Monday, July 20, 2009
Friday, July 17, 2009
Tuesday, August 12, 2008
Account Payable (AP)
Account Payable
An accounting entry that represents an entity's obligation to pay off a short-term debt to its creditors. The accounts payable entry is found on a balance sheet under the heading current liabilities. Credit purchases will be treated as account payable which used to be due with in one year period.
Journals entry's for credit purchases
DR Inventory
CR Account Payable
Account Receivable (AR)
Money owed by customers (individuals or corporations) to another entity in exchange for goods or services (SALE) that have been delivered or used, but not yet paid for. Receivables usually come in the form of operating lines of credit and are usually due within a relatively short time period, ranging from a few days to a year.
Journal entry's
DR Account Receivable
CR Sales
In two ways accounting treatement used to give for uncollectible amount.
- Provide or Provision or Allowance for Bad Debt
Amounts that can be expected to be uncollectible for the year of assessment that can be treated as allowance for bad debt. - Write off
When entity realise certain amount can not be collected then entity will pass the entry to write off the amount from the account receivable.
Journal entry's
- Allowance for bad debt
DR Bad Debt Expenses
CR Allowance for Bad Debt - Write Off
DR Allowance for Bad Debt
CR Account Receivable
Monday, August 11, 2008
Objectives of Financial Reporting
To prepare financial information that will help readers of the financial statements make better decisions. Readers of financial statements may not all have the same information requirements.
- Assessing and Predicting cash flows – this type of reader wants to know whether the company will have enough cash flow from operations to pay its bills, to repay its bank loan or to meet a lease payment. Bankers are always concerned about companies not being able to repay their loans.
- Tax Minimization – for example, a company will defer revenues as long as possible, and recognize expenses as soon as possibleHowever, the CCRA often have their own rules and the financial reporting policies used by a company are not relevant.
- Contract compliance – a company wants to show how it has met the requirements of some obligation. In this case the company will show a partial financial statement.Sometimes this is done for Royalty payments for things like software or for production of items under agreement.
- Stewardship – this generally applies to non-profit organizations. For example, the people who donate to the organization want to know that the money is being spent on the purposes of the organization.You may remember earlier this year, the toronto star newapaper did a survey of various charities and found that some charities were spending over 50% of their donations on advertising and commissions – the public was not pleased.
- Performance evaluation – recognize revenue when effort expended, match with expenses.In the example we just looked at – on a cash basis it looks like the company did badly during the first two years and did well during the last three years.This could scare away investors – some investors like to see companies that are consistently profitable. For this reason, many investors like to use GAAP, it may help the company look more consistently profitable.
Generally Accepted Accounting Principles (GAAP)
GAAP ASSUMPTIONS
- Going Concern Assumption: The company or entity is a “going concern” and is not likely to end operations in the current year. It is expected to remain in business for the foreseeable future. Any exceptions to this assumption must be disclosed.
- Economic Entity Assumption: The company is an independent entity and is separate from it’s owners.
- Monetary Unit Assumption: The currency used to measure the entity’s financial performance is stable.
- Periodic Reporting Assumption: Business operations are reported on a regular basis, usually annually. The fiscal year doesn’t have to be the same as the calendar year. This is usually set according to the business cycle for the particular company.
In CANADA GAAP
- OFFICIAL Pronouncements of the ACCOUNTING STANDARDS BOARD (ACsB)
- Other pronouncements of the Accounting Standards Board – these are not as specific as the official prouncements mentioned aboveOther Sources – such as US Pronouncements, Industry standards or International standards.”
Two types of corporations:
- Public corporations – issues securities to the public (whether
debt or equity) If the company is public - then must use GAAP - Private corporation – does not issue securities to the publicIf the company is private – then several choices;
1. GAAP
2. Differential GAAP - Big company/little company
3. Foreign Parent company accounting policies
4. Disclosed Basis of Accounting – however if this type of accounting is followed, then one has to describe the Policy in the Notes to The Financial Statements – otherwise it may be misleading to the reader of the financial statements(more common)
Changes in Equity or Statement of Retained Earnings
Shareholders Equity Contain Followings
- Common Shares
- Preferred Shares
- Retain Earning
- Net Profit or Loss
- Dividend payment
- Prior year adjustment
- Issue or Recall of Common Stock
- Issue or Recall of Preferred Shares
- Error correction – if error occurred in the past and is large then the financial statements of the previous year has to be corrected, which is done by re-stating the amounts in the financial statements. The re-statement may cause the net income amount from the previous year to be different than what was originally reported. The amount of the difference in Net Income is highlighted on the Statement of Retained Earnings.
ALSO – reported Net of Tax. - Changes in Accounting Policy – applied retroactively
Bank Reconciliation
Bank reconciliation is the process of matching and comparing figures from accounting records against those presented on a bank statement. Less any items which have no relation to the bank statement, the balance of the accounting ledger should reconcile (match) to the balance of the bank statement.
Thorough bank reconciliation following balance used to get adjusted....
Adjustments: | |
Add: Deposit in transit | |
Deduct: Outstanding Checks | |
Add or Deduct: Bank errors | |
Adjusted/Corrected Balance per Bank |
Accounting Equation
Equity
At the start of a business, owners put some funding into the business or owners interest on a business its define as equity (Owners capital, Retained earning,etc)
Assets
The probable future benefit involves a capacity, singly or in combination with other assets, in the case of profit oriented enterprises, to contribute directly or indirectly to future net cash flows.
- Current AssetsA balance sheet account that represents the value of all assets that are reasonably expected to be converted into cash within one year in the normal course of business. Current assets include cash, accounts receivable, inventory, marketable securities, prepaid expenses and other liquid assets that can be readily converted to cash.
- Non Current assets
An asset which is not easily convertable to cash or not expected to become cash within the year. Examples include Property Plant Equipment. opposite of current asset
This can be define in to two - Tangible Assets
Assets having a physical existence, such as cash, equipment, and real estate; accounts receivable are also usually considered tangible assets for accounting purposes. - Intangible Assets
Something of value that cannot be physically touched, such as a brand, franchise, trademark or patent. opposite of tangible assets.
An obligation that legally binds an individual or company to settle a debt. When one is liable for a debt, they are responsible for paying the debt or settling a wrongful act they may have committed. This include accounts payable, taxes, wages, accrued expenses, and deferred revenues. Current liabilities are debts payable within one year or long.
- Current Liability
An obligation that legally binds an individual or company to settle a debt with in ONE YEAR of period - Long Term Liability
An obligation that legally binds an individual or company to settle a debt MORE THAN ONE YEAR period.
- Equity = Assets - Liability
- Equity = (Current Assets + Non Current Assets)-(Current Liability + Long-Term Liability)
- Owners Capital + Retain Earnings = Assets - Liability
Cash Flow Statement
Its records the amounts of cash and cash equivalents entering and leaving a company. The CFS allows investors to understand how a company's operations are running, where its money is coming from, and how it is being spent.
The cash flow statement organizes and reports the cash generated and used in the following categories:
- Operating activities
converts the items reported on the income statement from the accrual basis of accounting to cash. - Investing activities
reports the purchase and sale of long-term investments and property, plant and equipment. - Financing activities
reports the issuance and repurchase of the company's own bonds and stock and the payment of dividends.
Cash flow statement is being prepared using two methods as follow
- Direct Method CFS
A cost or expense that can directly traceable against each activity that define as direct method of Cash Flow Statement
Anderson Inc.
Cash Flow Statement for the year end 31st December 20xx
- Indirect Method CFC
A cost or expense that can NOT BE DIRECTLY traceable against each activity that define as direct method of Cash Flow Statement
Anderson Inc.
Cash Flow Statement for the year end 31st December 20xx
BOTH METHODS DIFFER FROM OPERATING ACTIVITY
Balance Sheet in Canada
Balance sheet will reflect the unamortized cost of the company`s major groups of assets and the sources used to finance those assets.
Balance Sheet as at 31st December 20xx
Income Statement In Canada
Income statement which explain the changes in owners equity caused by operation and certain other activity during a period.
Income can be define in two category
- Economic Income
Increase in the wealth of a corporation - Accounting Income
Reported wealth of an entity based on its actual transaction.
Draft of Income statement
Anderson Inc.
Income Statement for the year end 31st December 20xx
Cost of goods can be calculated
Beginning Inventory XXX
Add: Purchases XXXX
Inventory for Sales XXXX
Closing Inventory (XXX)
Cost of Sales XXXX
Operating Exposes
Administration Cost XXX
Selling and Distribution cost XXX
Finance Cost XXX
Total Operating Cost XXXX
Other Income
Income from Investment XXX
Gain from Disposal of Capital Assets XXX
Interest Income XXX
Discounts XXX
Total Other Income XXXX
Income statement balance Net profit or Loss balance will carried forward to changes in equity statement.
Accounting Ratios
Liquidity Analysis Ratios |
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|
| | Current Assets |
| Current Ratio = | ------------------------ |
| | Current Liabilities |
| | |
|
| | Quick Assets |
| Quick Ratio = | ---------------------- |
| | Current Liabilities |
| | |
Quick Assets = Current Assets - Inventories |
|
|
| | Net Working Capital |
| Net Working Capital Ratio = | -------------------------- |
| | Total Assets |
| | |
Net Working Capital = Current Assets - Current Liabilities |
|
Profitability Analysis Ratios |
|
| | Net Income |
| Return on Assets (ROA) = | ---------------------------------- |
| | Average Total Assets |
| | |
Average Total Assets = (Beginning Total Assets + Ending Total Assets) / 2 |
|
|
| | Net Income |
| Return on Equity (ROE) = | -------------------------------------------- |
| | Average Stockholders' Equity |
| | |
Average Stockholders' Equity = (Beginning Stockholders' Equity + Ending Stockholders' Equity) / 2 |
|
|
| | Net Income |
| Return on Common Equity (ROCE) = | -------------------------------------------- |
| | Average Common Stockholders' Equity |
| | |
Average Common Stockholders' Equity = (Beginning Common Stockholders' Equity + Ending Common Stockholders' Equity) / 2 |
|
|
| | Net Income |
| Profit Margin = | ----------------- |
| | Sales |
| | |
| |
|
| | Net Income |
| Earnings Per Share (EPS) = | --------------------------------------------- |
| | Number of Common Shares Outstanding |
| | |
|
Activity Analysis Ratios |
|
| | Sales |
| Assets Turnover Ratio = | ---------------------------- |
| | Average Total Assets |
| | |
Average Total Assets = (Beginning Total Assets + Ending Total Assets) / 2 |
|
|
| | Sales |
| Accounts Receivable Turnover Ratio = | ----------------------------------- |
| | Average Accounts Receivable |
| | |
Average Accounts Receivable = (Beginning Accounts Receivable + Ending Accounts Receivable) / 2 |
|
|
| | Cost of Goods Sold |
| Inventory Turnover Ratio = | --------------------------- |
| | Average Inventories |
| | |
Average Inventories = (Beginning Inventories + Ending Inventories) / 2 |
|
Capital Structure Analysis Ratios |
|
| | Total Liabilities |
| Debt to Equity Ratio = | ---------------------------------- |
| | Total Stockholders' Equity |
| | |
| |
|
| | Income Before Interest and Income Tax Expenses |
| Interest Coverage Ratio = | ------------------------------------------------------- |
| | Interest Expense |
| | |
Income Before Interest and Income Tax Expenses = Income Before Income Taxes + Interest Expense |
|
Capital Market Analysis Ratios |
|
| | Market Price of Common Stock Per Share |
| Price Earnings (PE) Ratio = | ------------------------------------------------------ |
| | Earnings Per Share |
| | |
| |
|
| | Market Price of Common Stock Per Share |
| Market to Book Ratio = | ------------------------------------------------------- |
| | Book Value of Equity Per Common Share |
| | |
Book Value of Equity Per Common Share = Book Value of Equity for Common Stock / Number of Common Shares |
|
|
| | Annual Dividends Per Common Share |
| Dividend Yield = | ------------------------------------------------ |
| | Market Price of Common Stock Per Share |
| | |
Book Value of Equity Per Common Share = Book Value of Equity for Common Stock / Number of Common Shares |
|
|
| | Cash Dividends |
| Dividend Payout Ratio = | -------------------- |
| | Net Income |
| | |
| |
ROA = Profit Margin X Assets Turnover Ratio |
|
| | Net Income | Net Income | Sales |
| ROA = | ------------------------ = | -------------- X | ------------------------ |
| | Average Total Assets | Sales | Average Total Assets |
| | | |
Profit Margin = Net Income / Sales Assets Turnover Ratio = Sales / Averages Total Assets |
Accounting Introduction
Some of the basic accounting terms that you will learn include revenues, expenses, assets, liabilities, income statement, balance sheet, and statement of cash flows. You will become familiar with accounting debits and credits as we show you how to record transactions. You will also see why two basic accounting principles, the revenue recognition principle and the matching principle, assure that a company's income statement reports a company's profitability.
In this explanation of accounting basics, and throughout the entire website, AccountingCoach.com will often omit some accounting details and complexities in order to present clear and concise explanations. This means that you should always seek professional advice for your specific circumstances.
Sunday, August 10, 2008
Amortization (Depriciation + Depletion) and Impairment
What is amortization?
A systematic method of allocating the costs of a capital asset over its estimated period of usefulness.
The calculation and reporting of depreciation is based upon two accounting principles.
- Cost Principles
- Matching Principles
Are any assets not amortized?
- Land
- Goodwill – but there is an impairment test. (Its Depend on country accounting policy)
- Intangible Capital Assets with Indefinite Life
Methods of Amortization
- Straight line
Formula: (Accounting cost - Residual value OR Salvage Value) / Estimated useful life in years
Accounting Cost: Purchasing cost of Capital asset plus shipping cost plus installation etc which bring to useage.
Salvage Value: An asset's fair value at the end of its life; often zero
Residual Value: The estimated net recoverable amount from disposal at the end of estimated useful life.
Estimated useful life: Entity decision based on use
FYI. This method commonly used world wide - Variable Charge (input-output)
a) Service hours
Formula: (Accounting cost - Residual value OR Salvage Value) / Service hours
Service Hour: Entity decided useful of service hour of a Equipment or Machine
b) Productive Output
Formula: (Accounting cost - Residual value OR Salvage Value) / Productivity in units
Productivity: Productivity of an asset over a period of life - Accelerated Methods or Decreasing Charges
a) Declining Balance (DB)
Formula: (Accounting cost - Accumulated Amortization) X Decline method rate
Note 1:
For DB calculation residual values or salvage value are not subtracted from Cost when computing amortization.
But calculation of amortization stops when the Net Book Value of the asset is equal to residual value
Note 2:
If DB rate is not provided then you have to find out the rate first using straight line only for first year thereafter you can use same rate for rest of the life.
b) Sum-of-the-Years Digits (SYD)
Formula: (Accounting cost - Residual value OR Salvage Value) /SYD Fraction
SYD Fraction is calculated using following method
Example 5 year life
Year 1 = [(Acc cost -Resi or Sal) / (5+4+3+2+1)] x 5
Year 2 = [(Acc cost -Resi or Sal) / (5+4+3+2+1)] x 4 - Sinking fund (increasing charges)
Formula: [(Accounting cost - Residual value OR Salvage Value) /(F/A, interest rate,# of periods)] + Annual Compound interest to date
A method of allocating cost in which amortization expenses is lower in an asset's early years but increases over time.
What is the group amortization
The amortization of a set of similar assets on a average rate designed to be statistically valid for the groups as whole
What is the composite amortization
The amortization of a set of related but similar assets using one composite rate
Accounting policy CONVENTION APPROACH
- Half year convention Under this approach if any assets acquired or disposed during the year against that particular assets amortization to be calculate only for half year
- Full first-year convention Under this approach amortization is charged all the assets exist at the END OF YEAR, including those acquired during the year.
- Final year convention Under this approach amortization is charged all the assets exist at the BEGINNING OF YEAR.
IMPAIRMENT of CAPITAL ASSETS AND GOODWILL
The loss of a portion of the asset`s utility or value; a permanent reduction in value necessitating loss recognition.
As i dont have much knowledge about impairment if anyone can help me to update on this please mail me to anda4tamil"gmail.com
Basic Accounting Principle
- Economic Entity Assumption
The accountant keeps all of the business transactions of a sole proprietorship separate from the business owner's personal transactions. For legal purposes, a sole proprietorship and its owner are considered to be one entity, but for accounting purposes they are considered to be two separate entities. - Monetary Unit Assumption
Economic activity is measured in U.S. dollars, and only transactions that can be expressed in U.S. dollars are recorded.
Because of this basic accounting principle, it is assumed that the dollar's purchasing power has not changed over time. As a result accountants ignore the effect of inflation on recorded amounts. For example, dollars from a 1978 transaction are combined (or shown with) dollars from a 2008 transaction. - Time Period Assumption
This accounting principle assumes that it is possible to report the complex and ongoing activities of a business in relatively short, distinct time intervals such as the five months ended May 31, 2008, or the 5 weeks ended May 1, 2008. The shorter the time interval, the more likely the need for the accountant to estimate amounts relevant to that period. For example, the property tax bill is received on December 15 of each year. On the income statement for the year ended December 31, 2008, the amount is known; but for the income statement for the three months ended March 31, 2008, the amount was not known and an estimate had to be used.
It is imperative that the time interval (or period of time) be shown in the heading of each income statement, statement of stockholders' equity, and statement of cash flows. Labeling one of these finacial statements with "December 31" is not good enough—the reader needs to know if the statement covers the one week ending December 31, 2008 the month ending December 31, 2008 the three months ending December 31, 2008 or the year ended December 31, 2008. - Cost Principle
From an accountant's point of view, the term "cost" refers to the amount spent (cash or the cash equivalent) when an item was originally obtained, whether that purchase happened last year or thirty years ago. For this reason, the amounts shown on financial statements are referred to as historical cost amounts.
Because of this accounting principle asset amounts are not adjusted upward for inflation. In fact, as a general rule, asset amounts are not adjusted to reflect any type of increase in value. Hence, an asset amount does not reflect the amount of money a company would receive if it were to sell the asset at today's market value. (An exception is certain investments in stocks and bonds that are actively traded on a stock exchange.) If you want to know the current value of a company's long-term assets, you will not get this information from a company's financial statements—you need to look elsewhere, perhaps to a third-party appraiser. - Full Disclosure Principle
If certain information is important to an investor or lender using the financial statements, that information should be disclosed within the statement or in the notes to the statement. It is because of this basic accounting principle that numerous pages of "footnotes" are often attached to financial statements.
As an example, let's say a company is named in a lawsuit that demands a significant amount of money. When the financial statements are prepared it is not clear whether the company will be able to defend itself or whether it might lose the lawsuit. As a result of these conditions and because of the full disclosure principle the lawsuit will be described in the notes to the financial statements.
A company usually lists its significant accounting policies as the first note to its financial statements. - Going Concern Principle
This accounting principle assumes that a company will continue to exist long enough to carry out its objectives and commitments and will not liquidate in the foreseeable future. If the company's financial situation is such that the accountant believes the company will not be able to continue on, the accountant is required to disclose this assessment.
The going concern principle allows the company to defer some of its prepaid expenses until future accounting periods. - Matching Principle
This accounting principle requires companies to use the accrual basic of accounting. The matching principle requires that expenses be matched with revenues. For example, sales commissions expense should be reported in the period when the sales were made (and not reported in the period when the commissions were paid). Wages to employees are reported as an expense in the week when the employees worked and not in the week when the employees are paid. If a company agrees to give its employees 1% of its 2007 revenues as a bonus on January 15, 2008, the company should report the bonus as an expense in 2007 and the amount unpaid at December 31, 2007 as a liability. (The expense is occurring as the sales are occurring.)
Because we cannot measure the future economic benefit of things such as advertisements (and thereby we cannot match the ad expense with related future revenues), the accountant charges the ad amount to expense in the period that the ad is run. - Revenue Recognition Principle
Under the accrual basis of accounting, revenue are recognized as soon as a product has been sold or a service has been performed, regardless of when the money is actually received. Under this basic accounting principle, a company could earn and report $20,000 of revenue in its first month of operation but receive $0 in actual cash in that month.
For example, if ABC Consulting completes its service at an agreed price of $1,000, ABC should recognize $1,000 of revenue as soon as its work is done—it does not matter whether the client pays the $1,000 immediately or in 30 days. Do not confuse revenue with a cash receipt. - Materiality
Because of this basic accounting principle or guideline, an accountant might be allowed to violate another accounting principle if an amount is insignificant. Professional judgement is needed to decide whether an amount is insignificant or immaterial.
An example of an obviously immaterial item is the purchase of a $150 printer by a highly profitable multi-million dollar company. Because the printer will be used for five years, the matching principle directs the accountant to expense the cost over the five-year period. The materiality guideline allows this company to violate the matching principle and to expense the entire cost of $150 in the year it is purchased. The justification is that no one would consider it misleading if $150 is expensed in the first year instead of $30 being expensed in each of the five years that it is used.
Because of materiality, financial statements usually show amounts rounded to the nearest dollar, to the nearest thousand, or to the nearest million dollars depending on the size of the company. - Conservatism
If a situation arises where there are two acceptable alternatives for reporting an item, conservatism directs the accountant to choose the alternative that will result in less net income and/or less asset amount. Conservatism helps the accountant to "break a tie." It does not direct accountants to be conservative. Accountants are expected to be unbiased and objective.
The basic accounting principle of conservatism leads accountants to anticipate or disclose losses, but it does not allow a similar action for gains. For example, potential losses from lawsuits will be reported on the financial statements or in the notes, but potential gains will not be reported. Also, an accountant may write inventory down to an amount that is lower than the original cost, but will not write inventory up to an amount higher than the original cost.