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.

    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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