any additional information that facilitates better comprehension and analysing of the overall financial statement.

    know-preparing-cash-flow-statements 13 Jul

    All To Know About Preparing Cash Flow Statements

    Another part of accounting basics that all accountants should take care to remember would be the procedure of cash flow statement preparation. If you are a beginner with accounting basics, here are some things to be acquainted to:

    A comprehensive cash flow statement should involve the cash that was generated/used in operating, investing, supplemental information as well as financing activities. As a standard accounting practise, each different sector can be reported with emphasis on different formats since their focus will be on different factors. All accountants are advised to carefully monitor the corporation’s activities so as to accurately prepare their cash flow statements.

    One of the general accounting basics often observed and practised in cash flow statement preparation would be inventory purchase when it comes to displaying changes in operational activities of a corporation. For example, if a corporation invests in the purchase of inventory stock, accountants should make note of the cash decrease in the cash flow statements under operational activities. However, this should not affect the profit or loss, since the corporation technically would not have sales or expenses.

    This decrease is noted as inventory is increased. Pay attention to the financing activities section, if any personal investment has been made before the purchase of inventory. The financing activities section should match up with the increase in overall investment increase. Make sure net change of the investment and the cash outflow regarding inventory be subsequently verified in the balance sheets.

    Another accounting practise often relied on would be the calculation of revenue and expenses. Presuming that the corporation sold products or services to a customer and issued an invoice that has been paid- Accounting basics dictate that the revenue is only recognised during the time of delivery for products/services and not when the payment is received. The expenditure of the corporation appears in the cash flow income statement when they match up with the corporation’s revenue and not when the products/services are paid.

    For corporations who require dealing with supplies, the supplies expenses account only reflects changes when the supplies are used. Standard accounting basics reveal that whatever cost the supply order displays will be recorded on the balance sheet under asset account supplies. If payment has yet to be made, liabilities are recorded under the accounts payable section.

    If there are depreciation expenses, another good accounting practise worth noting would be that there will be situations where the amount will require to be added back to the net income. The situations that fit into this category of treatment would be when there is no cash spent and yet the depreciation expense account entry results in net loss. In order to convert the income statement’s bottom line into the cash used in operating activities or other relevant areas, accountants will need to add back or remove the depreciation expense.

    5-accounting-practises-keep-preparing-income-statements 29 Jun

    5 Accounting Practises To Keep When Preparing Income Statements

    When it comes to preparing income statements on behalf of your corporation, great care must be exercised in order to keep information accuracy and minimise the potential risk of errors. To successfully prepare income statements, there are 5 accounting practises every accountant should bear in mind:

    1. Revenues and Gains

    A corporation can achieve revenue from primary and secondary activities. Revenue earned from primary activities are mostly known as operating revenues (sales revenue or service revenue) whereas revenue earned from secondary activities are known as non operating activities. This accounting practise is one of the most essential to note since beginner accountants often confuse revenues earned with receipts. These revenues are usually displayed around the top of income statements, usually in the period they are either earned or delivered- not when payment is collected. So make sure to report both operating and non operating revenues in the profit and loss statement only when the sale is made and earned.

    Gains, on the other hand, is an accounting practise that is reported in income statements as the net of proceeds received from long term asset sales with the subtraction of the book value. When proceeds are more than book value, that is when the gain occurs.

    2. Expenses and Losses

    Much like revenues, expenses can be categorised under primary and secondary activities as well. Expenses that are incurred to earn operating revenues are considered primary activities and should show up under the same income statement where the related sales was reported, regardless of if payment has been made or not. Costs that are used up or expiring in the accounting period displayed under the income statement will also be considered to be a part of the expenses of that particular accounting period.

    Certain expenses can be matched against the sales under the income statement since there is a cause and effect link, whereas others with no direct link to sales are usually matched to the period where they are used/consumed. For example: Advertising expenses are typically not linked to sales or specific accounting periods, so they are usually reported as part of expenses as soon as the advertisements occur.

    Losses are often reported when there are situations where the corporation incurs a loss from long term asset sales or lawsuit results from transactions that are outside of primary activities. As part of the general accounting practises, losses are reported typically as the net of two amounts- book value minus proceed received, where the proceeds are less than book value.

    3. Single Step Income Statements

    One of the two most commonly used accounting practises when it comes to income statement preparation would be the single step income statement format. This particular format relies only on one subtraction to derive the net income. Take care to note that single step income statement formats involve critical information within the heading, time interval reported and precision of the time period data. One can typically expect single subtotals for revenue line items, expense line items, and a report on net gain or loss. This format is usually more suitable for businesses that rely on simple operations.

    4. Multi-Step Income Statements

    True to it’s name, multi step income statements usually involve multiple subtractions to compute the net income. Another most commonly practised step out of all accounting practises, one can expect details and segregation on operating revenues, operating expenses, nonoperating revenues, non operating expenses, losses, gains and gross profit.

    5. Discontinued Operations Reporting

    For corporations who have gone through with eliminating significant parts of their business, discontinued operations is something accountants should observe in their accounting practises. Take note that income tax expenses should be included as part of the income statement generated. Gains in discontinued corporation operations should be reduced by income tax expenses that are associated with the gain, whereas losses incurred are reduced by income tax savings associated with it.

    everything-know-accounts-payable-process 22 Jun

    Everything To Know About The Accounts Payable Process

    As part of accounting basics, all accountants are expected to be able to fully understand and explain what goes on within the accounts payable account. If you are beginning or possess no accounting knowledge, here is a simple guide to understanding what happens:

    The Accounts Payable account is an open account that contains liabilities to creditors. If corporations make purchases for good and services in advance (without payment first), the purchases are made on account/credit while the invoices/bills are recorded into the Liability account (Accounts Payable). As a part of Double entry accounting basics, the Accounts Payable should be credited while another account is debited when the vendor invoice requires recording. Once the payment is made, the Accounts Payable should be debited while cash is credited. Basic accounting practise dictates that corporations who are to receive goods/services on credit are required to make reports of the liability no later than the date in which they are received. This same date has to be recorded within the debit entry to asset accounts or an expense when appropriate.

    In order to ensure that the accurate amount is entered within accounting systems, there are certain details one should pay attention to: purchase orders and receiving reports issued by the corporation, company vendor’s invoices, contracts and other agreements. As a good recommendation for accounting basics regarding running an accounts payable process, accountants should ensure that- vendor invoices are processed in a timely fashion, general ledger accounts are recorded accurately, and that the accrual of obligations/expenses are not yet completely processed.

    The goal of the Accounts payable process is to identify legitimate invoices and bills of the corporation. Before the invoice issued by creditors/vendors are entered into accounting records, the invoices should reflect/include: The corporation’s purchase order, what the corporation has received, unit costs, totals, calculations, additional terms and more.

    Another recommended accounting practise for accountants would be to advise and ensure that there are internal controls for the accounts payable process. This ensures that the corporation’s assets and cash are safeguarded. Part of the account basics for internal controls include fraudulent invoice payment prevention, inaccurate invoice payment prevention, double payment prevention, as well as organisation practises to ensure that all vendor invoices have been accounted for.

    Purchase orders are highly recommended to be prepared by corporations when there is intent to order from vendors. Relevant people or departments should be able to receive a purchase order copy detailing: a PO number, date of preparation, corporation name, vendor name, contact details, purchase item description, quantity of purchased items, unit prices, date required, shipping methods and other relevant details. Receiving reports should also be generated to document services or goods the corporation has received since they will be used to reconcile with the purchase order information.

    Once both purchase orders and receiving reports have been generated and reconciled, they will require comparison with the vendor’s invoice in an accounting practise known as three way match. The three way match involves the comparison of service/product description, quantity, price, terms of the purchase order, description and quantity of the receiving report and description, quantity, cost, and terms of the invoice. The process is done when all three documents are in agreement and the vendor’s invoice will be input into the Accounts Payable account for payment scheduling.

    Income And Expenses

    income and expenses

    Income and expenses are the accounts that are contained in the Profit and Loss Statement or Statement of Earnings.  They are also referred to as nominal or temporary accounts. This is because they are reported for in a specific accounting period, its balances closed at the end of the accounting year or year of operations.  End-of- year balances of income and expenses are closed to the owner’s capital accounts.

     

    Revenue

    In Accounting, revenue is income earned for rendering services in case of a service company.  For a company engaged in selling merchandise or goods, revenue is income derived from sales of goods to customers.

    It is very important to note that in accounting, Sales or Service Income comes from the normal business activities of the business. Sales or Service Income does not come from other revenue generating activities which is not part of the normal operations of the business.  For example, a company engaged in buying and selling of merchandise like groceries sold an old building it have previously owned.  The sale of the old building will not form part of the Sales of the business but will be reported as other revenue if it realize a gain for selling the asset.

    If a company is using accrual basis of accounting, sales are recognized and recorded when the goods are delivered to the customer even without receiving payment.  In case of service income, the revenues are recognized and recorded when the services are rendered to the customer.

    Revenues can come in different forms and accounts as follows:

    • Sales – this means the revenue generated from selling merchandise in the case of merchandise business.
    • Service Income – this means the revenue generated from rendering services in the case of services business.
    • Interest Income – the interest earned from bank deposits.

    Income or revenues have normal credit balance so that when the revenue is earned and recognized, it is recorded as a credit to Sales in case of sales of merchandise to customer and debit cash if the customer pays in cash. If the customer payment is on terms, accounts receivable is debited instead of cash.

     

    Expenses

    Expenses are costs that are incurred as a result of the business efforts to generate revenue and pay for its business operations. The cost of purchasing the merchandise for sale is called as cost of sales or cost of goods sold.  For service business, the cost to render the service to customer is referred to as service costs.

    Other expenses that are incurred by the business related to selling and running the business include the following:

    • Salaries and Wages – this can be further classified into sales department salaries, office staff salaries
    • Rental – this can be further classified into office, store or warehouse rental.
    • Electricity and water
    • Supplies – this could be in form of store supplies or office supplies.
    • Insurance expense – can be in form of employees’ insurance, store building insurance
    • Interest expense – in the form of
    • Depreciation expense – this expense is not actually paid out in cash but in the form of depreciating the value of the asset in the form of depreciation.

    Expenses are recorded as a debit to the corresponding account and credit to cash if paid in cash.  If the expense is not yet paid in cash, the credit would be to a liability account.

    Capital or Owners Equity

    Capital-or-Owners-Equity

    We are able to define assets and liabilities in the previous topics.  Now we are going to discuss about Capital or Owner’s Capital.

    When we hear the word Capital or Owner’s capital, what comes to mind is the amount of money or resources that an owner invest in his business.  Capital always involve investments of sum of money.  However, owners can always contribute capital in form of other assets like machinery and equipment or properties.  What comes to mind is the investment made by the owner when he set up his business or the additional amount of money, properties being contributed or put up in the course of business operations.

    However, in the business setting and accounting world, capital is considered the sum total of owner’s investment that may consist of money or properties, less any withdrawals or drawings. The net amount of investments less the amount of withdrawals or drawings are then added to the net income or lessened by the net loss of the business to arrive at the computed capital or owner’s investment.  For example, if the owner has invested S$10,000 cash and S$5,000.00 of office furniture and equipment, his capital investment amounted to S$15,000.00

    During the first year of operations, net profit from the business amounted to S$8,000.00 while his capital withdrawals or drawings amounted to S$2,500.00.   To compute his capital or owner’s equity, we calculated S$20,500.00 capital as follows:

    Beginning Capital Investment                         S$15,000.00

    Add:  Net Profit from Operations                           8,000.00

    Less:   Drawings                                             (      2,500.00)

    Capital at end of first year operations            S$20,500.00

    In Accounting, Capital is the difference between Assets and Liabilities so capital also mean Net Assets.  Net Assets is the remaining balance of the total company or business assets after paying off all company debts and liabilities to all suppliers and debtors. For example, XYZ company have a total assets of S$25,000.00 and total liabilities of S$15,000.00, that means the Capital or Owners equity is S$10,000.00

    Correct and accurate recording of business financial transactions is very important in order to have reliability on the level of accuracy contained in the accounting information of the business.  Assuming that a company with high volume of transactions have erroneously recorded $5,000.00 cash contribution from its owner as a payment from a customer.  To correctly record the transaction the following entry should be made:

    Debit  –  Cash                                      S$5,000.00

    Credit – Capital                                                                       S$5,000.00

    If the bookkeeper have erroneously recorded the investment transaction as:

    Debit –  Cash                                      S$5,000.00

    Credit – Accounts Receivable                                                S$5,000.00

    Erroneous recording of transactions result to erroneous financial information which in this case, resulting in understatement of owners capital.  In the next topic you will get to know how to correctly analyze and record transactions using the basic principles and the normal balance debit and credit of accounts. You will get to know what is the normal balance side of an account which is the key to correctly recording transactions of the business.

    What are Non-Current Assets?

    Assets and current assets are defined in the previous accounting topic. Now we discuss about non-current assets.

    As previously defined, non-current assets are those economic resources of an enterprise which are not expected to be used, utilized, or immediately available within the normal business operations or normal operating cycle of the business. This is the opposite scenario for current assets, which are expected to be used, utilized or immediately available within the normal business operations or normal operating cycle, which is usually within one year.
    non-current-assets

    Non-current assets are classified into the following:

    Long-Term Investments – are securities or other investment instruments which are not expected to mature within one year. This can be in form of bonds, investments in stocks, time deposits which will mature after one year and other securities. Land owned by the business and held to be sold after a year or more when the value increases is also an example of long-term investment.

    Property, Plant and Equipment – are physical or tangible assets owned and held by an economic enterprise for use in the business operations. The uses for these assets include, but not limited to, the production of goods for sale or rendering of services, in case if the business is service in nature. Buildings, plant and equipment lose or diminish its value because of wear and tear and depreciation. This decrease in value is presented as a contra-asset account which is called accumulated depreciation. However, not all property, plant and equipment assets are subject to depreciation. An example of this is the land where the business or plant is located. Land owned by the business that is intended to be sold for more than a year or more in order to increase its market value is not to be classified as property, plant and equipment, but as a long-term investment.

    Intangible Assets – are non-physical assets of the business enterprise which have a useful life of more than one year. Intangible assets include patents, copyrights, trademarks and goodwill are example of intangible assets. An example of Goodwill being recognized as an intangible asset is when an acquiring company acquired a business and paid the price at more than its fair market value or at more than the fair market value of all assets acquired. The excess of the price paid for the value of the assets is called as goodwill and is recorded as an intangible asset.

    As an example, assume Company A acquired the properties of Company B at $$500,000.00. Total assets to be acquired by Company A have a fair market value of S$420,000.00 composed only of Property, Plant and equipment. The difference of $80,000.00 will be recorded as Goodwill which is an intangible asset of the acquiring Company A.

    Other Assets – are assets of the company which do not fall the classification for current asset, investment, property, plant and equipment and as intangible asset. Examples of other assets include deferred tax assets or credits.

    How to Maintain Proper Company Records?

    Companies operating in Singapore are mandated to maintain proper company records of their financial transactions, accounting records, bank statements and all relevant and related business transactions of their business operations.

    Why Maintain?

    If Companies maintain proper company records, it enables them to have a more effective assessment of the financial year.

    What documents?

    Companies must maintain proper company records and accounts of all business transactions. Additionally, they must maintain company records of its financial transactions and keep the original documents, accounting records and schedules, together with any other transaction records related to the company.

    How?

    Financial and accounting records including supporting documents pertaining to the Year of Assessment (YA) 2007, and earlier, should be maintained for seven years from the appropriate YA. For YA 2008 and subsequent YAs, mandatory record keeping time frame has been reduced from seven to five years.

    The Income Tax act allows the IRAS to raise an assessment or additional assessment within six years after the end of that YA for assessments prior to YA 2008. Hence, the statutory time finality to raise an assessment, or additional assessment, will be accorded the appropriate reduction from six to four years in tandem with the reduction of record keeping time frame from YA 2008 from seven years to five years.

    How to Maintain Proper Company Records?

    Companies operating in Singapore are mandated to maintain proper company records of their financial transactions, accounting records, bank statements and all relevant and related business transactions of their business operations.

    Why Maintain?

    If Companies maintain proper company records, it enables them to have a more effective assessment of the financial year.

    What documents?

    Companies must maintain proper company records and accounts of all business transactions. Additionally, they must maintain company records of its financial transactions and keep the original documents, accounting records and schedules, together with any other transaction records related to the company.

    How?

    Financial and accounting records including supporting documents pertaining to the Year of Assessment (YA) 2007, and earlier, should be maintained for seven years from the appropriate YA. For YA 2008 and subsequent YAs, mandatory record keeping time frame has been reduced from seven to five years.

    The Income Tax act allows the IRAS to raise an assessment or additional assessment within six years after the end of that YA for assessments prior to YA 2008. Hence, the statutory time finality to raise an assessment, or additional assessment, will be accorded the appropriate reduction from six to four years in tandem with the reduction of record keeping time frame from YA 2008 from seven years to five years.

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