1. Define accounting? How does accounting differ from book keeping?

State the accounting

concepts and conventions? Distinguish between accrual accounting and actual accounting
from Islamic perspective? Users and uses of accounting?
Definition of Accounting
Accounting is the recording of financial transactions along with storing, sorting,
retrieving, summarizing, and presenting the results in various reports and analyses.
Accounting is also a field of study and profession dedicated to carrying out those tasks.
Bookkeeping and accounting are two functions which are extremely important for every
business organization. In the simplest of terms, bookkeeping is responsible for the
recording of financial transactions whereas accounting is responsible for interpreting,
classifying, analyzing, reporting, and summarizing the financial data. Bookkeeping and
accounting may appear to be the same profession to an untrained eye. This is because
both accounting and bookkeeping deal with financial data, require basic accounting
knowledge, and classify and generate reports using the financial transactions. At the same
time, both these processes are inherently different and have their own sets of advantages.
Read this article to understand the major differences between bookkeeping and
accounting.

Bookkeeping vs Accounting - Major Differences

A major misconception regarding bookkeeping vs. accounting is that both are considered
to be one profession. Though they seem to be very similar, there are some striking
differences between the two. To resolve this confusion, we have listed down accounting
vs. bookkeeping differences here -
Definition
Bookkeeping is mainly related to identifying, measuring, and recording, financial
transactions. Accounting is the process of summarizing, interpreting, and communicating
financial transactions which were classified in the ledger account.
Decision Making
Management can't take a decision based on the data provided by bookkeeping.
Depending on the data provided by the accountants, the management can take critical
business decisions.
Objective
The objective of bookkeeping is to keep the records of all financial transactions proper
and systematic.
The objective of accounting is to gauge the financial situation and further communicate
the information to the relevant authorities.
Preparation of Financial Statements
Financial statements are not prepared as a part of this process.
Financial statements are prepared during the accounting process.
Skills Required
Bookkeeping doesn't require any special skill sets.
Accounting requires special skills due to its analytical and complex nature
Analysis
The process of bookkeeping does not require any analysis.

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Accounting uses bookkeeping information to analyze and interpret the data and then
compiles it into reports.
Types
Basically there are two types of bookkeeping - Single entry and double entry
bookkeeping. The accounting department does preparations of a company's budgets and
plans loan proposals.
Bookkeepers and Accountants
Bookkeepers are required to be accurate in their work and knowledgeable about financial
topics. Bookkeepers work is usually overseen by an accountant.
Accountants with sufficient experience and education can obtain the title of Certified
Public Accountant (CPA).
Accounting Concepts and Conventions

In drawing up accounting statements, whether they are external "financial accounts" or

internally-focused "management accounts", a clear objective has to be that the accounts
fairly reflect the true "substance" of the business and the results of its operation. The
theory of accounting has, therefore, developed the concept of a "true and fair view". The
true and fair view is applied in ensuring and assessing whether accounts do indeed
portray accurately the business' activities. To support the application of the "true and fair
view", accounting has adopted certain concepts and conventions which help to ensure
that accounting information is presented accurately and consistently.
Accounting Conventions
The most commonly encountered convention is the "historical cost convention". This
requires transactions to be recorded at the price ruling at the time, and for assets to be
valued at their original cost. Under the "historical cost convention", therefore, no account
is taken of changing prices in the economy. The other conventions you will encounter in
a set of accounts can be summarized as follows:
Monetary measurement
Accountants do not account for items unless they can be quantified in monetary terms.
Items that are not accounted for (unless someone is prepared to pay something for them)
include things like workforce skill, morale, market leadership, brand recognition, quality
of management etc.
Separate Entity
This convention seeks to ensure that private transactions and matters relating to the
owners of a business are segregated from transactions that relate to the business.
Realization
With this convention, accounts recognize transactions (and any profits arising from them)
at the point of sale or transfer of legal ownership - rather than just when cash actually
changes hands. For example, a company that makes a sale to a customer can recognise
that sale when the transaction is legal - at the point of contract. The actual payment due
from the customer may not arise until several weeks (or months) later - if the customer
has been granted some credit terms.
Materiality
An important convention. As we can see from the application of accounting standards
and accounting policies, the preparation of accounts involves a high degree of judgement.
Where decisions are required about the appropriateness of a particular accounting

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judgement, the "materiality" convention suggests that this should only be an issue if the
judgement is "significant" or "material" to a user of the accounts. The concept of
"materiality" is an important issue for auditors of financial accounts.
Accounting Concepts

Four important accounting concepts underpin the preparation of any set of accounts:

Going Concern
Accountants assume, unless there is evidence to the contrary, that a company is not going
broke. This has important implications for the valuation of assets and liabilities.
Consistency
Transactions and valuation methods are treated the same way from year to year, or period
to period. Users of accounts can, therefore, make more meaningful comparisons of
financial performance from year to year. Where accounting policies are changed,
companies are required to disclose this fact and explain the impact of any change.
Prudence
Profits are not recognised until a sale has been completed. In addition, a cautious view is
taken for future problems and costs of the business (the are "provided for" in the
accounts" as soon as their is a reasonable chance that such costs will be incurred in the
future.
Matching (or "Accruals")
Income should be properly "matched" with the expenses of a given accounting period.
Accrual Accounting vs. Cash Accounting
The primary difference between the two principal business accounting methods, accrual
accounting and cash accounting, is when revenue and expenses are recorded as taking
place.
Accrual Accounting:
Accrual accounting is the most common accounting practice for corporations. Businesses
with annual revenues in excess of $5 million are required to use the accrual method for
tax purposes. The impetus for using the accrual method of accounting comes from
increasingly complex business transactions, such as selling on credit and extended
contracts that continue to provide revenue for a company over a long span of time, and
the financial market's desire to have more timely, accurate information on a company's
financial situation. This accounting method aims to provide the most accurate, current
picture of a company's financial condition. The accrual method is essentially a matching
up of revenues to expenses when the transaction takes place instead of when payment is
processed or received, which is the cash basis accounting method. Because income is
recorded and reported when goods are delivered or services are rendered rather than
when payment is actually made, it is necessary to factor in a "non-payment allowance,"
commonly an estimated amount that takes into account the fact that some
customers/clients fail to pay. (For more, see "How to Decipher Accrual Accounting.")

In cases wherein payment is received prior to goods or services actually being provided, a
company initially lists the payment as a liability. The company is liable to deliver the
goods or services. Once the good or service is provided, the payment is shifted from
being listed as a liability to being listed as revenue for the company. Expenses are

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handled in the same manner as revenues; as soon as a bill is received, it is recorded as a
company expense rather than being recorded after the company actually makes payment.
Cash Accounting:
The cash accounting method is almost exclusively restricted to very small businesses and
can work perfectly well for a sole proprietor with a home business. In the modern
economy, it is difficult for any standard business to operate on a cash accounting basis.
For example, cash accounting simply does not work for a retail operation that sells goods
on credit through in-house financing, as it does not provide any means of recording
money due from a customer at some future date. The cash method accounts for all
revenue and expenses when cash physically changes hands.
Cash basis accounting is simple, straightforward and provides a clear picture of the actual
money the company has on hand. In this respect, it is superior to accrual accounting,
which does not provide an accurate report of cash on hand. To overcome this problem,
companies that use accrual accounting usually have a system set up to monitor cash flow.
A weakness of cash accounting is since it does not record future liabilities – bills due but
not yet paid – it may paint an inaccurately positive view of a company's current financial
condition.
Users of Accounting Information
The accounting process provides financial data for a broad range of individuals whose
objectives in studying the data vary widely. Three primary users of accounting
information were previously identified, Internal users, External users, and Government/
IRS. Each group uses accounting information differently, and requires the information to
be presented differently.
Internal Users:
Accounting supplies managers and owners with significant financial data that is useful
for decision making. This type of accounting in generally referred to as managerial
accounting.
Some of the ways internal users employ accounting information include the following:

*Assessing how management has discharged its responsibility for protecting and
managing the company’s resources
*Shaping decisions about when to borrow or invest company resources
* Shaping decisions about expansion or downsizing

External Users:
Typically called financial accounting, the record of a business’ financial history for use
by external entities is used for many purposes. The external users of accounting
information fall into six groups; each has different interests in the company and wants
answers to unique questions. The groups and some of their possible questions are:

Owners and prospective owners. Has the company earned satisfactory income on its
total investment? Should an investment be made in this company? Should the present
investment be increased, decreased, or retained at the same level? Can the company
install costly pollution control equipment and still be profitable?
Creditors and lenders. Should a loan be granted to the company? Will the company be
able to pay its debts as they become due? Hand Putting Deposit into Piggy Bank

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 Employees and their unions. Does the company have the ability to pay increased
wages? Is the company financially able to provide long-term employment for its
workforce?
Customers. Does the company offer useful products at fair prices? Will the company
survive long enough to honor its product warranties?
Governmental units. Is the company, such as a local public utility, charging a fair rate
for its services?
General public. Is the company providing useful products and gainful employment for
citizens without causing serious environmental problems?
##Uses of Accounting
Accounting plays important role for correct and satisfied operating of any organization.
As a matter of fact, the development of any business is only possible, if we record all
business transactions with correct method and analyze them. There are following main
uses of Accounting:-
1. Avoidance of the limitation of memorizing power:-
Businessman cannot remember all business transactions due to the limitation of human
memory. Accounting is helpful for recording all business transaction and when
businessman checks the record, he can easily remember it and use it for his business
purposes.
2. Compliance of Statutory provisions:-
From accounting point of view, recording of business transaction is compulsory. Hereby,
accounting helps to fulfill all statutory provisions. In India, it is compulsory to record of
all cash, bank and purchase and sale transaction for joint stock companies.

3. Ascertainment of profit and loss of the business:-

Any business concern is established for the motive of earning profit. Net profit or loss is
pure result of business. For correct calculation of business profit, it is necessary to record
correctly by adopting the principles of accounting.
4. Ascertainment of financial position of the business:-
At specific date, company finds the knowledge of his assets and liabilities from financial
statement. Assets means all sources of business and liabilities means all payable amounts
of business. Business can calculate correct financial position, if businessman records all
assets and liabilities in accounting.
5. Assessment of Tax:-
Nowadays, a businessman has to pay many taxes. For example income tax, sale tax,
property tax , excise duty , import duty and custom duty etc. Its correct estimation is only
possible, if businessman record correctly all his income, production and sale with the
help of accounting. If businessman does not keep his record properly, then Assessing
officer calculates amount of tax with his own estimation.
6. Knowledge of Debtors and Creditors:-
With accounting, businessman can easily find what amount is due from his debtors and
what amount is payable to his creditors. If he maintains the accounting records properly.
7. Determination of sale price of business:-
If businessman wants to sell his active business to other party , then the total sale value of
business can easily determine, if businessman records all investments in business.

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 8. Evidence in the court of law:-
If any disputes are presented between two parties in court. Then books of accounts can
show as proofs, court accepts these records as evidence of transaction.
9. Assistance in taking managerial decisions:-
Accounting is helpful for many managerial decisions like calculation the price of goods
and services , calculating the product mix and sale mix , purchase decisions , different
uses of plants , determination of the productivity of different sources of productions ,
continue or close of business decisions , replacement of machinery decisions , decision
regarding accepting of any specific order , decision regarding tenders etc.
10. Development of nation:-
Nation can also develop with the help of accounting, if all the businessman records
correctly. With this, the cannot save black money and with huge amount of tax, Govt. can
utilize these funds for development programmes of nation. After this development of
nation is possible. Read also the Accounting facts of other countries

2. Define Cash book? What are books of original entry? What types of transactions are not
recorded in cashbook? Sketch up of a triple column cash book and briefly describe every
column?
A cash book is a financial journal that contains all cash receipts and disbursements, including
bank deposits and withdrawals. Entries in the cash book are then posted into the general ledger.
Key Takeaways
- A cash book is a subsidiary to the general ledger in which all cash transactions during a period
are recorded.
- The cash book is recorded in chronological order, and the balance is updated and verified on a
continuous basis.
-There are three common types of cash books: single column, double column, and triple
column.
Types of cash book
There are four major types of cash book that companies usually maintain to account for their cash
flows. These are given below:

1. A single column cash book to record only cash transactions.

2. A double/two column cash book to record cash as well as bank transactions.
3. A triple/three column cash book to record cash, bank and purchase discount and sales
discount.
4. A petty cash book to record small day to day cash expenditures.
Books of original entry
Books of original entry refers to the accounting journals in which business transactions are
initially recorded. The information in these books is then summarized and posted into a general
ledger, from which financial statements are produced. Each accounting journal contains detailed
records for the types of accounting transactions pertaining to a specific area. Examples of these
accounting journals are:

-Cash journal

- General journal

- Purchase journal

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 -Sales journal

The general ledger is not considered a book of original entry, if it only contains summarized
entries posted to it from one of the underlying accounting journals. However, if transactions are
recorded directly into the general ledger, it can be considered one of the books of original entry.
Books of original entry are extremely useful for investigating individual accounting transactions,
and are commonly accessed by auditors, who verify a selection of business transactions to ensure
that they were recorded correctly, as part of their audit procedures. This concept only applies to
manual record keeping. A computerized accounting system no longer makes reference to any of
the accounting journals, instead recording all business transactions in a central database.
Which transactions are not recorded in cash book?
When a cashbook is maintained, transactions of cash are not recorded in the journal, and no
separate account for cash or bank is required in the ledger. The single column cash book records
all cash transactions of the business in a chronological order, i.e., it is a complete record of cash
receipts and cash payments.
Triple/three column cash book:
The triple column cash book (also referred to as three column cash book) is the most exhaustive
form of cash book which has three money columns on both receipt (Dr) and payment (Cr) sides to
record transactions involving cash, bank and discounts. A triple column cash book is usually
maintained by large firms which make and receive payments in cash as well as by bank and
which frequently receive and allow cash discounts.The procedure of recording transactions in a
triple/three column cash book is similar to that of a double column cash book. The only
difference between two types of cash book is that a double column cash book has two money
columns (i.e., cash and bank) whereas a triple column cash book has three money columns (i.e.,
cash, bank and discount).

The cash and bank columns of triple column cash book are used as accounts and are periodically
totaled and balanced just like in case of a double column cash book. The discount column is only
totaled. It is not balanced because it does not work as an account.In general ledger, two separate
accounts are maintained for discount allowed and discount received. The total of discount column
on debit side of cash book represents the total cash discount allowed to customers during the
period and is posted to the discount allowed account maintained in the ledger. The total of
discount column on credit side represents the total cash discount received from suppliers during
the period and is posted to the discount received account maintained in the ledger.

Discount allowed is an expense and discount received is an income of the business.

Format

The format of a triple/three column cash book is given below:

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 The triple column cash book has 7 columns on both debit and credit sides. The purpose of each
column is briefly explained below:

Date: The date column is used to enter the transaction date.

Description: The description column is used to write the name of the account to be debited or
credited in the ledger as a result of cash or bank transaction.
Voucher number (VN): A voucher is a document in support of a transaction. The serial
number of the voucher is entered in this column.
Posting reference (PR): Each account in the ledger is assigned a unique numbered. The
number each ledger account that is written in description column is entered in PR column.
Discount: The amount of discount allowed is recorded on debit side and the amount of
discount received is recorded on credit side in discount column.The totals of debit column and
credit column are posted to discount allowed account and discount received account respectively.
Cash: The amount of cash received (net of any discount allowed) is entered on the debit side
and the amount of cash paid (net of any discount received) is entered on the credit side in cash
column. This column is totaled and balanced like a ledger account.
Bank: The amount of all receipts and payments made by the bank account are entered in bank
column of the cash book. This column is also totaled and balanced like a ledger account.

3. Describe the importance of inventory management? Why FIFO method is better for
inventory management? How inventory valuation affects the preparation of financial
statement?
Inventory is a current asset on company’s balance sheet. More important, it is a major part of
your ongoing business operations. For manufacturers, inventory includes raw materials used to
make and assemble products. For re-sellers, it includes products acquire to resell to customers. In
either case, one need inventory to earn revenue.Inventory management is important from the
view point that it enables to address two important issues:

1. The firm has to maintain adequate inventory for smooth production and selling
activities.2. It has to minimize the investment in inventory to enhance firm's profitability.

The importance or significance of inventory management could be specified as

below:

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* Inventory management helps in maintaining a trade off between carrying costs and
ordering costs which results into minimizing the total cost of inventory.

* Inventory management facilitates maintaining adequate inventory for smooth

production and sales operations.

* Inventory management avoids the stock-out problem that a firm otherwise would face
in the lack of proper inventory management.

* Inventory management suggests the proper inventory control system to be applied by a

firm to avoid losses, damages and misuses.

The Benefits and Importance of Managing Inventory

The importance of inventory management cannot be stressed enough for eCommerce and
online retail brands. Accurate inventory tracking allows brands to fulfill orders on time
and accurately. And as brands grow out of small warehouse space and into larger
facilities, so does the need to efficiently manage inventory.

The Importance of Managing Inventory: Benefits of an Effective System

An effective inventory management system is the cornerstone of successful e Commerce

and online retail brands. With a strategic plan in place that optimizes the process of
overseeing and managing inventory, including real-time data of inventory conditions and
levels, companies can achieve inventory management benefits that include:

Accurate Order Fulfillment – Imagine this scenario: A customer places an order and an e
Commerce brand receives the order. The brand sends it to the warehouse only to discover
that the product is out of stock. Or just as bad, the e Commerce brand ships the wrong
item. This isn’t an uncommon story if inventory is poorly managed. Taking the time to
develop a more robust plan can help brands avoid inaccurately filled orders, high return
volumes and a loss of customer base.

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 Better Inventory Planning and Ordering – It’s difficult to gauge which products are
needed if there isn’t a clear way to tell what products are already stocked. If online
retailers don’t properly manage the inventory they already have, they can easily
overstock items, and some of these items might not be strong sellers. Detailed inventory
management mitigates these issues, allowing warehouse managers to refresh inventory
only when needed. It’s both space and cost-effective. Increased Consumer Satisfaction –
Customers that shop online are eagerly awaiting their orders, and there’s nothing worse
than when their orders arrive not-as-described, late or damaged. When that happens,
buyers are less likely to purchase from the brand again. On the other hand, good
inventory management leads to orders being fulfilled more quickly and shipped out to
customers faster. The enhanced processes can help e Commerce and online retail brands
build a strong repertoire with consumers – and keep them coming back for more.As you
can see, proper inventory management is very important, especially as inventory volume
increases, and can make or break a business!

More Advantages of a Good Inventory Management Strategy

There are so many great advantages that can result from managing inventory
properly. Here are some additional benefits to keep in mind:

Improved Accuracy of Inventory Orders:Accuracy of product orders, status, and tracking

are critical to good inventory management. An effective fulfillment partner will have
real-time software and systems in place to make sure no product is left untracked
throughout the fulfillment process.

Organized Warehouse:A good inventory management strategy leads to an organized

fulfillment center. An organized warehouse results in more efficient present and future
fulfillment plans. This also includes cost-savings and improved product fulfillment for
businesses utilizing the warehouse for managing inventory.

Increased Efficiency and Productivity:With proper inventory management in place, less

time and resources are spent invested in managing inventory and can be allocated to other
areas. Technology is often used to speed up tracking and fulfillment operations, ensuring
inventory records are accurate.

Save Time and Money: Due to improved ordering accuracy, efficiency, and product flow,
good inventory management results in saved time and money.

Repeat Customers: Effective inventory management and control protects from incorrect
or damaged goods being shipped to customers. This helps improve customer experience,
protect from issues such as refunds, and achieve more repeat buyers.

Why FIFO method is better for inventory management?

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This results in higher costs and lower profits. If the opposite it’s true, and inventory costs
are going down, FIFO costing might be better. ... If one want a more accurate cost, FIFO
is better, because it assumes that older less-costly items are most usually sold first.

What is inventory valuation?

Inventory valuation is the amount associated with the items contained in a company's
inventory. Initially the amount is the cost of the items defined as all of the costs necessary
to get the inventory items in place and ready for sale. (The costs of selling and
administration are not included in the cost of inventory.)Since the inventory items are
constantly being sold and restocked and since the costs of the items are constantly
changing, a company must select a cost flow assumption. Cost flow assumptions include
first-in, first-out; weighted average; and last-in, first out. The company is expected to be
consistent in its application of the selected cost flow assumption. A manufacturer's
inventory valuation will include the costs of production, namely direct materials, direct
labor, and manufacturing overhead. Manufacturers are also required to consistently
follow their cost flow assumptions. Inventory valuation is important in that it affects the
cost of goods sold, a significant amount reported on the company's income statement.
Inventory is also an important component of a company's current assets, working capital,
and current ratio. If the net realizable value of a company's inventory declines to a value

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 which is less than its cost, the company is usually required to report the inventory at its
net realizable value. (Net realizable value is the expected selling price minus the the costs
of completion, disposal, and transportation.)

Ways in Which Inventory Management Affects Financial Statements

The Income/Profits: If there are any errors in calculating inventory, there would be
cascading effects on COGS, profits and income. There are several reasons why your
inventory might be inaccurate. Some instances include breakage during transit, not
adding returned goods to inventory and old goods which might have to be sold at a
discount. In all such cases, you need to adjust your inventory to an accurate value.
Understand that using LIFO will have higher COGS and would be more representative of
the current economic reality. Hence, profitability will be more accurate, making it a better
indicator for forecasting.Adjusting inventory cannot be an annual affair. This should be
done more often so that there are no major changes to the inventory value during the time
of change. For this, companies often use an inventory reserve account, where obsolete or
unusable inventory is recorded as a percentage of the inventory value. The inventory
reserve account is a balance sheet account and would have a negative balance. If you pit
it against the inventory account, you would get an accurate idea of your inventory.

Cash Flows: If a business uses FIFO when prices are rising and inventories are also
rising, COGS would be low and net income would be higher. As a result, the company
would have to pay higher taxes. This would result in a lower cash flow for the firm.

Balance Sheet: Change in inventories and incorrect inventory balances affect your
balance sheet, the financial statement that is a snapshot of your company’s worth based
on its assets and liabilities. An incorrect inventory balance can result in inaccurate
reported value of assets and owner’s equity on the balance sheet. However, it does not
affect liabilities.

Working Capital: Since working capital is defined as current assets minus current
liabilities, when inventory goes up in the income statement, the working capital would
also go up.

4. Why charging of depreciation is required? What is the difference between straight line
method of depreciation and diminishing balance method of depreciation? Why depreciation
is important to maintain tangible assets?
Causes of Depreciation:

Wear and Tear: Some assets physically deteriorate due to wear and tear in use. ...
Lapse of Time: There are certain assets like leasehold property, patents, copy-right etc. that are
acquired for a particular period. ...
Obsolescence: ...
Exhaustion: ...
Non-Use: ...
Maintenance: ...
Market Trend:

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 Why depreciation is important to maintain tangible assets?
Depreciation means the erosion in the value of an asset due to various reasons. The reasons could
be natural and unnatural too. They could also be during the course of business and also due to
idleness.Every company allocates one portion of the value of its assets as depreciation during the
year/reporting period. This is important for three reasons-
It is a fact that any asset will erode in its value over its useful life. For example, consider you
have a machine in your factory which you have purchased today, for One Lac rupees. You use
that machine for the production process. After three years, you don’t want that machine anymore
since you have some other plans. Now if you put that particular machine up for sale, how much
will that fetch? Definitely not one lac rupees or above. It will fetch a sum that is less than the
price for which you bought that asset, in the first place. Who would pay the original cost to
purchase a second hand machine that has been in use for three years? Common sense, right? So,
reducing the carrying value/realisable value of an asset in a phased manner will reflect a fair
picture of the correct value of the asset at that particular point in time. So,to reflect a truer and
fairer picture of the value of the assets.
To prepare the entity to be ready to purchase a new asset once an asset gets worn out. Now,
this is related to a concept where instead of expensing off the depreciation, if that is taken to a
sinking fund account, which is similar to small savings account. You save up, little by little, to
replace the asset once they get worn out.
Tax purposes. As you might know, the Indian Income Tax act gives a lot of benefits relevant to
depreciation of assets. To avail those, the depreciation needs to be shown in the books of
accounts, in the first place. Hence depreciation is important for any entity.
5. Distinguish between trade discount and cash discount?

6. Why ledger is called “the king of all books”. Why does bank prepare reconciliation
statement?

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Ledger is called the king of all books of accounts because all entries from the books of original
entry must be posted to the various accounts in the ledger. It should be noted that journal contains
a chronological record while ledger contains a classified record of all transactions.

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 7. How would you differentiate capital expenditure from revenue expenses? Why we should
not treat capital expenditure as revenue expenditure? Describe the factors affecting the
computation of depreciation against fixed assets?

Capital Expenditure That Is Mistakenly Recorded As a Revenue Expenditure

Property, plant and equipment are generally considered capital expenditures.

When a business makes a purchase, it's generally a capital expenditure or a revenue expenditure. Revenue
expenditures are normal business expenses that use an asset, like cash, to produce a good or a service. On

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the other hand, capital expenditures are long-term assets that bring future benefit to the company.
Incorrectly recording a capital expenditure has consequences for both financial and tax accounting.

Financial Accounting Rules for Expenditures

When to book a revenue expenditure and when to book a capital expenditure depends on the accounting
standards the company follows and specific company policies. According to generally accepted
accounting principles, or GAAP, any asset that has a life that's longer than one year can be considered a
capital asset. However, it can be unnecessarily time consuming and complex to track a large number of
capital assets. To simplify things, companies generally set a dollar floor to capitalize expenses. For
example, a company may decide to capitalize expenditures only if the equipment purchase is more than
$1,000.

Affect on Financial Accounting Records

Mistakenly booking a capital expenditure as a revenue expenditure affects expenditure, asset and
depreciation accounts. The initial journal entry overstates expenses and understates assets. For example, a
capital asset purchase journal entry debits an asset account and credits cash. A mistaken revenue
expenditure journal entry debits expense and credits cash. Capital assets are also depreciated on a regular
basis, so incorrectly classifying an asset understates depreciation expense over time. An accountant can
correct the mistake by reversing the initial journal entry, booking the correct entry and booking any
necessary depreciation.

Tax Rules for Expenditures

Internal Revenue Service standards for capital expenditures are similar to GAAP standards. Like GAAP,
assets must have a useful life of more than one year to be a capital asset. However, the IRS maintains
strict guidelines for depreciating capital assets. Most businesses use the modified accelerated cost
recovery system, or MACRS, which allows them to depreciate a larger amount of the asset in the
beginning of the asset's life. MACRS isn't allowed under GAAP standards, so business owners have to
keep a separate set of records if they want to remain GAAP compliant.

Affect on Tax Records

Classifying a capital asset as a revenue expenditure usually overstates expenses. Many business owners
are able to fully expense their capital asset in the first year under Internal Revenue Code Section 179. If
this is the case, the mistake has no affect on total expense for the year. However, if the asset does not
qualify for Section 179, the mistake means the business owner expensed too much of the asset in the first
year. Since the IRS keeps an eye out for overstated expenses, business owners should work with their tax
professional and the IRS to correct the mistake as soon as possible.

Need for Depreciation and Factors Affecting Amount of Depreciation

When an accountant prepares the accounts of a firm and jots down the amount of depreciation, he brings
down the potential gains of the firm. The amount of depreciation is an expense for an entity. Thus, it is
imperative to make the correct and accurate calculations. Let us understand what is depreciation and why
we need to provide for it.

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Need to Provide Depreciation

Depreciation needs to be provided because an asset is bound to undergo wear and tear over a period of
time. This reduces the working capacity and effectiveness of the asset. Hence, this should reflect the value
of the asset, at which it is carried in the books of accounts.Also, every asset becomes obsolete over a
period of time, as new technology and innovation take over. The value of the asset will hence decrease
over time and this must be accounted for.Moreover, in order to comply with the matching principle of
accounts, it is ideal to provide depreciation. The Matching principle says that the expense of a period
must be recognized in the same period in which we recognize it’s revenue. So an asset which generates
income must be depreciated as per given provisions.

Factors Affecting Amount of Depreciation:

Amount of Depreciation

The amount of depreciation is impacted by a number of factors. Let us take a look at some of them. There
are four main factors to consider when calculating the depreciation expense are as follows:

The cost of the asset.

The estimated salvage value of the asset. Salvage value (also called residual value) is the amount of
money that the company expects to recover, less the disposal costs, on the date the asset is scrapped, sold,
or traded in.

Estimated useful life of the asset.

Useful life refers to the window of time that a company plans to use an asset. Useful life can be
expressed in years, months, working hours, or units produced.

Obsolescence should be considered when determining an asset’s useful life and will affect the
calculation of depreciation. For example, a machine capable of producing units for 20 years may be
obsolete in six years; therefore, the asset’s useful life is six years in this case.A company is free to make
use of the most appropriate depreciation method for its business operations. Accounting theory suggests
that companies should make use of a depreciation method that closely reflects the company’s’ economic
circumstances. Thus, companies can choose a method that allocates the asset cost to accounting periods
according to benefits received from the use of the asset.Most companies use the straight-line method for
financial reporting purposes, but they may also use different methods for different assets. The most
important criteria to follow is to Use a depreciation method that allocates asset cost to accounting periods
in a systematic and rational manner.

8. Short notes:
Accounting cycle:The accounting cycle is a collective process of identifying, analyzing, and recording the
accounting events of a company. The series of steps begin when a transaction occurs and end with its

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inclusion in the financial statements.

Forms of business organization:

Islamic vs. conventional accounting system:

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Golden rules of debit and credit:

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IDR, CRR, SLR:

An international depository receipt or IDR is a negotiable certificate that a bank issues. (Negotiable or
marketable means its price is not firmly established, and ownership is therefore easily transferable.)It
represents ownership in the stock of a foreign company that the bank holds in trust. The International
Depository Receipt (IDR) is also known as the American Depository Receipt (ADR) in the United States;
ADRs represent stocks of quality issuers in a number of developed and emerging markets. In Europe,
IDRs are known as Global Depository Receipts, and trade on the London, Luxembourg and Frankfurt
exchanges.IDR can also specifically refer to Indian Depository Receipts (IDRs).

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Ethics in accounting:

Accounting ethics is primarily a field of applied ethics and is part of business ethics and human ethics, the
study of moral values and judgments as they apply to accountancy. It is an example of professional ethics.
Accounting introduced by Luca Pacioli, and later expanded by government groups, professional
organizations, and independent companies. Ethics are taught in accounting courses at higher education
institutions as well as by companies training accountants and auditors. Due to the diverse range of
accounting services and recent corporate collapses, attention has been drawn to ethical standards accepted
within the accounting profession.[2] These collapses have resulted in a widespread disregard for the
reputation of the accounting profession.[3] To combat the criticism and prevent fraudulent accounting,
various accounting organizations and governments have developed regulations and remedies for
improved ethics among the accounting profession.

Importance of ethics

The nature of the work carried out by accountants and auditors requires a high level of ethics.
Shareholders, potential shareholders, and other users of the financial statements rely heavily on the yearly
financial statements of a company as they can use this information to make an informed of the decision
about investment.[4] They rely on the opinion of the accountants who prepared the statements, as well as
the auditors that verified it, to present a true and fair view of the company.[5] Knowledge of ethics can
help accountants and auditors to overcome ethical dilemmas, allowing for the right choice that, although
it may not benefit the company, will benefit the public who relies on the accountant/auditor's
reporting.[6]Most countries have differing focuses on enforcing accounting laws. In Germany, accounting

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legislation is governed by "tax law"; in Sweden, by "accounting law"; and in the United Kingdom, by the
"company law". In addition, countries have their own organizations which regulate accounting. For
example, Sweden has the Bokföringsnämden (BFN - Accounting Standards Board), Spain the Instituto de
Comtabilidad y Auditoria de Cuentas (ICAC), and the United States the Financial Accounting Standards
Board (FASB).

Statutory reserve:

In the business of insurance, statutory reserves are those assets an insurance company is legally
required to maintain on its balance sheet with respect to the unmatured obligations (i.e., expected
future claims) of the company. Statutory reserves are a type of actuarial reserve. Statutory
reserves are intended to ensure that insurance companies are able to meet future obligations
created by insurance policies. These reserves must be reported in statements filed with insurance
regulatory bodies. They are calculated with a certain level of conservatism in order to protect
policyholders and beneficiaries.[1] There are two types of methods for calculation of statutory
reserves. Reserve methodology may be fully prescribed by law, which is often called formula-
based reserving. This is in contrast to principles-based reserves, where actuaries are given
latitude to use professional judgment in determining methodology and assumptions for reserve
calculation.[1] In the United States, where formula-based reserves are used, the National
Association of Insurance Commissioners plans to implement principles-based reserves in 2017.[2]

Contingent assets and liabilities:

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Suspense account:

Suspense account is an account used temporarily or permanently to carry doubtful entries and
discrepancies pending their analysis and permanent classification. It can be a repository for monetary
transactions (cash receipts, cash disbursements and journal entries) entered with invalid account
numbers. The account specified may not exist, or it may be deleted/frozen. If one of these conditions
applies, the transaction should be directed to a suspense account. In branchless banking (BB) ‐ banking
through mobile for unbanked ‐ these accounts are used for 'money‐in‐transit'. For example, sender
sends payment from US ACH account to a BB mobile number in Japan. The customer receives an alert on
their mobile to withdraw this money from a BB agent. Until they withdraw, the remittance stays in a
suspense account, earning the financial institute or the BB enabler float/interest on that money. When
customer withdrawal is completed, the money moves from the suspense account to the account of the
agent who facilitated the cash withdrawal. A suspense account is an account in the general ledger in
which amounts are temporarily recorded. A suspense account is used when the proper account cannot
be determined at the time the transaction is recorded. When the proper account is determined, the
amount will be moved from the suspense account to the proper account. It can also be used when there
is a difference between the debit and credit side of a closing or trial balance, as a holding area until the
reason for error is located and corrected. Suspense accounts should be cleared at some point, because
they are for temporary use. Suspense accounts are a control risk.

Cash flow statement:

In financial accounting, a cash flow statement, also known as statement of cash flows,[1] is a financial
statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents,
and breaks the analysis down to operating, investing, and financing activities. Essentially, the cash flow
statement is concerned with the flow of cash in and out of the business. As an analytical tool, the
statement of cash flows is useful in determining the short-term viability of a company, particularly its
ability to pay bills. International Accounting Standard 7 (IAS 7), is the International Accounting Standard
that deals with cash flow statements.

People and groups interested in cash flow statements include:

-Accounting personnel, who need to know whether the organization will be able to cover payroll and
other immediate expenses

-Potential lenders or creditors, who want a clear picture of a company's ability to repay

-Potential investors, who need to judge whether the company is financially sound

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-Potential employees or contractors, who need to know whether the company will be able to afford
compensation

-Company Directors, who are responsible for governance of the company, and are responsible for
ensuring that the company doesn't trade while insolvent

-Shareholders of the business.

Franchise and expenses:

##Franchising is a method of distributing products or services. At least two levels of people are involved
in a franchise system: (1) the franchisor, who establishes the brand’s trademark or trade name and a
business system; and (2) the franchisee, which pays a royalty and often an initial fee for the right to do
business under the franchisor's name and system. Technically, the contract binding the two parties is
the “franchise,” but that term is often used to mean the actual business that the franchisee operates.
There are two different types of franchising relationships. Business Format Franchising is the type most
identifiable. In a business format franchise, the franchisor provides to the franchisee not just its trade
name, products and services, but an entire system for operating the business. The franchisee generally
receives site selection and development support, operating manuals, training, brand standards, quality
control, a marketing strategy and business advisory support from the franchisor. While less identified
with franchising, traditional or product distribution franchising is larger in total sales than business
format franchising. Examples of traditional or product distribution franchising can be found in the
bottling, gasoline, automotive and other manufacturing industries.

##Expenditure is an outflow of money to another person or group to pay for an item or service, or for a
category of costs. For a tenant, rent is an expense. For students or parents, tuition is an expense. Buying
food, clothing, furniture or an automobile is often referred to as an expense. An expense is a cost that is
"paid" or "remitted", usually in exchange for something of value. Something that seems to cost a great
deal is "expensive". Something that seems to cost little is "inexpensive". "Expenses of the table" are
expenses of dining, refreshments, a feast, etc.In accounting, expense has a very specific meaning. It is an
outflow of cash or other valuable assets from a person or company to another person or company. This
outflow of cash is generally one side of a trade for products or services that have equal or better current
or future value to the buyer than to the seller. Technically, an expense is an event in which an asset is
used up or a liability is incurred. In terms of the accounting equation, expenses reduce owners' equity.

Accounting standard of AAOIFI:

Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) is a Bahrain
based not‐for‐profit organization that was established to maintain and promote Shariah
standards for Islamic financial institutions, participants and the overall industry.The Commission
also organizes a number of professional development programs (especially the Islamic legal
accountant program and the observer program and forensic auditor) in their effort to upgrade
the human resources working in the industry and the development of governance structures
controls the institutions.
Incorporation
AAOIFI was established in accordance with the Agreement of Association which was signed by
Islamic financial institutions on 26 February 1990 in Algiers. Then, it was registered on 27 March
1991 in Bahrain. It has members from more than 45 countries, including central banks and

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Islamic financial institutions and other parties working in the financial industry and banking,
Islamic International. The Commission has obtained support for the application of the standards
issued by it, where these standards are dependent today in the Kingdom of Bahrain and the
Dubai International Financial Centre, Jordan, Lebanon, Qatar, Sudan and Syria . The competent
authorities in Australia, Indonesia, Malaysia, Pakistan, Saudi Arabia and South Africa issued
guidelines derived from the standards and publications.[2]
Organizational Structure
The organizational structure of AAOIFI includes a general assembly. AAOIFI also has a board of
trustees and an accounting and auditing standards board each consisting of fifteen part‐time
members, a Shari‘ah committee consisting of four part‐time members, an executive committee,
and a secretary‐general who is a full‐time executive and heads the general secretariat.[3]
The objectives of AAOIFI are:
 To develop accounting and auditing thoughts relevant to Islamic financial institutions
 To disseminate accounting and auditing thoughts relevant to Islamic financial
institutions and its applications through training, seminars, publication of periodical
newsletters, carrying out and commissioning of research and other means
 To prepare, promulgate and interpret accounting and auditing standards for Islamic
financial institutions
 To review and amend accounting and auditing standards for Islamic financial institutions

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GAAP:

Generally Accepted Accounting Principles (GAAP or U.S. GAAP) is the accounting standard adopted by
the U.S. Securities and Exchange Commission (SEC). While the SEC previously stated that it intends to
move from U.S. GAAP to the International Financial Reporting Standards (IFRS), the latter differ
considerably from GAAP and progress has been slow and uncertain. More recently, the SEC has
acknowledged that there is no longer a push to move more U.S companies to IFRS so the two sets of
standards will "continue to coexist" for the foreseeable future.The Financial Accounting Standards Board
(FASB) has published U.S. GAAP in Extensible Business Reporting Language (XBRL) beginning in
2008.

Assets and liabilities:In its simplest form, your balance sheet can be divided into two categories: assets
and liabilities. Assets are the items your company owns that can provide future economic benefit.
Liabilities are what you owe other parties. In short, assets put money in your pocket, and liabilities take
money out!

Assets vs. Liabilities

Assets add value to your company and increase your company’s equity, while liabilities decrease your
company’s value and equity. The more your assets outweigh your liabilities, the stronger the financial
health of your business. But if you find yourself with more liabilities than assets, you may be on the cusp
of going out of business.

Examples of assets are:

Cash

Investments

Inventory

Office equipment

Machinery

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 Real estate

Company‐owned vehicles

Examples of liabilities are:

Bank debt

Mortgage debt

Money owed to suppliers (accounts payable)

Wages owed

Taxes owed

Shareholder’s equity:

In accounting, equity (or owner's equity) is the difference between the value of the assets and the value
of the liabilities of something owned. It is governed by the following equation:

equity = assets value − liabilities

For example, if someone owns a car worth $15,000 (an asset), but owes $5,000 on a loan against that
car (a liability), the car represents $10,000 of equity. Equity can be negative if liabilities exceed
assets.Shareholders' equity (or stockholders' equity, shareholders' funds, shareholders' capital or similar
terms) represents the equity of a company as divided among shareholders of common or preferred
stock. Negative shareholders' equity is often referred to as a shareholders' deficit.Alternatively, equity
can also refer to a corporation's share capital (capital stock in American English). The value of the share
capital depends on the corporation's future economic prospects. For a company in liquidation
proceedings, the equity is that which remains after all liabilities have been paid.

Accounting equation:

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Audit report vs. audit accounts:

Audit accounting plays a key role in ensuring a company’s accounts are accurate and finances are being
distributed in the fairest or most efficient manner. As companies and public sector organizations face
increasing scrutiny over their finances, audit accountants are entrusted with the responsibility of
reviewing financial records to ensure they are accurate and compliant. Audit accounting can be an internal
process with a focus on mitigating risk and identifying areas where cost savings can be made.
Alternatively, audit accountants can be independent specialists who conduct external audits on company
accounts.

Adjusting entries:

Adjusting entries are journal entries recorded at the end of an accounting period to adjust income and
expense accounts so that they comply with the accrual concept of accounting. Their main purpose is to
match incomes and expenses to appropriate accounting periods.The transactions which are recorded using
adjusting entries are not spontaneous but are spread over a period of time. Not all journal entries recorded
at the end of an accounting period are adjusting entries. For example, an entry to record a purchase on the
last day of a period is not an adjusting entry. An adjusting entry always involves either income or expense
account.

Types

There are following types of adjusting entries:

Accruals:

These include revenues not yet received nor recorded and expenses not yet paid nor recorded. For
example, interest expense on loan accrued in the current period but not yet paid.

Prepayments:

These are revenues received in advance and recorded as liabilities, to be recorded as revenue and
expenses paid in advance and recorded as assets, to be recorded as expense. For example, adjustments
to unearned revenue, prepaid insurance, office supplies, prepaid rent, etc.

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 Non‐cash:

These adjusting entries record non‐cash items such as depreciation expense, allowance for doubtful
debts etc.

Single entry vs. double entry system:

Trial balance vs. balance sheet:

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Financial statement of bank:

Financial statements (or financial reports) are formal records of the financial activities and position of a
business, person, or other entity. Relevant financial information is presented in a structured manner and in
a form which is easy to understand. They typically include four basic financial statements accompanied
by a management discussion and analysis:[1]

* A balance sheet or statement of financial position, reports on a company's assets, liabilities, and
owners equity at a given point in time.

*An income statement—or profit and loss report (P&L report), or statement of comprehensive income,
or statement of revenue & expense—reports on a company's income, expenses, and profits over a stated
period of time. A profit and loss statement provides information on the operation of the enterprise. These
include sales and the various expenses incurred during the stated period.

* A statement of changes in equity or equity statement, or statement of retained earnings, reports on the
changes in equity of the company over a stated period of time.

* A cash flow statement reports on a company's cash flow activities, particularly its operating, investing
and financing activities over a stated period of time.

(Notably, a balance sheet represents a single point in time, where the income statement, the statement of
changes in equity, and the cash flow statement each represent activities over a stated period of time.)For
large corporations, these statements may be complex and may include an extensive set of footnotes to the
financial statements and management discussion and analysis. The notes typically describe each item on
the balance sheet, income statement and cash flow statement in further detail. Notes to financial
statements are considered an integral part of the financial statements.

###########################################################################

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Accounting is ingrained in our society and it is vital to our economic system do you agree Explain?

Accounting - good or bad - is what makes or breaks a business. A good accounting system will provide the management with the tools to make
profitable business decisions. Management, large or small, can see what's profitable and what's causing the business to lose money.

A poor accounting system, whether it is sloppy or just plain illegal can ruin a business. Management will make poor decisions based on poor or
non-existent accounting systems. Management sometimes chooses to use accounting for unethical motives.

In either case, accounting IS ingrained in society and affects the economic system for better or worse.

Accounting is vital because is a gauge that gives an indication of how well the economy is growing, the areas that need improvement and the
areas that need to be improved.

What role does financial accounting play in decision making?

Accounting has been defined as the process of identifying, measuring, recording and communicating economic information to permit informed
judgments and economic decisions. The primary purpose of accounting is to help persons make economic decisions. In our society resources
must be allocated among and within all kinds of entities. Accounting information provides the basis for making decisions about resource
allocation.

Accounting information is financial information about economic activities. All economic entities (e.g. businesses, government agencies, families,
charitable entities) need such information because it is used for making economic decisions about those entities.

Users of Accounting Information (Internal and External Users Explained)

Users of accounting information are internal and external.

External users are creditors, investors, government, trading partners, regulatory agencies, international standardization agencies, journalists and
internal users are owners, directors, managers, employees of the company.

Let’s look at who are the internal and external users of account information and why they use it.

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Internal users of Accounting information

Internal users are that individual who runs, manages and operates the daily activities of the inside area of an organization.

So who are the internal users of account information;

1. Owners and Stockholders.

2. Directors,

3. Managers,

4. Officers.

5. Internal Departments.

6. Employees

7. Internal Auditor.

Managerial accounting identifies, measures, analyzes and communicates the financial information needed by management to plan, control, and
evaluates a company’s operations for the internal users.

External users of Accounting information

External users are those individuals who take interest in the account information of an organization but they are not part of the organization’s
administrative process.

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External users have a direct or indirect interest in accounting information.

Financial accounting is the process for the preparation of financial reports of the enterprise for use by both internal and external parties.

These reports are important to the external users of accounting information.

Examples of external users of accounting information are;

 Creditors.

 Investors.

 Government.

 Trading partners.

 Regulatory agencies.

 International standardization agencies.

 Journalists.

Creditors and Investors are the most regular example of external users among many other external users.

The external users of accounting are;

Creditors

Creditors or lenders use the accounting information to find out the ability of the borrower to repay the loan, the number of assets and liabilities of
the borrower, evidence of income, economic position, etc. before he or she lend the money to the economic entity.

Investors

Investors are the capital providers of a business.

Before investing, an investor sees the financial report for figuring out the possibilities of the business in the future. Financial information is
important for an investor for making sure that the investment is secure.

Trading partners

Business needs business to do business, it is the truth.

Associate trading companies look at the financial information and decide to trade with the particular economic entity.

Government Regulatory Agencies

The financial information is vital for government regulatory agencies as it allows them to monitor the economy and market.

Lawmakers and economic planners

It is important to keep a nation’s economic structure up-to-date with global changes. It is a job for lawmakers and economic planners.

The accounting information provides information that is necessary for making changes to the existing laws at the right moment for the economy
and society betterment.

Other examples

There are other external users for example; labor unions, customers and consumers, suppliers, SEC, tax authority, chamber of commerce, press,
competitors, auditors, etc.

Anybody outside of the managing radius of an economic entity is interested in the financial information of it, is defined as an external user.

For example to that statement; an MBA student looking for financial information on Google, he/she is the external user of the accounting
information of Google.

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The financial reports or information are the result of the accounting process that transferred to the users in two forms-internal and external.

These reports used for effective for operating the business by the internal users, on the other hand, the external users use the information to get a
real picture of the financial state of the organization.

What Items Effect Owners Equity Explain

Ans.: There are two items effect owners equity 1) Revenue 2) Expense.

1) Revenue: Revenue is the inflow of assets arising out of sale of commodities services.

2) Expenses: Cost of goods sold, salary, house rent etc. expense results in the decrees of assets and increase of assets and increase of liabilities.

If each expense and revenue directly change the owner’s equity i.e. increases or decreases, it becomes difficult to known the read position of
owner’s equity and sources of expense and revenue. Because revenue and expense are directly adjusted with capital, many information relating to
this do not exit. That is whey showing revenue and expense in separate accounts the net results of this are adjusted with capital.

What is the monetary unit assumption?

Definition of Monetary Unit Assumption

The monetary unit assumption as it applies to a U.S. corporation is that the U.S.dollar (USD) is stable in the long run. That is the USD does not
lose its purchasing power. Note that this is the assumption.

As a result of the monetary assumption, accountants at a U.S. corporation do not hesitate to add the cost of a parcel of land purchased in 2019 to
the cost of another parcel of land that had been purchased in 1970. (See example below.)

Another part of the monetary unit assumption is that U.S. accountants report a corporation's assets in dollar amounts (rather than reporting details
of all of the assets). If an asset cannot be expressed as a dollar amount, it cannot be entered in a general ledger account. For example, the
management team of a very successful corporation may be the corporation's most valuable asset. However, the accountant is not able to
objectively convert those talented people into USDs. Hence, the management team will not be included in the reported amounts on the balance
sheet.

Example of Monetary Unit Assumption

Let's illustrate the monetary unit assumption with the following hypothetical example. A U.S. corporation purchased a two-acre parcel of land at a
cost of $40,000 in 1970. Then in 2019 the corporation purchased an adjacent (nearly identical) two-acre parcel at a cost of $500,000. After the
2019 purchase is recorded, the balance in the corporation's general ledger account Land is $540,000. Therefore, the corporation's balance sheet
will report its four acres of land at a cost of $540,000. There is no adjustment for the vast difference in purchasing power between the 1970 dollar
and the 2019 dollar.

What is the Monetary Unit Assumption? Explanation with Examples

Monetary unit assumption has two parts. The first part says that the monetary unit is stable in the long run and does not lose it’s purchasing
power. The second part of the assumption says that every transaction and event related to an entity should be recorded in the financial statements
of the entity with a monetary unit. This monetary unit can be dollars, yen, pound, rupees or any other monetary unit. If a Transaction or event
cannot be described in a monetary unit, it should not be recorded in the books.

Monetary unit Assumption is just like an accounting guideline or accounting principle where we are directed to use U.S dollars as it is assumed
that U.S dollar is constant and stable in the long run. Similarly, if we are unable to express an item in U.S dollars, we cannot record such an item
in our books.

Define Monetary Unit Assumption?

The monetary unit assumption is just an assumption that assumes that transactions and events can be recorded in a monetary unit as it is constant
and stable in the long run.

What is the effect of Inflation on Monetary Unit Assumption?

Inflation has no effect on the assumption as this assumption does not take inflation into consideration. For example, if a piece of land is purchased
in 1970 at $30,000, it will appear at the same cost of $30,000 even in 2019. This is because this assumption assumes that the monetary unit is
stable in the long run.

Monetary unit assumptions assume to measure and record transactions and events in a monetary unit.

Monetary Unit Assumption Examples

Examples of the First Part of the Assumption

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 1. Suppose NHIRKM Engineers bought a building in 1988 at a cost of $80,000. It recorded the building with $80,000 in its books. Now
suppose in 2019, it bought a similar building at a cost of $600,000. It will record buildings at an amount of $680,000 ($80,000 +
$600,000). You know there is a huge difference in purchasing power between 1988 and 2019, but we are not accounting for it. This is
all because of this assumption.

2. Suppose ABC Ltd. Purchased a Land in 1930 at a cost $30,000. It recorded that transaction in its books with $30,000. Similarly, it
purchased another piece of the same land in 2030 at a cost of $300,000. Now if we look at the books of ABC Ltd. We will find out
that Land is recorded at $330,000. ($30,000+$300,000).

Examples of the Second Part of the Assumption

1. Suppose XYZ software house has very talented and intellectual software engineers. But it cannot record them as their assets. This is
because the monetary unit assumption directs us to record only those transactions that can be expressed in U.S dollars. We cannot
express talent in dollars. Similarly, we cannot express the intellectuality of someone in dollars.

2. Suppose students of Smart Science School hold the highest position in the city. This is because of helpful, talented, intellectual and
exam-focused teachers of Smart Science School. Now if you look at the books of Smart Science Schools, you’ll find furniture, fixtures
and other assets. You will not find its famous teacher being recorded as an asset. This is because of this assumption which directs us to
record only those transaction and events that can be expressed in a monetary form. As we cannot express talent, intellectualism and
exam-focused techniques of teachers in a monetary form, we cannot record as an asset.

Implications of Monetary Unit Assumption

1. You’ve to record every business transaction in a monetary unit. This’s because the monetary unit is stable in the long run.

2. You’ve to record every business transaction and event in a monetary unit i.e. USD. The reason is the same, the monetary unit is
constant and stable in for a long term.

3. Your books should contain only those transactions and events that can be expressed in the form of a monetary unit. If a transaction or
event cannot be expressed in dollars form, it should not be included in the books.

Problems with Monetary Unit Assumption

1. A problem with the monetary unit assumption is that it does not take the effect of inflation into consideration. For example, as we
stated in our examples, a building purchased in 1988 at a cost of $80,000 was still recorded at $80,000 even in 2019. You know, prices
have increased a lot since 1988, but monetary unit assumption does not take this into consideration.

2. Another problem with this assumption is that it can be misleading or deceiving for external users of financial statements. For example,
in our first example, NHIRKM Engineers has buildings worth $680,000. It might not be $680,000 currently, as $80,000 out of
$680,000 is from 1988.

Does debit mean increase and credit mean decrease in accounting?

Debit means increased under limited conditions.

You must look at what type of an account you are making your journal entry to.

If the account is an 1) asset or 2) expense, then the statement is 'always' true.

If the account is a 1) liability, 2) equity or 3) revenue, then the statement is 'always' false.

Why?

I think the easiest way to understand why is to think about journal entries in general.

Here is what you need to remember:

Everything thing has an opposite and equal reaction.

Think of the balance sheet: Accounting 101

Assets = Liability + Equity

All P&L accounts roll into Equity (i.e. retained earnings).

All accounts belong to one of the following general categories:

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 1. Assets

2. Liabilities

3. Equity

4. Revenue

5. Expense

So let's look at a simple journal entry:

DR Expense
CR Accounts Payable (liability)

One entry hits #5 (expense) and the opposite and equal reaction hits #2 (liabilitie)

So in the above entry I have 'increased' expense with a debit. So far so good.

But what have I done with the credit?

I have recorded or recognized the liability I now owe for this expense. Am I increasing or decreasing my liability?

The answer is increasing.

So this is an example where increasing meant a debit 'and' a credit, demonstrating that debit does not 'always' mean increasing.

I hope this is clear and helpful.

What is the difference between the cash basis and the accrual basis of accounting?

Definition of the Cash Basis of Accounting

1. Revenues are reported on the income statement in the period in which the cash is received from customers.

2. Expenses are reported on the income statement when the cash is paid out.

Definition of the Accrual Basis of Accounting

The accrual basis of accounting provides a better picture of a company's profits during an accounting period for the following reasons:

1. Revenues are reported on the income statement when they are earned, which often occurs before the cash is received from the
customers.

2. Expenses are reported on the income statement in the period when they match up with the related revenues, occur, or expire, which is
often in a period different from the period when the payment is made.

The accrual basis of accounting also provides a better picture of a company's financial position at the end of the accounting year. The reason is
that all assets that were earned are reported and all liabilities that were incurred will be reported on the balance sheet.

The accrual basis of accounting is required because of the matching principle.

How Does Accrual Accounting Differ from Cash Basis Accounting?

The main difference between accrual and cash basis accounting lies in the timing of when revenue and expenses are recognized. The cash method
is a more immediate recognition of revenue and expenses, while the accrual method focuses on anticipated revenue and expenses.

The Cash Method

Revenue is reported on the income statement only when cash is received. Expenses are only recorded when cash is paid out. The cash method is
mostly used by small businesses and for personal finances.

The Accrual Method

Revenue is accounted for when it is earned. Typically, revenue is recorded before any money changes hands. Unlike the cash method, the accrual
method records revenue when a product or service is delivered to a customer with the expectation that money will be paid in the future. Expenses
of goods and services are recorded despite no cash being paid out yet for those expenses.

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Example of Accrual and Cash Methods

Let's say you own a business that sells machinery. If you sell $5,000 worth of machinery, under the cash method, that amount is not recorded in
the books until the customer hands you the money or you receive the check. Under the accrual method, the $5,000 is recorded as revenue
immediately when the sale is made, even if you receive the money a few days or weeks later.

The same principle applies to expenses. If you receive an electric bill for $1,700, under the cash method, the amount is not added to the books
until you pay the bill. However, under the accrual method, the $1,700 is recorded as an expense the day you receive the bill.

Advantages and Disadvantages of Both Methods

The advantages of the cash method include its simplicity since it only accounts for cash paid or received. Tracking cash flow of a company is
also easier with the cash method.

A disadvantage of the cash method is that it might overstate the health of a company that is cash-rich but has large sums
of accounts payables that far exceed the cash on the books and the company's current revenue stream. An investor might conclude the company is
making a profit when, in reality, the company is losing money.

The advantage of the accrual method is that it includes accounts receivables and payables and, as a result, is a more accurate picture of the
profitability of a company, particularly in the long term. The reason for this is that the accrual method records all revenues when they are earned
and all expenses when they are incurred.

For example, a company might have sales in the current quarter that wouldn't be recorded under the cash method because revenue isn't expected
until the following quarter. An investor might conclude the company is unprofitable when, in reality, the company is doing well.

The disadvantage of the accrual method is that it doesn't track cash flow and, as a result, might not account for a company with a major
cash shortage in the short term, despite looking profitable in the long term. Another disadvantage of the accrual method is that it can be more
complicated to implement since it's necessary to account for items like unearned revenue and prepaid expenses.

Adjusting entries

Adjusting entries are journal entries recorded at the end of an accounting period to alter the ending balances in various general ledger accounts.
These adjustments are made to more closely align the reported results and financial position of a business with the requirements of an accounting
framework, such as GAAP or IFRS. This generally involves the matching of revenues to expenses under the matching principle, and so impacts
reported revenue and expense levels.

The use of adjusting journal entries is a key part of the period closing processing, as noted in the accounting cycle, where a preliminary trial
balance is converted into a final trial balance. It is usually not possible to create financial statements that are fully in compliance with accounting
standards without the use of adjusting entries.

An adjusting entry can used for any type of accounting transaction; here are some of the more common ones:

 To record depreciation and amortization for the period

 To record an allowance for doubtful accounts

 To record a reserve for obsolete inventory

 To record a reserve for sales returns

 To record the impairment of an asset

 To record an asset retirement obligation

 To record a warranty reserve

 To record any accrued revenue

 To record previously billed but unearned revenue as a liability

 To record any accrued expenses

 To record any previously paid but unused expenditures as prepaid expenses

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  To adjust cash balances for any reconciling items noted in the bank reconciliation

As shown in the preceding list, adjusting entries are most commonly of three types, which are:

 Accruals. To record a revenue or expense that has not yet been recorded through a standard accounting transaction.

 Deferrals. To defer a revenue or expense that has been recorded, but which has not yet been earned or used.

 Estimates. To estimate the amount of a reserve, such as the allowance for doubtful accounts or the inventory obsolescence reserve.

When you record an accrual, deferral, or estimate journal entry, it usually impacts an asset or liability account. For example, if you accrue an
expense, this also increases a liability account. Or, if you defer revenue recognition to a later period, this also increases a liability account. Thus,
adjusting entries impact the balance sheet, not just the income statement.

Since adjusting entries so frequently involve accruals and deferrals, it is customary to set up these entries as reversing entries. This means that the
computer system automatically creates an exactly opposite journal entry at the beginning of the next accounting period. By doing so, the effect of
an adjusting entry is eliminated when viewed over two accounting periods.

A company usually has a standard set of potential adjusting entries, for which it should evaluate the need at the end of every accounting period.
These entries should be listed in the standard closing checklist. Also, consider constructing a journal entry template for each adjusting entry in the
accounting software, so there is no need to reconstruct them every month. The standard adjusting entries used should be reevaluated from time to
time, in case adjustments are needed to reflect changes in the underlying business.

Why may a trial balance not contain up-to-date and complete financial information?

Solution

A trial balance not contain up-to-date and complete financial information because

1. Some events are not recorded daily because it is not efficient to do so. Examples are the use of supplies and the earning of wages by
employees.

2. Some costs are not recorded during the accounting period because these costs expire with the passage of time rather than as a result of
recurring daily transactions. Examples are charges related to the use of buildings and equipment, rent, and insurance.

3. Some items may be unrecorded. An example is a utility service bill that will not be received until the next accounting period.

The company analyzes each account in the trial balance to determine whether it is complete and up-to-date for financial statement purpose.

What Is a Trial Balance?

A trial balance is a bookkeeping worksheet in which the balance of all ledgers are compiled into debit and credit account column totals that are
equal. A company prepares a trial balance periodically, usually at the end of every reporting period. The general purpose of producing a trial
balance is to ensure the entries in a company's bookkeeping system are mathematically correct.

How a Trial Balance Works

Preparing a trial balance for a company serves to detect any mathematical errors that have occurred in the double-entry accounting system. If the
total debits equal the total credits, the trial balance is considered to be balanced, and there should be no mathematical errors in the ledgers.
However, this does not mean there are no errors in a company's accounting system. For example, transactions classified improperly or those
simply missing from the system could still be material accounting errors that would not be detected by the trial balance procedure.

Requirements for a Trial Balance

Companies initially record their business transactions in bookkeeping accounts within the general ledger. Depending on the kinds of business
transactions that have occurred, accounts in the ledgers could have been debited or credited during a given accounting period before they are used
in a trial balance worksheet. Furthermore, some accounts may have been used to record multiple business transactions. As a result, the ending
balance of each ledger account as shown in the trial balance worksheet is the sum of all debits and credits that have been entered to that account
based on all related business transactions.

A company’s transactions are recorded in a general ledger and later summed to be included in a trial balance.

At the end of an accounting period, the accounts of asset, expense or loss should each have a debit balance, and the accounts of liability, equity,
revenue or gain should each have a credit balance. However, certain accounts of the former type may have also been credited and certain
accounts of the latter type may have also been debited during the accounting period when related business transactions reduce their respective

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accounts' debit and credit balances, an opposite effect on those accounts' ending debit or credit balances. On a trial balance worksheet, all the
debit balances form the left column, and all the credit balances form the right column, with the account titles placed to the far left of the two
columns.

Special Considerations

After all, the ledger accounts and their balances are listed on a trial balance worksheet in their standard format, add up all debit balances and
credit balances separately to prove the equality between total debits and total credits. Such uniformity guarantees there are no unequal debits and
credits that have been incorrectly entered during the double-entry recording process. However, a trial balance cannot detect bookkeeping errors
that are not simple mathematical mistakes. If equal debits and credits are entered into the wrong accounts, a transaction is not recorded or
offsetting errors are made with a debit and credit at the same time, a trial balance would still show a perfect balance between total debits and
credits.

Perpetual inventory system

Perpetual Inventory System Overview

Under the perpetual inventory system, an entity continually updates its inventory records to account for additions to and subtractions from
inventory for such activities as:

 Received inventory items

 Goods sold from stock

 Items moved from one location to another

 Items picked from inventory for use in the production process

 Items scrapped

Thus, a perpetual inventory system has the advantages of both providing up-to-date inventory balance information and requiring a reduced level
of physical inventory counts. However, the calculated inventory levels derived by a perpetual inventory system may gradually diverge from
actual inventory levels, due to unrecorded transactions or theft, so you should periodically compare book balances to actual on-hand quantities
(typically using cycle counting) and adjust the book balances as necessary.

Perpetual inventory is by far the preferred method for tracking inventory, since it can yield reasonably accurate results on an ongoing basis, if
properly managed. The system works best when coupled with a computer database of inventory quantities and bin locations, which is updated in
real time by the warehouse staff using wireless bar code scanners, or by sales clerks using point of sale terminals. It is least effective when
changes are recorded on inventory cards, since there is a significant chance that entries will not be made, will be made incorrectly, or will not be
made in a timely manner.

The perpetual inventory system is a requirement for any organization planning to install a material requirements planning system.

How Are Accumulated Depreciation and Depreciation Expense Related?

Accumulated depreciation is the total amount a company depreciates its assets, while depreciation expense is the amount a company's assets are
depreciated for a single period. Essentially, accumulated depreciation is the total amount of a company's cost that has been allocated to
depreciation expense since the asset was put into use.

What is the difference between depreciation expense and accumulated depreciation?

Definition of Depreciation Expense

Depreciation expense is the amount of depreciation that is reported on the income statement. In other words, it is the amount of an asset's cost that
has been allocated and reported as an expense for the period (year, month, etc.) shown in the income statement's heading.

Definition of Accumulated Depreciation

Accumulated depreciation reports the total amount of depreciation that has been reported on all of the income statements from the time that the
assets were put into service until the date of the balance sheet. The account Accumulated Depreciation is a contra asset account because it will
have a credit balance. The credit balance is reported in the property, plant and equipment section of the balance sheet and it reduces the cost of
the assets to their carrying value or book value.

Example of Depreciation Expense and Accumulated Depreciation

To illustrate, let's assume that a retailer purchases new display racks at a cost of $84,000. This asset is estimated to have a useful life of 7 years
(84 months) and no salvage value at the end of 7 years. Assuming the retailer uses the straight-line depreciation method, during each month of the

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display racks' lives the retailer's monthly income statement will report depreciation expense of $1,000. However, the credit balance in
Accumulated Depreciation will be reported on the balance sheet at $1,000 at the end of the first month, $2,000 at the end of the second month,
$3,000 at the end of the third month, etc. until the balance in Accumulated Depreciation reaches $84,000 at the end of the 84th month.

What is Accelerated Depreciation?

Accelerated depreciation is a depreciation method in which an asset loses book value at a faster (accelerated) rate than it would using traditional
depreciation methods such as the straight-line method. Therefore, under accelerated depreciation, an asset faces greater deductions in its value in
the earlier years than in the later years. Accelerated depreciation is often used as a tax-reduction strategy.

What Is Accelerated Depreciation?

Accelerated depreciation is any method of depreciation used for accounting or income tax purposes that allows greater deductions in the earlier
years of the life of an asset. While the straight-line depreciation method spreads the cost evenly over the life of an asset, an accelerated
depreciation method allows the deduction of higher expenses in the first years after purchase and lower expenses as the depreciated item ages.

Understanding Accelerated Depreciation

The use of accelerated depreciation methods are mostly logistical. Although an asset is not required to be depreciated in the same manner in
which it is used, an accelerated depreciation method tends to make this occur. This is because an asset is most heavily used when it is new,
functional, and most efficient. Because this tends to occur at the beginning of the asset’s life, the rationale behind an accelerated method of
depreciation is that it appropriately matches how the underlying asset is used. As an asset ages, it is not used as heavily, since it is slowly phased
out for newer assets.

Special Considerations

Utilization of an accelerated depreciation method has financial reporting implications. Because depreciation is accelerated, expenses are higher in
earlier periods compared to in later periods. Companies may utilize this strategy for taxation purposes, as an accelerated depreciation method will
result in a deferment of tax liabilities due to income being lower in earlier periods. Alternatively, public companies tend to shy away from
accelerated depreciation methods, as net income is reduced in the short-term.

Accelerated Depreciation Methods

The double declining balance (DDB) method is an accelerated depreciation method. After taking the reciprocal of the useful life of the asset and
doubling it, this rate is applied to the depreciable base, book value, for the remainder of the asset’s expected life. For example, an asset with a
useful life of five years would have a reciprocal value of 1/5 or 20%. Double the rate, or 40%, is applied to the asset's current book value for
depreciation. Although the rate remains constant, the dollar value will decrease over time because the rate is multiplied by a smaller depreciable
base each period.

The sum-of-the-year’s-digits (SYD) method also allows for accelerated depreciation. To start, combine all the digits of the expected life of the
asset. For example, an asset with a five-year life would have a base of the sum of the digits one through five, or 1+ 2 + 3 + 4 + 5 = 15. In the first
depreciation year, 5/15 of the depreciable base would be depreciated. In the second year, only 4/15 of the depreciable base would be depreciated.
This continues until year five depreciates the remaining 1/15 of the base.

What is petty cash?

Definition of Petty Cash

Petty cash or a petty cash fund is a small amount of money available for paying small expenses without writing a check. Petty Cash is also the
title of the general ledger current asset account that reports the amount of the company's petty cash. The amount of petty cash will vary by
company and may be in the range of $30 to $300.

The petty cash is controlled through the use of a petty cash voucher for each payment made. The expenses will be recorded in the company's
general ledger expense accounts when the petty cash on hand is replenished.

Examples of Petty Cash Payments

Some examples of small payments made from petty cash include:

 Paying the mail carrier 30 cents for the postage due on a letter

 Reimbursing an employee $9 for supplies purchased

 Reimbursing an employee for purchasing $14 of bakery goods for an early morning meeting.

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Business activity statement

The business activity is statement (BAS) is a form submitted to the Australian Taxation Office (ATO) by registered business entities
to report their tax obligations, including GST, pay as you go withholding (PAYGW), pay as you go instalments (PAYGI), fringe
benefits tax (FBT), wine equalisation tax (WET) and luxury car tax (LCT). PAYGW is sometimes known as "Income Tax
Withholding (ITW)," PAYGI is sometimes known as "Income Tax Instalments (ITI)".[1]

The ATO forwards to each registered business before the end of each reporting period a BAS tailor-made for the business entity. The
BAS may be delivered to the business as a paper form, electronically or via the business’s registered tax agent. Parts of the BAS may
be pre-filled.

Related to the BAS is the Instalment Activity Statement (IAS), which is used by taxpayers who are not registered for the GST, but
have other tax obligations. An IAS is also used by entities that prepare a quarterly BAS but are required to remit their PAYG
withholding tax on a monthly basis.

The business activity statement reporting system was introduced in 2000 as a part of a major tax reform, which also included the
introduction of the goods and services tax (GST). The various forms and reporting methods have changed considerably since the
initial introduction of the BAS.

Accounting in Bangladesh

In Bangladesh, the profession of accountancy developed during the British colonial period. The basic requirements for financial
reporting by all companies in Bangladesh are provided by the Companies Act of 1994.[1] Today, it is represented by two professional
bodies, the Institute of Cost & Management Accountants of Bangladesh (ICMAB) and the Institute of Chartered Accountants of
Bangladesh (ICAB).

Chartered Accountants complete their training in practising firms and specialise in financial accounting, financial audit and tax. CMAs
receive particular training in cost audit, management audit and management accounting, as well as general accounting and taxation.
Both the ICMAB and ICAB are under the administrative control of the Ministry of Commerce. The Government of Bangladesh
considers both type of professional accountants equal in respect of employment in government services per circular
No.Com/PTMA/AP/2/19/87.[2]

The Generally Accepted Accounting Principles (GAAP) in Bangladesh are based upon standards set by the ICAB, which has stated its
intention to adopt International Financial Reporting Standards. As of 2013, ICAB has adopted the IFRS as issued by the IASB, except
for IAS 39, IAS 29, and IFRS 9 [1] and All foreign companies, and domestic companies listed on the Dhaka Stock Exchange (DSE)
and/or the Chittagong Stock Exchange (CSE) are required to use IFRS.[3][4]

Bangladesh Financial Reporting Standards (BFRS)

The Institute of Chartered Accountants of Bangladesh (ICAB) prescribes Financial Reporting Standards which are known as
Bangladesh Financial Reporting Standards (BFRS). Bangladesh Accounting Standards (BAS) are also included in BFRS. International
Accounting Standards and International Financial Reporting Standards which are issued by the International Accounting Standards
Board are what the BFRS models on. For listed companies under the Securities and Exchange Commission (SEC) rules, adopted
BFRS are legally enforceable.[1]

Revenue recognition principle

The revenue recognition principle states that one should only record revenue when it has been earned, not when the related cash is
collected. For example, a snow plowing service completes the plowing of a company's parking lot for its standard fee of $100. It can
recognize the revenue immediately upon completion of the plowing, even if it does not expect payment from the customer for several
weeks. This concept is incorporated into the accrual basis of accounting.

A variation on the example is when the same snow plowing service is paid $1,000 in advance to plow a customer's parking lot over a
four-month period. In this case, the service should recognize an increment of the advance payment in each of the four months covered
by the agreement, to reflect the pace at which it is earning the payment.

If there is doubt in regard to whether payment will be received from a customer, then the seller should recognize an allowance for
doubtful accounts in the amount by which it is expected that the customer will renege on its payment. If there is substantial doubt that
any payment will be received, then the company should not recognize any revenue until a payment is received.

Also under the accrual basis of accounting, if an entity receives payment in advance from a customer, then the entity records this
payment as a liability, not as revenue. Only after it has completed all work under the arrangement with the customer can it recognize
the payment as revenue.

Under the cash basis of accounting, you should record revenue when a cash payment has been received. For example, using the same
scenario as just noted, the snow plowing service will not recognize revenue until it has received payment from its customer, even
though this may be a number of weeks after the plowing service completes all work.

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 What is window dressing?

Definition of Window Dressing

Window dressing refers to actions taken or not taken prior to issuing financial statements in order to improve the appearance of the
financial statements.

Example of Window Dressing

Let's assume that a company operates throughout the year with a negative balance in its general ledger account Cash: Checking
Account. (At the bank, the checking account has a positive balance due to the time it takes for the company's checks to clear.) In order
to avoid its December 31 balance sheet reporting a negative cash balance, the company decides to postpone issuing checks for
vendors' invoices that should have been paid. The postponement allows its general ledger Cash account to temporarily have a positive
amount. On January 2, the company will issue the postponed checks and will resume its normal practice of having a negative balance
in its Cash account.

Window dressing in accounting

Window dressing is actions taken to improve the appearance of a company's financial statements. Window dressing is particularly common when
a business has a large number of shareholders, so that management can give the appearance of a well-run company to investors who probably do
not have much day-to-day contact with the business. It may also be used when a company wants to impress a lender in order to qualify for a loan.
If a business is closely held, the owners are usually better informed about company results, so there is no reason for anyone to apply window
dressing to the financial statements.

Examples of window dressing are:

 Cash. Postpone paying suppliers, so that the period-end cash balance appears higher than it should be.

 Accounts receivable. Record an unusually low bad debt expense, so that the accounts receivable (and therefore the current ratio) figure
looks better than is really the case.

 Fixed assets. Sell off those fixed assets with large amounts of accumulated depreciation associated with them, so the net book value of
the remaining assets appears to indicate a relatively new cluster of assets.

 Revenue. Offer customers an early shipment discount, thereby accelerating revenues from a future period into the current period.

 Depreciation. Switch from accelerated depreciation to straight-line depreciation in order to reduce the amount of depreciation charged
to expense in the current period. The mid-month convention can also be used to further delay expense recognition.

 Expenses. Withhold supplier invoices, so that they are recorded in a later period.

These actions are taken shortly before the end of an accounting period.

The window dressing concept is also used by fund managers, who replace poorly-performing securities with higher-performing ones just before
the end of a reporting period, to give the appearance of having a robust set of investments.

The entire concept of window dressing is clearly unethical, since it is misleading. Also, it merely robs results from a future period in order to
make the current period look better, so it is extremely short-term in nature.

Cash flow statement

In financial accounting, a cash flow statement, also known as statement of cash flows,[1] is a financial statement that shows how changes in
balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to operating, investing, and financing
activities. Essentially, the cash flow statement is concerned with the flow of cash in and out of the business. As an analytical tool, the statement of
cash flows is useful in determining the short-term viability of a company, particularly its ability to pay bills. International Accounting Standard 7
(IAS 7) is the International Accounting Standard that deals with cash flow statements.

People and groups interested in cash flow statements include:

 Accounting personnel, who need to know whether the organization will be able to cover payroll and other immediate expenses

 Potential lenders or creditors, who want a clear picture of a company's ability to repay

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  Potential investors, who need to judge whether the company is financially sound

 Potential employees or contractors, who need to know whether the company will be able to afford compensation

 Company Directors, who are responsible for governance of the company, and are responsible for ensuring that the company doesn't
trade while insolvent

 Shareholders of the business.

What is a Non­interest Bearing Note?

Definition: A noninterest-bearing note is a note or bond with no stated interest rate on its face. Contrary to the name, noninterest-bearing notes
do actually pay interest. The interest is implied in the face value of the note.

What Does Non-Interest Bearing Note Mean?

A noninterest-bearing note works the same way a discounted bond works. The note is issued for a lessor amount than the face value. After the
note matures the entire face value is repaid. It might be easier to look at an example.

Example

Big Ben’s Machining is looking for financing to expand its machine plant. It decides to talk with a bank about long-term notes. Big Ben and his
bank settle on a noninterest-bearing 5%, $10,000, 10-year note with $500 monthly payments. The bank writes Big Ben a check for $6,927.71. At
the end of the 10 years Big Ben will have paid the bank back the full $10,000. Here is a table that shows the noninterest bearing note calculations.

Current ratio

The current ratio is a liquidity ratio that measures whether a firm has enough resources to meet its short-term obligations. It compares a firm's
current assets to its current liabilities, and is expressed as follows:

The current ratio is an indication of a firm's liquidity. Acceptable current ratios vary from industry to industry.[1] In many cases, a creditor would
consider a high current ratio to be better than a low current ratio, because a high current ratio indicates that the company is more likely to pay the
creditor back. Large current ratios are not always a good sign for investors. If the company's current ratio is too high it may indicate that the
company is not efficiently using its current assets or its short-term financing facilities.[2]

If current liabilities exceed current assets the current ratio will be less than 1. A current ratio of less than 1 indicates that the company may have
problems meeting its short-term obligations.[3] Some types of businesses can operate with a current ratio of less than one, however. If inventory
turns into cash much more rapidly than the accounts payable become due, then the firm's current ratio can comfortably remain less than one.
Inventory is valued at the cost of acquiring it and the firm intends to sell the inventory for more than this cost. The sale will therefore generate
substantially more cash than the value of inventory on the balance sheet.[4] Low current ratios can also be justified for businesses that can collect
cash from customers long before they need to pay their suppliers.

How Effectiveness & Efficiency Relate to Productivity

Increased competition has set small businesses searching for measures to improve competitiveness. Moreover, the costs of doing business, such
as energy and material costs, are increasing. To address these challenges, small-business managers need to boost the productivity of their
companies. However, productivity is a multifaceted concept and closely related to effectiveness and efficiency. Without a clear understanding of
these concepts, efforts to boost productivity can fail.

Efficiency

Efficiency is an internal measure of performance for companies that shows how well the company converts inputs into outputs. The more the
ratio of outputs to inputs approaches 100 percent, the better the efficiency of the process will be. In simple terms, it is “doing things right” and
comes from proper harnessing of time, cost and efforts. For example, an employee can improve efficiency by developing a daily work schedule,
avoiding personal phone calls and preventing distractions.

Effectiveness

Organizational effectiveness is an external measure of performance and indicates how well an organization fulfills the demands of various
organizational stakeholders. Simply put, it is “doing the right things." For example, in educational institutions, effectiveness is measured by

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teaching students what they need to know. Managers need to make sure that the services or products meet customers’ expectations. When
analyzing a company's processes, effectiveness takes precedence over efficiency.

Productivity

Productivity relates the output of goods and services of the company to the inputs of all the resources used in the production of goods and
services. In other words, it measures how well a company transforms resources into products. Productivity is the combination of efficiency and
effectiveness. This means that a company that only attains efficiency or effectiveness is either partially productive or not productive at all. To be
productive, a company needs to be efficient and effective at the same time.

Benefits

Relating efficiency and effectiveness overcomes the shortcomings of using either of them alone. If managers focus on efficiency alone, they may
jeopardize the competitiveness of their company. For example, mere focus on efficiency ignores the contribution of the activity to customer value
creation. Likewise, exclusive emphasis on effectiveness ignores the cost-effectiveness of the activity. Improving productivity boosts
competitiveness by lowering operational costs, using resources better, increasing market share and increasing profits.

Accounting information system

An accounting as an information system (AIS) is a system of collecting, storing and processing financial and accounting data that are used by
decision makers. An accounting information system is generally a computer-based method for tracking accounting activity in conjunction with
information technology resources. The resulting financial reports can be used internally by management or externally by other interested parties
including investors, creditors and tax authorities. Accounting information systems are designed to support all accounting functions and activities
including auditing, financial accounting & reporting, managerial/ management accounting and tax. The most widely adopted accounting
information systems are auditing and financial reporting modules.

Why is accounting considered an information system?

Any system of measurement is an ‘information system’. The key is organizing the data to produce useful ‘information.

That means asking the user what information they need to do their job, designing the system to collect the appropriate data and organize it in
appropriate ways and then making sure that the reports deliver the information in a format that’s easy to read, in detail or summary depending on
the user’s preference (NB which is NOT necessarily the same as the way the computer spits it out, prioritized according to the user’s wants and at
a frequency that matches what is needed.

Another critical factor is comparing results to something else (previous year, budget, last month). A number on its own is just raw data, of limited
value.

Under the Triple Bottom Line, any project or organization should be measured on three criteria: Profit, People and Planet. You should have
systems to collect the information you need to make informed decisions. The Profit system (accounting ) is well recognized. People and Planet
are much harder to set up (more ‘subjective’), just don’t think they are less important because the info is less ‘accurate’. My book Better Roughly
Right Than Precisely Wrong: Why Accounting Is Broken and How To Fix It, on the press as I write this speaks to all of these issues.

Why Accounting is called the Language of Business

Many famous writers of Accounting of the world have regarded Accounting as the language of business.

Man expresses his feelings through language in written and verbal form, similarly, various information of the business organization are expressed
and presented through accounting statements.

In language, efforts are made to express a particular feeling using words one after another.

Similarly, in accounting, financial transactions are recorded in books of accounts and there from preparing financial statements various financial
information are communicated to concerned persons.

Accounting furnishes all information about past events, current activities and future possibilities of a business.

Recording and analyzing past and present financial events.

Accounting presents and communicates various information in the form of statements and reports to the interested parties like owners,
employees, management, investors, buyers, sellers etc.

From these accounts, statements, and reports, parties concerned can evaluate their success-failure, financial solvency/insolvency etc.

Of course, having sound command over accounting language one can understand this information.

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These financial statements are meaningless to those who do not have knowledge of accounting, in the same way as a newspaper is a bundle of
papers to an illiterate person.

So, Accounting functions like a language. One may think it is not apt to compare Accounting with language but actually, it is not so.

Shorthand is a language but the persons who are ignorant of it cannot understand this symbolic language.

Similarly, it is not illogical to term accounting as a language of business.

It is meaningless to those who are ignorant of this discipline. No language in the world is universal.

Similarly, accounting language also is not understandable to all.

With the changes in society and human life languages are changing.

Similarly with the advancement and complexity of business accounting language is changing gradually.

Therefore, it is apt to say, Accounting is the language of business.

Debits and credits

Debit and Credit Definitions

Business transactions are events that have a monetary impact on the financial statements of an organization. When accounting for these
transactions, we record numbers in two accounts, where the debit column is on the left and the credit column is on the right.

 A debit is an accounting entry that either increases an asset or expense account, or decreases a liability or equity account. It is
positioned to the left in an accounting entry.

 A credit is an accounting entry that either increases a liability or equity account, or decreases an asset or expense account. It is
positioned to the right in an accounting entry.

Debit and Credit Usage

Whenever an accounting transaction is created, at least two accounts are always impacted, with a debit entry being recorded against one account
and a credit entry being recorded against the other account. There is no upper limit to the number of accounts involved in a transaction - but the
minimum is no less than two accounts. The totals of the debits and credits for any transaction must always equal each other, so that an accounting
transaction is always said to be "in balance." If a transaction were not in balance, then it would not be possible to create financial statements.
Thus, the use of debits and credits in a two-column transaction recording format is the most essential of all controls over accounting accuracy.

There can be considerable confusion about the inherent meaning of a debit or a credit. For example, if you debit a cash account, then this means
that the amount of cash on hand increases. However, if you debit an accounts payable account, this means that the amount of accounts payable
liability decreases. These differences arise because debits and credits have different impacts across several broad types of accounts, which are:

 Asset accounts. A debit increases the balance and a credit decreases the balance.

 Liability accounts. A debit decreases the balance and a credit increases the balance.

 Equity accounts. A debit decreases the balance and a credit increases the balance.

The reason for this seeming reversal of the use of debits and credits is caused by the underlying accounting equation upon which the entire
structure of accounting transactions are built, which is:

Assets = Liabilities + Equity

Thus, in a sense, you can only have assets if you have paid for them with liabilities or equity, so you must have one in order to have the other.
Consequently, if you create a transaction with a debit and a credit, you are usually increasing an asset while also increasing a liability or equity
account (or vice versa). There are some exceptions, such as increasing one asset account while decreasing another asset account. If you are more
concerned with accounts that appear on the income statement, then these additional rules apply:

 Revenue accounts. A debit decreases the balance and a credit increases the balance.

 Expense accounts. A debit increases the balance and a credit decreases the balance.

 Gain accounts. A debit decreases the balance and a credit increases the balance.

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  Loss accounts. A debit increases the balance and a credit decreases the balance.

If you are really confused by these issues, then just remember that debits always go in the left column, and credits always go in the right column.
There are no exceptions.

Debit and Credit Rules

The rules governing the use of debits and credits are as follows:

 All accounts that normally contain a debit balance will increase in amount when a debit (left column) is added to them, and reduced
when a credit (right column) is added to them. The types of accounts to which this rule applies are expenses, assets, and dividends.

 All accounts that normally contain a credit balance will increase in amount when a credit (right column) is added to them, and reduced
when a debit (left column) is added to them. The types of accounts to which this rule applies are liabilities, revenues, and equity.

 The total amount of debits must equal the total amount of credits in a transaction. Otherwise, an accounting transaction is said to be
unbalanced, and will not be accepted by the accounting software.

How to Use the Accounting Equation

As a small business owner, it’s important to understand information about your company’s finances. One important thing to look at is how much
of your business assets are financed with debt vs. paid for with capital. Use the accounting equation to see the difference.

What is the accounting equation?

The accounting equation is used in double-entry accounting. It shows the relationship between your business’s assets, liabilities, and equity. By
using the accounting equation, you can see if your assets are financed by debt or business funds. The accounting equation is also called the
balance sheet equation.

Balance sheet equation parts

Use your business’s balance sheet to calculate the accounting equation. The balance sheet is a financial statement that tracks your company’s
progress. The balance sheet has three parts: assets, liabilities, and equity.

Assets are items of value that your business owns. For example, your business bank account, company vehicles, and equipment are assets.

Liabilities are debts that you owe to others. For example, your payables are liabilities.

Business equity shows your ownership in the business. If you are a sole proprietor, you hold all the ownership. If there is more than one owner,
you split the equity. Calculate equity by subtracting your assets from liabilities.

What is the basic accounting equation?

The accounting equation requires liabilities and equity to equal assets. The following is the accounting calculation:

Assets = Liabilities + Equity

Each side of the accounting equation has to equal the other because you must purchase things with either debt or capital.

Equity has an equal effect on both sides of the equation. If you know any two parts of the accounting equation, you can calculate the third.

You can write the accounting equation with the liabilities by itself:

Liabilities = Assets – Equity

Or, you can write the accounting equation with equity by itself:

Equity = Assets – Liabilities

Accounting equation examples

The following examples are connected to the same business. Take a look at how different transactions affect the accounting equation. Then, see
the business’s balance sheet at the end of this section.

Example 1:

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You’re starting a business selling printed T-shirts. You save for a year before opening and contribute $10,000 to the new company. By doing this,
you increase your business’s assets and owner’s equity by the same amount:

$10,000 Assets = Liabilities + $10,000 Equity

Expanded accounting equation

The expanded accounting equation shows the relationship between your income statement and balance sheet. You can see how equity is created
from its two main sources: revenue and owner contributions.

This the expanded accounting equation:

Assets = Liabilities + Owner’s Equity + Revenue – Expenses – Draws

Revenues are what your business earns through regular operations. Expenses are what it costs to provide your products and services.

Certain patterns occur as figures in the expanded accounting equation change:

 Revenue increases owner’s equity

 Expenses decrease owner’s equity

 Owner’s draw decreases owner’s equity

The two sides of the equation must equal each other. If the expanded accounting equation is not balanced, your financial reports are inaccurate.

Why the accounting equation is important

The accounting equation can give you a clear picture your business’s financial situation. You must calculate the accounting equation to read your
balance sheet. The accounting equation helps you understand the relationship between your financial statements. In a Fundera article, Heather D.
Satterley, founder of Satterley Training & Consulting, LLC, explains:

The purpose of the balance sheet is to show the financial position of the business on any given day. The balance sheet can tell you how much
money the business has in the bank and how likely it is that the business will be able to meet all of its financial obligations. It can also tell you
how much profit (or loss) the business has retained since it started.

By using the accounting equation, you can see if you can fund the purchase of an asset with your business’s existing assets. And, the equation
will reveal if you should pay off debts with assets (like cash) or by taking on more liabilities.

Need a simple way to track your business’s transactions? Patriot’s online accounting software is easy to use and made for the non-accountant.
We offer free, U.S.-based support. Try it for free today.

Balance Sheet - Liabilities and Stockholders' Equity

(B) Liabilities

The balance sheet reports Direct Delivery's liabilities as of the date noted in the heading of the balance sheet. Liabilities are obligations of the
company; they are amounts owed to others as of the balance sheet date. Marilyn gives Joe some examples of liabilities: the loan he received from
his aunt (Notes Payable or Loan Payable), the interest on the loan he owes to his aunt (Interest Payable), the amount he owes to the supply store
for items purchased on credit (Accounts Payable), the wages he owes an employee but hasn't yet paid to him (Wages Payable).

Another liability is money received in advance of actually earning the money. For example, suppose that Direct Delivery enters into an
agreement with one of its customers stipulating that the customer prepays $600 in return for the delivery of 30 parcels every month for 6 months.
Assume Direct Delivery receives that $600 payment on December 1 for deliveries to be made between December 1 and May 31. Direct Delivery
has a cash receipt of $600 on December 1, but it does not have revenues of $600 at this point. It will have revenues only when it earns them by
delivering the parcels. On December 1, Direct Delivery will show that its asset Cash increased by $600, but it will also have to show that it has a
liability of $600. (It has the liability to deliver $600 of parcels within 6 months, or return the money.)

The liability account involved in the $600 received on December 1 is Unearned Revenue (or Deferred Revenues, Customer Deposits, etc.).
Each month, as the 30 parcels are delivered, Direct Delivery will be earning $100, and as a result, each month $100 moves from the account
Unearned Revenue to Service Revenues. Each month Direct Delivery's liability decreases by $100 as it fulfills the agreement by delivering
parcels and each month its revenues on the income statement increase by $100.

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(C) Stockholders' Equity

If the company is a corporation, the third section of a corporation's balance sheet is Stockholders' Equity. (If the company is a sole proprietorship,
it is referred to as Owner's Equity.) The amount of Stockholders' Equity is exactly the difference between the asset amounts and the liability
amounts. As a result accountants often refer to Stockholders' Equity as the difference (or residual) of assets minus liabilities. Stockholders' Equity
is also the "book value" of the corporation.

Since the corporation's assets are shown at cost or lower (and not at their market values) it is important that you do not associate the reported
amount of Stockholders' Equity with the market value of the corporation. (Hence, it is a poor choice of words to refer to Stockholders' Equity as
the corporation's "net worth".) To find the market value of a corporation, you should obtain the services of a professional familiar with valuing
businesses.

Within the Stockholders' Equity section you may see accounts such as Common Stock, Paid-in Capital in Excess of Par Value-Common
Stock, Preferred Stock, Retained Earnings, Accumulated Other Comprehensive Income, Treasury Stock, and Current Year's Net
Income.

The account Common Stock will be increased when the corporation issues shares of stock in exchange for cash (or some other asset). Another
account Retained Earnings will increase when the corporation earns a profit. There will be a decrease when the corporation has a net loss. This
means that revenues will automatically cause an increase in Stockholders' Equity and expenses will automatically cause a decrease in
Stockholders' Equity. This illustrates a link between a company's balance sheet and income statement.

Is a Stockholder's Equity a Liability?

Stockholder's equity and liabilities are both monies that a firm owes. They are not, however, the same thing, and it is important for managers and
shareholders to understand why this is the case. They should understand what stockholder's equity and liabilities are, how they are similar and in
what ways they are different.

Definition of a Liability

A liability is any financial obligation that a firm is required to meet. In simple terms, a liability is money that a company owes to external parties;
that it is to say that it is debt that the company holds. Examples of liabilities include outstanding loans, salaries payable, taxes owed and accounts
payable.

Stockholder's Equity

When a corporation has profits, it can either reinvest them or it can distribute them to shareholders. if the company plans to distribute them to
shareholders, then the funds are retained as stockholder's equity until the amount is paid to the shareholders as a dividend. In essence,
stockholder's equity is the profit that a corporation owes to its owners.

Similarities

Stockholder's equity is similar to a liability in that it is an amount of money that is earmarked to be paid out (to shareholders and creditors,
respectively). On a balance sheet, stockholder's equity and liabilities are placed in the right hand column while assets are placed in the left hand
column. The total of a firm's liabilities and stockholder equity must always be equal to its assets.

Key Differences

Although a stockholder's equity has similarities to a liability, it is not considered to be a liability itself. The important difference between
stockholder's equity and liabilities is that stockholder equity is money owed to shareholders within the company while liabilities are owed to
external parties. It is also important to note that in bankruptcy law, liabilities take precedence over stockholders' equity, meaning that a firm must
pay its debts before its shareholders in the event of a bankruptcy.

Difference Between Provision and Reserve

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In the business glossary, provision implies money set aside to cover an anticipated liability or loss. Look the other term Reserve, reserves refer to
withholding some amount for any use in future. Provision and reserves are two terms which are highly confused, but they carry different
meanings.

While running a business, some expenses or losses relate to the current financial year, but their amount is not known, as they are not yet incurred.
For such expenses/losses provision is created, as a charge against profit. Likewise, a certain portion of the profit is retained in the business as
reserves, to utilize them at the time of need, or to invest it in growth activities, or to cover future contingencies. Reserves are the only
appropriation of profit.

So, the basic difference between provision and reserve is that net profit is calculated only after giving effect to all provisions, whereas reserves
are created only after reckoning profit. Check out the article to know some more differences.

Basis for
Provision Reserve
Comparison

Reserves means to retain a part of profit for

Meaning The Provision means to provide for a future expected liability.
future use.

What is it? Charge against profit Appropriation of profit

Provides For Known liabilities and anticipated losses Increase in capital employed

Profit must be present for the creation of

Presence of profit Not necessary
reserves, except for some special reserves.

Appearance in In case of assets it is shown as a deduction from the concerned asset while
Shown on the liabilities side.
Balance Sheet if it is a provision for liability, it is shown in the liabilities side.

Optional except for some reserves whose

Compulsion Yes, as per GAAP
creation is obligatory.

Payment of
Dividend can never be paid out of provisions. Dividend can be paid out of reserves.
Dividend

Specific use Provisions can only be used, for which they are created. Reserves can be used otherwise.

Methods of Pricing Material Issues: 11 Methods | Costing

The important methods followed in pricing of issue of materials are:- 1. Actual Cost Method 2. First-In First-Out (FIFO) Method 3. Last-In First-
Out (LIFO) Method 4. Highest-in First-Out (HIFO) Method 5. Simple Average Cost Method 6. Weighted Average Cost Method 7. Periodic
Average Cost Method 8. Standard Cost Method 9. Replacement Cost Method 10. Next in First Out (NIFO) Method 11. Base Stock Method.

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1. Actual Cost Method:

Where materials are purchased specially for a specific job, actual cost of materials is charged to that job. Such materials will normally be stored
separately and issued only to that particular job.

2. First-In First-Out (FIFO) Method:

CIMA defines FIFO as “a method of pricing the issue of material using, the purchase price of the oldest unit in the stock”. Under this
method materials are issued out of stock in the order in which they were first received into stock. It is assumed that the first material to come into
stores will be the first material to be used.

3. Last-In First-Out (LIFO) Method:

Under this method most recent purchase will be the first to be issued. The issues are priced out at the most recent batch received and continue to
be charged until a new batch received is arrived into stock. It is a method of pricing the issue of material using the purchase price of the latest unit
in the stock.

4. Highest-in First-Out (HIFO) Method:

Under this method, the materials with highest prices are issued first, irrespective of the date upon which they were purchased. The basic
assumption is that in fluctuating and inflationary market, the cost of material are quickly absorbed into product cost to hedge against risk of
inflation. This method is used when the material is in short supply and in execution of cost plus contracts. This method is not popular and not
acceptable under standard accounting practices.

5. Simple Average Cost Method:

Under this method all the materials received are merged into existing stock of materials, their identity being lost. The simple average price is
calculated without any regard to the quantities involved. The simple average cost is arrived at by adding the different prices paid during the
period for the batches purchased by dividing the number of batches. For example, three batches of materials received at Rs. 10, Rs. 12 and Rs. 14
per unit respectively.

The simple average price is calculated as follows:

Rs. 10 + Rs. 12 + Rs. 14/3 batches = Rs. 36/3 batches = Rs 12 per unit

This method is not popular because it takes into consideration the prices of different batches but not the quantities purchased in different batches.
This method is used when prices do not fluctuate very much and the stock values are small in value.

6. Weighted Average Cost Method:

It is a perpetual weighted average system where the issue price is recalculated every time after each receipt taking into consideration both the
total quantities and total cost while calculating weighted average price. For example, three batches of material received in quantities of 1,000
units @ Rs. 15, 1,300 units @ Rs. 16 and 800 units @ Rs. 14.

The weighted average price is calculated as follows:

(1,000 units x Rs. 15) + (1,300 units x Rs. 16) + (800 units x Rs. 14)/1,000 units + 1,300 units + 800 units

= Rs. 15,000 + Rs. 20,800 + Rs. 11,200/3,100 units = Rs. 47,000/3,100 units = Rs. 15.16 per unit

This method tends to smooth out the fluctuations in price and reduces the number of calculations to be made, as each issue is charged at the same
price until a fresh batch of material is received.

This method is easier as compared to FIFO and LIFO, as there is no necessity to identify each batch separately. But this method increases the
clerical work in calculation of new average price every time a new batch is received. The issue price calculated rarely represents the actual
purchase price.

7. Periodic Average Cost Method:

Under this method, instead or recalculating the simple or weighted average cost every time there is a receipt, an average for the accounting period
as a whole is computed.

The average price for all the materials issued during the period is computed as follows:

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8. Standard Cost Method:

Under this method, material issues are priced at a predetermined standard issue price. Any variance between the actual purchase price and
standard issue price is written off to the Profit and Loss Account. Standard cost is a predetermined cost set by the management prior to the actual
material costs being known and the standard issue price is used for all issues to production and for valuation of closing stock.

If initially the standard price is set carefully then it reduces all the clerical work and errors tremendously and the stock recording procedure is
simplified. The realistic production cost comparisons can be made easier by eliminating fluctuations in cost due to material price variance. In a
situation of fluctuating prices, this method is not suitable.

9. Replacement Cost Method:

This method is also called as ‘market price method’. The replacement cost is a cost at which material identical to that can be replaced by
purchasing at the date of pricing material issues; as distinct from the actual cost price at the date of purchase. The replacement price is the price of
replacing the material at the time of issue of materials or on the date of valuation of closing stock.

This method is not acceptable for standard accounting practice, since it reflects a cost which has not really been paid. If stocks are held at
replacement cost, for balance sheet purposes when they have been bought at a lower price, an element of profit which has not yet been realized
will be built into the Profit and Loss Account.

This method is advocated by charging the market price of material to the job or process, make it easier to determine the profitability of the job or
process. This method is suitable particularly in the inflationary tendency of market prices of materials. Where there is no precise market for
particular materials, it would be difficult in ascertainments of replacement prices for the material issues.

10. Next in First Out (NIFO) Method:

This method is a variant of replacement cost method. Under this method the price quoted on the latest purchase order or contract is used for all
issues until a new order is placed.

11. Base Stock Method:

Under this method, a specified quantity of material is always held in stock and is priced at its original cost as buffer or base stock; and any issue
of materials above the base stock quantity is priced under any one of the methods discussed above.

This method indicates how prices are moving over a longer period of time. But this method is not popular and also not accepted under standard
accounting practice since it would result in stock valuation totally unrealistic

Break Even Analysis

What is Break Even Analysis?

Break Even Analysis in economics, business, and cost accounting refers to the point in which total cost and total revenue are equal. A break even
point analysis is used to determine the number of units or dollars of revenue needed to cover total costs (fixed and variable costs).

Formula for Break Even Analysis

The formula for break even analysis is as follows:

Break even quantity = Fixed costs / (Sales price per unit – Variable cost per unit)

Where:

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  Fixed costs are costs that do not change with varying output (i.e. salary, rent, building machinery).

 Sales price per unit is the selling price (unit selling price) per unit.

 Variable cost per unit is the variable costs incurred to create a unit.

It is also helpful to note that sales price per unit minus variable cost per unit is the contribution margin per unit. For example, if a book’s selling
price is $100 and its variable costs are $5 to make the book, $95 is the contribution margin per unit and contributes to offsetting the fixed costs.

Example of Break Even Analysis

Colin is the managerial accountant in charge of Company A, which sells water bottles. He previously determined that the fixed costs of Company
A consist of property taxes, a lease, and executive salaries, which add up to $100,000. The variable costs associated with producing one water
bottle is $2 per unit. The water bottle is sold at a premium price of $12. To determine the break even point of Company A’s premium water
bottle:

Break even quantity = $100,000 / ($12 – $2) = 10,000

Therefore, given the fixed costs, variable costs, and selling price of the water bottles, Company A would need to sell 10,000 units of water bottles
to break even.

Graphically Representing the Break Even Point

The graphical representation of unit sales and dollar sales needed to break even is referred to as the break even chart or Cost Volume Profit
(CVP) graph. Below is the CVP graph of the example above:

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 Explanation:

1. The number of units is on the X-axis (horizontal) and the dollar amount is on the Y-axis (vertical).

2. The red line represents the total fixed costs of $100,000.

3. The blue line represents revenue per unit sold. For example, selling 10,000 units would generate 10,000 x $12 = $120,000 in revenue.

4. The yellow line represents total costs (fixed and variable costs). For example, if the company sells 0 units, the company would incur
$0 in variable costs but $100,000 in fixed costs for total costs of $100,000. If the company sells 10,000 units, the company would
incur 10,000 x $2 = $20,000 in variable costs and $100,000 in fixed costs for total costs of $120,000.

5. The break even point is at 10,000 units. At this point, revenue would be 10,000 x $12 = $120,000 and costs would be 10,000 x 2 =
$20,000 in variable costs and $100,000 in fixed costs.

6. When the number of units exceeds 10,000, the company would be making a profit on the units sold. Note that the blue revenue line is
greater than the yellow total costs line after 10,000 units are produced. Likewise, if the number of units is below 10,000, the company
would be making a loss. From 0-9,999 units, the total costs line is above the revenue line.

Established in 1973, the Financial Accounting Standards Board (FASB) is the independent, private-sector, not-for-profit organization based in
Norwalk, Connecticut, that establishes financial accounting and reporting standards for public and private companies and not-for-profit
organizations that follow Generally Accepted Accounting Principles (GAAP).

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The FASB is recognized by the Securities and Exchange Commission as the designated accounting standard setter for public companies. FASB
standards are recognized as authoritative by many other organizations, including state Boards of Accountancy and the American Institute of
CPAs (AICPA). The FASB develops and issues financial accounting standards through a transparent and inclusive process intended to promote
financial reporting that provides useful information to investors and others who use financial reports.

The Financial Accounting Foundation (FAF) supports and oversees the FASB. Established in 1972, the FAF is the independent, private-sector,
not-for-profit organization based in Norwalk, Connecticut responsible for the oversight, administration, financing, and appointment of the FASB
and the Governmental Accounting Standards Board (GASB).

FASB MISSION

The collective mission of the FASB, the Governmental Accounting Standards Board (GASB) and the FAF is to establish and improve financial
accounting and reporting standards to provide useful information to investors and other users of financial reports and educate stakeholders on
how to most effectively understand and implement those standards.

The FASB, the GASB, the FAF Trustees, and the FAF management contribute to the collective mission according to each one's specific role:

 The FASB and the GASB are charged with setting the highest-quality standards through a process that is robust, comprehensive, and
inclusive.

 The FAF management is responsible for providing strategic counsel and services that support the work of the standard-setting
Boards.

 The FAF Trustees are responsible for providing oversight and promoting an independent and effective standard-setting process.

What is the Going Concern Assumption?

Definition: The going concern assumption or going concern principle is an accounting principle that requires companies to be accounted for as if
they will continue operating into the future. In other words, we are not supposed to expect companies not to fail. Companies supposed to be
treated like they will stay out of bankruptcy and remain in business.

What Does Going Concern Assumption Mean?

This is an important concept to financial accounting because many other accounting principles are based on the assumption that companies will
not cease to exist at the end of a period. The going concern principle is what establishes the ability for companies to accrue expenses and prepay
asset.

If we automatically assumed that companies ended operations at the end of every period, there would be no reason to accrue expenses.
Companies wouldn’t have to pay for these expenses next year because they wouldn’t exist.

Example

The going concern assumption reinforces the matching principle, which states that revenues and expenses need to be accounted for in the period
at which they are earned or incurred.

Companies must also inform investors and creditors about possible going concern issues. For instance, if a company is facing financial
difficulties from an excessive debt burden or is facing a large liability lawsuit that could bankrupt the company, management must mention these
cautions in the financial statement notes. Potential investors have the right to know if the company’s going concern or longevity is in question. If
nothing about the going concern is mentioned in the financial statementnotes, it is assumed that the company faces no threatening financial
problems.

Check kiting

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Check kiting is the deliberate issuance of a check for which there is not sufficient cash to pay the stated amount. The mechanics of this fraud
scheme are as follows:

1. Write a check for which there is not sufficient cash in the payer's account.

2. Create a checking account at a different bank.

3. Deposit the fraudulent check in the checking account that was just opened.

4. Withdraw the funds from the new checking account.

The entity harmed by check kiting is the bank that has allowed funds to be withdrawn from the new checking account without first waiting for
funds to arrive from the paying bank.

Banks combat this problem by not allowing funds to be withdrawn from an account until a certain number of days have passed, by which time the
lack of funds in the payer's account will have been discovered. Also, there are a number of kiting indicators to look for, including the following:

 A large number of check deposits each day

 Many checks are drawn on the same bank

 A large proportion of cash in an account that has not yet cleared the paying bank

 Deposits are being made through multiple bank branches, in order to make the volume of deposits less obvious to the bank staff

Check kiting is extremely intentional. Someone engaged in kiting has a detailed knowledge of how long it takes for checks to clear the bank, and
will take advantage of the timing delay to withdraw cash (even partial amounts) just before the bank discovers that there is a problem. A
sophisticated check kiting scheme can result in multi-million dollar losses.

Kiting is particularly effective when an individual engages in a reasonable amount of normal check writing and depositing activities in an account
over a period of time, so that the related account appears perfectly normal, and so is subject to fewer bank-imposed restrictions than might be the
case for a newly-opened account.

A kiting scheme may involve multiple banks, where an individual is constantly shifting check payments among numerous accounts, just keeping
ahead of the funds-clearing mechanism. This can be a particular problem when a kiting scheme is finally shut down, for one of the banks in the
group may be stuck with the bulk of the losses, depending on which checks were written from which accounts, and the timing of the payments.

Lapping

Lapping is a machining process in which two surfaces are rubbed together with an abrasive between them, by hand movement or using a
machine.

This can take two forms. The first type of lapping (traditionally called grinding), involves rubbing a brittle material such as glass against a surface
such as iron or glass itself (also known as the "lap" or grinding tool) with an abrasive such as aluminum oxide, jeweller's rouge, optician's rouge,
emery, silicon carbide, diamond, etc., between them. This produces microscopic conchoidal fractures as the abrasive rolls about between the two
surfaces and removes material from both.

The other form of lapping involves a softer material such as pitch or a ceramic for the lap, which is "charged" with the abrasive. The lap is then
used to cut a harder material—the workpiece. The abrasive embeds within the softer material, which holds it and permits it to score across and cut
the harder material. Taken to a finer limit, this will produce a polished surface such as with a polishing cloth on an automobile, or a polishing
cloth or polishing pitch upon glass or steel.

Taken to the ultimate limit, with the aid of accurate interferometry and specialized polishing machines or skilled hand polishing, lensmakers can
produce surfaces that are flat to better than 30 nanometers. This is one twentieth of the wavelength of light from the commonly used 632.8 nm
helium neon laser light source. Surfaces this flat can be molecularly bonded (optically contacted) by bringing them together under the right
conditions. (This is not the same as the wringing effect of Johansson blocks, although it is similar).

Unearned revenue

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Unearned revenue is money received from a customer for work that has not yet been performed. This is advantageous from a cash flow
perspective for the seller, who now has the cash to perform the required services. Unearned revenue is a liability for the recipient of the payment,
so the initial entry is a debit to the cash account and a credit to the unearned revenue account.

Accounting for Unearned Revenue

As a company earns the revenue, it reduces the balance in the unearned revenue account (with a debit) and increases the balance in the revenue
account (with a credit). The unearned revenue account is usually classified as a current liability on the balance sheet.

If a company were not to deal with unearned revenue in this manner, and instead recognize it all at once, revenues and profits would initially be
overstated, and then understated for the additional periods during which the revenues and profits should have been recognized. This is also a
violation of the matching principle, since revenues are being recognized at once, while related expenses are not being recognized until later
periods.

Examples of Unearned Revenue

Examples of unearned revenue are:

 A rent payment made in advance

 A services contract paid in advance

 A legal retainer paid in advance

 Prepaid insurance

What Is Off­Balance Sheet (OBS)?

What Is Off-Balance Sheet (OBS)?

Off-balance sheet (OBS) items is a term for assets or liabilities that do not appear on a company's balance sheet. Although not recorded on the
balance sheet, they are still assets and liabilities of the company. Off-balance sheet items are typically those not owned by or are a direct
obligation of the company. For example, when loans are securitized and sold off as investments, the secured debt is often kept off the bank's
books. An operating lease is one of the most common off-balance items.

Understanding Off-Balance Sheet

Off-balance sheet items are an important concern for investors when assessing a company's financial health. Off-balance sheet items are often
difficult to identify and track within a company's financial statements because they often only appear in the accompanying notes. Also, of concern
is some off-balance sheet items have the potential to become hidden liabilities. For example, collateralized debt obligations (CDO) can become
toxic assets, assets that can suddenly become almost completely illiquid, before investors are aware of the company's financial exposure.

Off-balance sheet items are not inherently intended to be deceptive or misleading, although they can be mis-used by bad actors to be deceptive.
Certain businesses routinely keep substantial off-balance sheet items. For example, investment management firms are required to keep clients'
investments and assets off-balance sheet. For most companies, off-balance sheet items exist in relation to financing, enabling the company to
maintain compliance with existing financial covenants. Off-balance sheet items are also used to share the risks and benefits of assets and
liabilities with other companies, as in the case of joint venture (JV) projects.

The Enron scandal was one of the first developments to bring the use of off-balance-sheet entities to the public's attention. In Enron's case, the
company would build an asset such as a power plant and immediately claim the projected profit on its books even though it hadn't made one dime
from it. If the revenuefrom the power plant was less than the projected amount, instead of taking the loss, the company would then transfer these
assets to an off-the-books corporation, where the loss would go unreported.

What is Depreciation, Depletion, and Amortization (DD&A)?

Depreciation, depletion, and amortization (DD&A) is an accounting technique that enables companies to gradually expense various different
resources of economic value over time in order to match costs to revenues.

Depreciation spreads out the cost of a tangible asset over its useful life, depletion allocates the cost of extracting natural resources such as timber,
minerals, and oil from the earth, and amortization is the deduction of capital expenses over a specified time period, typically the life of an asset.

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Depreciation and amortization are common to almost every industry, while depletion is usually used only by energy and natural-resource firms.
The use of all three, therefore, is often associated with the acquisition, exploration, and development of new oil and natural gas reserves.

Understanding Depreciation, Depletion, and Amortization (DD&A)

Accrual accounting permits companies to recognize capital expenses in periods that reflect the use of the related capital asset. In other words, it
lets firms match expenses to the revenues they helped to produce.

For example, if a large piece of machinery or property requires a large cash outlay, it can be expensed over its usable life, rather than in the
individual period during which the cash outlay occurred. This accounting technique is designed to provide a more accurate depiction of the
profitability of the business.

Depreciation

Depreciation applies to expenses incurred for the purchase of assets with useful lives greater than one year. A percentage of the purchase price is
deducted over the course of the asset's useful life.

Amortization

Amortization is very similar to depreciation, in theory, but applies to intangible assets such as patents, trademarks, and licenses, rather than
physical property and equipment. Capital leases are also amortized.

Depletion

Depletion also lowers the cost value of an asset incrementally through scheduled charges to income. Where it differs is that it refers to the gradual
exhaustion of natural resource reserves, as opposed to the wearing out of depreciable assets or aging life of intangibles.

Depletion expense is commonly used by miners, loggers, oil and gas drillers, and other companies engaged in natural resource extraction.
Enterprises with an economic interest in mineral property or standing timber may recognize depletion expenses against those assets as they are
used. Depletion can be calculated on a cost or percentage basis, and businesses generally must use whichever provides the larger deduction for
tax purposes.

What are Intangible Assets?

Definition: Intangible assets are long-term resources that typically lack a physical presence and have an unknown amount of future value or
amount of benefits. In other words, intangible assets are typically intellectual assets the benefit the company over several accounting periods.

What Does Intangible Asset Mean?

The main examples of intangibles assets are patents, trademarks, copyrights, franchise agreements, goodwill, and other business contracts.

Since intangible assets are difficult to value and have unpredictable future benefits, they are usually recorded at cost when they are originally
purchased. Most of these assets’ recorded value, with exception of goodwill, is not adjusted over time. The original cost is all the balance
sheet reflects for value no matter what future benefits materialize.

Example

Take a trademark for example. A trademark is an intellectual property that gives a company exclusive use of a brand, symbol, or logo.
Trademarks are worth millions of dollars, but in many cases are rarely capitalized for that much on the balance sheet. Why not?

Remember, intangible assets are recorded at their cost not the market value. Although the Nike swoosh logo is worth billions of dollars, it cost the
company less then $50 to create. Some patents and trademarks, however, do cost significant amounts of money to create, establish, and protect.
Typically, legal fees to acquire intangible assets are included in their cost.

Intangible assets are usually reported in either the long-term assets category or the other assets section of the balance sheet. They are amortized
over their useful life or estimated useful. For instance, patents have a legal life of 20 years. After that, the patent expires and the idea becomes
public domain. Thus, patents usually have useful lives of 20 years or less.

Goodwill is the exception to all intangible assets because it is not amortized. Instead, it is test for impairment on an annual basis and adjusted
accordingly.

What is an Expense?

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An expense is the cost of operations that a company incurs to generate revenue. As the popular saying goes, “it costs money to make money.”

Common expenses include payments to suppliers, employee wages, factory leases, and equipment depreciation. Businesses are allowed to write
off tax-deductible expenses on their income tax returns to lower their taxable income and thus their tax liability. However, the Internal Revenue
Service (IRS) has strict rules on which expenses business are allowed to claim as a deduction.

Understanding Expense

One of the main goals of company management teams is to maximize profits. This is achieved by boosting revenues while keeping expenses in
check. Slashing costs can help companies to make even more money from sales. However, if expenses are cut too much it could also have a
detrimental effect. For example, paying less on advertising reduces costs but also lowers the company’s visibility and ability to reach out to
potential customers.

What is a Loss?

Losses can result from a number of activities such as; sale of an asset for less than its carrying amount, the write-down of assets, or a loss from
lawsuits.

The following are types of losses that are most commonly found in your average business.

Losses on Sale of Assets

This is known as a nonoperating item resulting from the sale of an asset (excluding inventory) for less than the amount shown in the company's
accounting records. Meaning that the asset was sold for less than it was worth in the company's books.

Since the loss is outside of the main activities of a business, it is reported on the income statement as a nonoperating or other loss. This term is
also used to show the writedown of asset amounts to a value that is lower than cost.

Loss from Lawsuit

A reduction in net income that comes from a judgement against the company. Generally, accounting principles stipulate that such losses must be
recorded when the amount of the loss is determined to be probable and the amount can be estimated.

This indicates that the loss is likely to be shown in the financial statements earlier than the actual payment is made. If the 'loss' is only possible
(and not probable) it is disclosed in the notes to the financial statements rather than actually recorded in the statements themselves.

If the 'loss' is unlikely to occur, it does not need to appear in the notes or in financial statements.

Revenue

In accounting, revenue is the income that a business has from its normal business activities, usually from the sale of goods and services to
customers. Revenue is also referred to as sales or turnover. Some companies receive revenue from interest, royalties, or other fees.[1] Revenue
may refer to business income in general, or it may refer to the amount, in a monetary unit, earned during a period of time, as in "Last year,
Company X had revenue of $42 million". Profits or net income generally imply total revenue minus total expenses in a given period. In
accounting, in the balance statement it is a subsection of the Equity section and revenue increases equity, it is often referred to as the "top line"
due to its position on the income statement at the very top. This is to be contrasted with the "bottom line" which denotes net income (gross
revenues minus total expenses).[2]

In general usage, revenue is income received by an organization in the form of cash or cash equivalents. Sales revenue is income received from
selling goods or services over a period of time. Tax revenue is income that a government receives from taxpayers. Fundraising revenue is income
received by a charity from donors etc. to further its social purposes.

In more formal usage, revenue is a calculation or estimation of periodic income based on a particular standard accounting practice or the rules
established by a government or government agency. Two common accounting methods, cash basis accounting and accrual basis accounting, do
not use the same process for measuring revenue. Corporations that offer shares for sale to the public are usually required by law to report revenue
based on generally accepted accounting principles or International Financial Reporting Standards.

In a double-entry bookkeeping system, revenue accounts are general ledger accounts that are summarized periodically under the heading Revenue
or Revenues on an income statement. Revenue account names describe the type of revenue, such as "Repair service revenue", "Rent revenue
earned" or "Sales".[3]

What are gains?

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Definition of Gains

In financial accounting, gains often pertain to some of a company’s transactions which occur outside of the company’s main business activities.
Transactions which are outside of a company’s main business activities are referred to as nonoperating activities.

Gain vs Operating Income

Let's assume that a company is a retailer whose main business activities are the purchasing and reselling of merchandise. When the retailer sells
$5,000 of merchandise that it had purchased at a cost of $3,000, the retailer’s income statement will report sales of merchandise of $5,000 and
cost of goods sold of $3,000. The difference of $2,000 is part of the retailer's gross profit, operating income, and net income. The word "gain" is
not appropriate since the activities involved the normal business activities of the retailer.

However, if the same retailer sells its old delivery van, this transaction is outside of the retailer’s main business activities of purchasing and
selling merchandise. Therefore, the sale of the van will not be included with the sales of merchandise. Instead, a gain (or loss) will be reported as
one of the company’s nonoperating items often under the heading of other income.

Calculating a Gain

To illustrate the calculation of a gain, let’s assume that the retailer sells its old van for $5,000 cash. At the time of the sale the van is on the
retailer’s books at $3,500 (which consists of its original cost of $20,000 and accumulated depreciation of $16,500). Since this transaction is not a
main business activity of the retailer and since the $5,000 of cash received is greater than the net cost of $3,500 being removed from the accounts,
the retailer will report a nonoperating item described as gain on sale of van of $1,500.

More Examples of Gains

Other examples of gains that could appear on a company’s income statement include:

 Gain on sale of investments

 Gain on sale of building

 Gain on legal settlement

 Gain on early extinguishment of debt

What is comprehensive income?

Definition of Comprehensive Income

Comprehensive income for a corporation is the combination of the following amounts which occurred during a specified period of time such as a
year, quarter, month, etc.:

1. Net income or net loss (the details of which are reported on the corporation's income statement), plus

2. Other comprehensive income (if any)

Examples of other comprehensive income include:

 Unrealized gains/losses on hedging derivatives

 Foreign currency translation adjustments

 Unrealized gains/losses on postretirement benefit plans

Basically, comprehensive income consists of all of the revenues, gains, expenses, and losses that caused stockholders' equity to change during the
accounting period.

The amount of net income for the period is added to retained earnings, while the amount of other comprehensive income is added to accumulated
other comprehensive income. Retained earnings and accumulated other comprehensive income are reported on separate lines within stockholders'
equity on the end-of-the-period balance sheet.

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What Is Net Operating Income – NOI?

Net operating income (NOI) is a calculation used to analyze the profitability of income-generating real estate investments. NOI equals all revenue
from the property, minus all reasonably necessary operating expenses. NOI is a before-tax figure, appearing on a property’s income and cash flow
statement, that excludes principal and interest payments on loans, capital expenditures, depreciation, and amortization. When this metric is used
in other industries, it is referred to as “EBIT”, which stands for “earnings before interest and taxes”.

What Is the Purpose of Closing Entries in Accounting?

When the end of the accounting period arrives, closing entries are recorded where accounting information in temporary accounts is summarized
and transferred over to permanent accounts. Most closing entries involve revenue and expense accounts. At the end of the accounting 12-month
period, also known as year end, closing entries are part of the preparation process to create the annual financial statements of the entity.

Revenue Closing Entries

Revenue accounts contain the cumulative amount of revenue sales transactions recorded throughout the accounting period. Examples of revenue
accounts include sales revenue or service revenue. The credit balance in this account is debited, and a corresponding credit is recorded to income
summary. These closing entries zero out the revenue balances of the ending year’s transactions and prepare the account for the next fiscal year.

Expense Closing Entries

Expense accounts contain the cumulative amount of expenses recorded throughout the accounting period. Examples of expenses include salary
expense, insurance expense and advertising expense. The debit balances in these accounts are credited and a corresponding debit is recorded to
income summary. These closing entries zero out the expense balances of the ending year’s transactions and prepare the accounts for the new
fiscal year that is set to begin.

What is a current asset?

Definition of Current Asset

A current asset is a company's cash and its other assets that are expected to be converted to cash within one year of the date appearing in the
heading of the company's balance sheet. However, if a company has an operating cycle that is longer than one year, an asset that is expected to
turn to cash within that longer operating cycle will be a current asset.

Current assets are usually presented first on the company's balance sheet and they are arranged in their order of liquidity.

Current assets are also a key component of a company's working capital and the current ratio.

Examples of Current Assets

Examples of current assets and the typical order of liquidity include:

 Cash and cash equivalents (which includes currency, checking accounts, petty cash, some U.S. Treasury Bills)

 Temporary investments

 Accounts receivable

 Inventory

 Supplies

 Prepaid expenses

Types of Accounting Certifications

There are several different accounting certifications. Each of them requires the passing of an exam for their specific focus. It is common for an
accountant to hold more than one certification, and some accounting jobs have duties that overlap between skills in two or more certified areas.

Recommended Online Accounting Degree Programs

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It is important to understand that each state has different requirements for some certifications. It is important to research your state's requirements
to ensure you understand what will be expected of you and what type of work you will be able to take once certified.

Certified Public Accountant

The CPA certification is the most common certification in the accounting world. It is required by almost any accounting firm or employer
regardless of other certifications held. You should plan to get your CPA certification regardless of what other certifications you are hoping to
achieve.

Certified Management Accountant

The CMA certification designates you as a professional in the areas of cost management, internal control auditing, decision analysis and
forecasting. CMAs are often responsible for choosing and maintaining accounting information systems. They are also responsible for analyzing
reports generated by the system.

Certified Financial Manager

This certification is generally held by those who work with the stock market, treasurers for companies, investment planners and risk analysts, and
finance educators. Most jobs for CFMs are held in the corporate world and are often a certification that comes after the general CMA
certification.

Certified Internal Auditor

The CIA certification is required for those who wish to do external auditing. This job requires the auditing of corporate or other public
businesses. It is the CIAs job to make sure that company finances are properly recorded and reported.

Certified Fraud Examiner

Fraud accountants investigate suspected fraud. They are responsible for auditing and analyzing reports in order to determine if proper reporting
has been done, and all money is accounted for. They work with businesses and corporations to ensure laws are followed.

Enrolled Agent

EAs are licensed by the federal government. They have permission to appear in place of a client in matters of taxation. They deal directly with the
IRS during matters relating to either personal tax or business tax audits. They also advise and prepare taxes for both personal and business taxes.
An EA is the only authorized person who can represent the individual or business who is being audited.

Certified Government Financial Manager

CGFMs work in the federal, state and local government sectors. They understand the laws and special government financial needs. Many CGFMs
are responsible for advising, preparing taxes, helping with budgets, and balancing financial statements for government spending and taxes
collected. This certification is difficult to obtain. Acquiring this certification designates you as a leader in your field and someone who
understands the unique financial needs of the government on all levels.

Certified Financial Planner

CFPs are responsible for advising clients in matters of financial planning. They are able to look at an individual financial position and make a
plan for expanding personal assets through investments and financial planning. They also advise their clients on tax laws and help them maximize
their personal assets in a way that benefits their future.

What type of account is the Dividends account?

Definition of Dividends Account

The account Dividends (or Cash Dividends Declared) is a temporary, stockholders' equity account that is debited for the amount of the dividends
that a corporation declares on its capital stock. At the end of the accounting year, the balance in the Dividends account is closed by transferring
the account balance to Retained Earnings. (Corporations could debit Retained Earnings directly when dividends are declared. In that case the
Dividends account is not used.)

Example of Using the Dividends Account

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When a corporation declares a cash dividend on its common stock, it will credit a current liability account Dividends Payable and will debit
either:

 Retained Earnings, or

 Dividends

Dividends is a balance sheet account. However, it is a temporary account because its debit balance will be closed to the Retained Earnings
account at the end of the accounting year.

Post Closing Trial Balance

What is the Post Closing Trial Balance?

The post closing trial balance is a list of all accounts and their balances after the closing entries have been journalized and posted to the ledger. In
other words, the post closing trial balance is a list of accounts or permanent accounts that still have balances after the closing entries have been
made.

This accounts list is identical to the accounts presented on the balance sheet. This makes sense because all of the income statement accounts have
been closed and no longer have a current balance. The purpose of preparing the post closing trial balance is verify that all temporary accounts
have been closed properly and the total debits and credits in the accounting system equal after the closing entries have been made.

Bank Reconciliation

What is Bank Reconciliation?

A bank reconciliation statement is a document that matches the cash balance on a company’s balance sheet to the corresponding amount on its
bank statement. Reconciling the two accounts helps determine if accounting changes are needed. Bank reconciliations are completed at regular
intervals to ensure that the company’s cash records are correct. They also help detect fraud and any cash manipulations.

Reasons for Difference Between Bank Statement and Company’s Accounting Record

When banks send companies a bank statement that contains the company’s beginning cash balance, transactions during the period, and ending
cash balance, almost always the bank’s ending cash balance and the company’s ending cash balance are not the same. Some reasons for the
difference are:

 Deposits in transit: Cash and checks that have been received and recorded by the company but have not yet been recorded on the bank
statement.

 Outstanding checks: Checks that have been issued by the company to creditors but the payments have not yet been processed.

 Bank service fees: Banks deduct charges for services they provide to customers but these amounts are usually relatively small.

 Interest income: Banks pay interest on some bank accounts.

 Not sufficient funds (NSF) checks: When a customer deposits a check into an account but the account of the issuer of the check has an
insufficient amount to pay the check, the bank deducts from the customer’s account the check that was previously credited. The check
is then returned to the depositor as an NSF check.

Nowadays, many companies use specialized accounting software in bank reconciliation to reduce the amount of work and adjustments required
and to enable real-time updates.

Bank Reconciliation Procedure:

1. On the bank statement, compare the company’s list of issued checks and deposits to the checks shown on the statement to identify
uncleared checks and deposits in transit.

2. Using the cash balance shown on the bank statement, add back any deposits in transit.

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 3. Deduct any outstanding checks.

4. This will provide the adjusted bank cash balance.

5. Next, use the company’s ending cash balance, add any interest earned and notes receivable amount.

6. Deduct any bank service fees, penalties, and NSF checks. This will arrive at the adjusted company cash balance.

7. After reconciliation, the adjusted bank balance should match with the company’s ending adjusted cash balance.

Example

XYZ Company is closing its books and must prepare a bank reconciliation for the following items:

 Bank statement contains an ending balance of $300,000 on February 28, 2018, whereas the company’s ledger shows an ending
balance of $260,900

 Bank statement contains a $100 service charge for operating the account

 Bank statement contains interest income of $20

 XYZ issued checks of $50,000 that have not yet been cleared by the bank

 XYZ deposited $20,000 but this did not appear on the bank statement

 A check for the amount of $470 issued to the office supplier was misreported in the cash payments journal as $370.

 A note receivable of $9,800 was collected by the bank.

 A check of $520 deposited by the company has been charged back as NSF.

What is the matching principle?

Definition of Matching Principle

The matching principle is one of the basic underlying guidelines in accounting. The matching principle directs a company to report an expense on
its income statement in the period in which the related revenues are earned. Further, it results in a liability to appear on the balance sheet for the
end of the accounting period. The matching principle is associated with the accrual basis of accounting and adjusting entries.

If an expense is not directly tied to revenues, the expense should be reported on the income statement in the accounting period in which it expires
or is used up. If the future benefit of a cost cannot be determined, it should be charged to expense immediately.

Examples of the Matching Principle

To illustrate the matching principle, let's assume that a company's sales are made entirely through sales representatives (reps) who earn a 10%
commission. The commissions are paid on the 15th day of the month following the calendar month of the sales. For instance, if the company has
$60,000 of sales in December, the company will pay commissions of $6,000 on January 15.

The matching principle requires that $6,000 of commissions expense be reported on the December income statement along with the related
December sales of $60,000. It also requires that the December 31 balance sheet report a current liability of $6,000. This is referred to as an
accrual and is achieved through an adjusting entry dated December 31 that debits Commissions Expense for $6,000 and credits Commissions
Payable for $6,000. (Without the matching principle and the adjusting entry, the company might report the $6,000 of commissions expense in
January rather than in December when the expense and the liability were incurred.)

A retailer's or a manufacturer's cost of goods sold is another example of an expense that is matched with sales through a cause and effect
relationship.

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Not all costs and expenses have a cause and effect relationship with revenues. Hence, the matching principle may require a systematic allocation
of a cost to the accounting periods in which the cost is used up. Hence, if a company purchases an elaborate office system for $252,000 that will
be useful for 84 months, the company should report $3,000 of depreciation expense on each of its monthly income statements.

If the future benefit of a cost cannot be determined, it should be charged to expense immediately. For example, the entire cost of a television
advertisement that is shown during the Olympics will be charged to advertising expense in the year that the ad is shown.

Invisible Transaction

An exchange in which a service is traded across international borders and money changes hands, but in which no tangible assets are traded. An
example of an invisible transaction is a consulting service offered to a client in a different country. Invisible transactions are included as invisible
items when calculating a country's balance of payments.

What is a VAT invoice?

The United States doesn't have a VAT, or value-added tax, but the European Union does. The way it works is this: Suppose someone sells logs to
a lumber mill, which turns the logs into lumber. The mill sells the lumber to a furniture maker, which sells you a wooden table. Each time the
wood changes hands, the buyer pays VAT on the purchase. If you export goods into Europe, they'll be subject to VAT there. The VAT invoice
helps companies figure their VAT correctly.

The VAT System

When a business sells an item or service subject to VAT, it collects the tax from the buyer, just as U.S. stores collect sales tax. Rather than send
in everything it collects, however, the company first deducts any VAT on its purchases in the same accounting period. For example, suppose a
business receives €500 in tax from its customers but also spent €300 paying VAT on its own purchases. The company only sends in €200.

VAT Invoice

Every time a company sells a VAT product, it should provide the buyer with a VAT invoice. The invoice shows the amount of tax the buyer pays.
The seller likewise receives VAT invoices from its own vendors. When the time comes for a company to send the government its payment, the
invoices provide an accurate record of VAT received and spent.

For any Legal and Accounting support, Happy to help you, let us talk at Wazzeer - Smart Platform for Legal, Accounting & Compliance services.

What is a Control Account?

Definition: A control account, often called a controlling account, is a general ledger account that summarizes and combines all of the subsidiary
accounts for a specific type. In other words, it’s a summary account that equals the sum of the subsidiary account and is used to simplify and
organize the general ledger.

What Does Control Account Mean?

The general ledger can have hundreds of accounts from asset and liability accounts to income and expense accounts. More over, each account
type can have hundreds of smaller accounts called subsidiary accounts. If every single account was included in the general ledger, it would be
very large, unorganized, and difficult to use. That is why control accounts are used to summary data from large numbers of related accounts.

The general ledger account that sums the subsidiary accounts is said to control the balances that are reported in the ledger. Thus, we call it a
controlling account. This makes sense because the subsidiary accounts are not directly reported in the GL. They are summarized and posted to the
control account that in turn appears in the GL. In this way, the controlling account really does dictate what appears in the GL and what is reported
on the financial statements.

Example

Take accounts receivable for example. A company can have hundreds or thousands of customers with current accounts receivable balances. All of
these balances are recorded in separate A/R subsidiary accounts. The total of all of these accounts is carried forward into the A/R control account,
which appears in the general ledger and the financial statements.

This way the ledger only has one accounts receivable account instead of hundreds. If more information is needed for a specific customer, the
subsidiary accounts and records can always be reviewed. As you can see, control accounts drastically clean up the ledger and make it easier for
accountants and bookkeepers to use.

Electronic funds transfer

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Electronic funds transfer (EFT) are electronic transfer of money from one bank account to another, either within a single financial institution or
across multiple institutions, via computer-based systems, without the direct intervention of bank staff.

According to the United States Electronic Fund Transfer Act of 1978 it is a funds transfer initiated through an electronic terminal, telephone,
computer (including on-line banking) or magnetic tape for the purpose of ordering, instructing, or authorizing a financial institution to debit or
credit a consumer's account.[1]

EFT transactions are known by a number of names across countries and different payment systems. For example, in the United States, they may
be referred to as "electronic checks" or "e-checks". In the United Kingdom, the term "bank transfer" and "bank payment" are used, while in
several other European countries "giro transfer" is the common term.

What is a suspense account?

Definition of Suspense Account

A suspense account is a general ledger account in which amounts are temporarily recorded. The suspense account is used because the appropriate
general ledger account could not be determined at the time that the transaction was recorded.

As soon as possible, the amount(s) in the suspense account should be moved to the proper account(s).

Example of Using a Suspense Account

An accountant was instructed to record a significant number of journal entries written by the controller of a large company. Unfortunately, there
was one amount that did not have an account designated. In order to complete the assignment by the deadline, the accountant recorded the
"mystery" amount in the general ledger Suspense account. When the controller is available, the accountant will get clarification and will move the
amount from the Suspense account to the appropriate account.

What is the difference between accounting theory and accounting practice?

What Is Accounting Theory?

Accounting theory is a set of assumptions, frameworks, and methodologies used in the study and application of financial reporting principles. The
study of accounting theory involves a review of both the historical foundations of accounting practices, as well as the way in which accounting
practices are changed and added to the regulatory framework that governs financial statements and financial reporting.

What Is an Accounting Practice?

An accounting practice is a routine manner in which the day-to-day financial activities of a business entity are gathered and recorded. A firm's
accounting practice refers to the method by which its accounting policies are implemented and adhered to on a routine basis, typically by an
accountant, auditor, or a team of accounting professionals.

Accounting Practices Explained

An accounting practice is intended to enforce a firm's accounting guidelines and policies. It exists as the daily recording of financial data that is
important to the evaluation and monitoring of the firm's economic activities. Accounting practice refers to the normal, practical application of
accounting or auditing policies that occurs within a business.

On a deeper level, to remain competitive while adhering to certain standards of business conduct, accounting practices will implement accounting
systems. These systems help gather, store and process financial and accounting data that is used by decision makers throughout an organization.

As physical and digital worlds have grown ever integrated, accounting information systems are now generally computer-based methods for
tracking accounting activities which complement other enterprise-wide technologies and information management resources.

Accounting practices and attached systems produce financial reports can be used internally by management or externally by other stakeholders
including investors, creditors and tax authorities. Accounting information systems, when paired with accounting practices, are designed to
support all accounting functions and activities including auditing, financial accounting and reporting, management accounting and tax.

Although less noticeable but still a potent element, an accounting practice’s culture often sets individual standards, behaviors, and attitudes.
These ways of doing business can manifest into good and bad norms in aggregate, which can lead to so-called accounting scandals at their worst.
High profiles scandals include Enron in 2001; Sunbeam, WorldCom, and Tyco in 2002; and Toshiba in 2015.

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Accounting practice definition

Accounting practice is the system of procedures and controls that an accounting department uses to create and record business transactions.
Accounting practice should ideally be extremely consistent, since there are a large number of business transactions that must be dealt with in
exactly the same manner in order to produce consistently reliable financial statements. Auditors rely upon consistent accounting practice when
examining a company's financial statements. Examples of good accounting practice are:

 Always using the same calculation to determine the amount of overtime paid to employees

 Always issuing billings to customers on the same day that goods are shipped to them

 Always paying supplier invoices on the day when they are due

 Always using the same depreciation method for the same class of fixed assets

The development of a high level of accounting practice calls for the routine examination of any departures from the mandated process flow, so
that errors can be spotted and the underlying causes corrected. This level of self-examination is only possible if the accounting staff has a
sufficiently high level of training to understand:

 The proper process flow

 When a departure from the authorized process has occurred

 How to devise a systemic correction to an error

 How to ensure that the change is properly implemented in the process on a go-forward basis

Accounting practice also calls for the continual installation and updating of best practices, so that both the efficiency and effectiveness of the
accounting processes are improved over time. Doing so calls for additional skills in identifying best practices and in the installation and
monitoring of any changes made.

GAAP vs. IFRS: An Overview

The standards that govern financial reporting and accounting vary from country to country. In the United States, financial reporting practices are
set forth by the Financial Accounting Standards Board (FASB) and organized within the framework of the generally accepted accounting
principles (GAAP). Generally accepted accounting principles refer to a common set of accepted accounting principles, standards, and procedures
that companies and their accountants must follow when they compile their financial statements.

International Financial Reporting Standards (IFRS) are a set of international accounting standards, which state how particular types of
transactions and other events should be reported in financial statements. IFRS are issued by the International Accounting Standards Board
(IASB), and they specify exactly how accountants must maintain and report their accounts. IFRS was established in order to have a common
accounting language, so business and accounts can be understood from company to company and country to country.

More than 100 countries around the world have adopted IFRS, which aim to establish a common global language for company accounting affairs.
While the Securities and Exchange Commission (SEC) has openly expressed a desire to switch from GAAP to IFRS, development has been slow.

GAAP

If a company distributes its financial statements outside of the company, GAAP must be followed. If a corporation's stock is publicly traded,
financial statements must also adhere to rules established by the U.S. Securities and Exchange Commission.

GAAP addresses such things as revenue recognition, balance sheet, item classification, and outstanding share measurements. If a financial
statement is not prepared using GAAP, investors should be cautious. Also, some companies may use both GAAP- and non-GAAP-compliant
measures when reporting financial results. GAAP regulations require that non-GAAP measures are identified in financial statements and other
public disclosures, such as press releases.

IFRS

The point of IFRS is to maintain stability and transparency throughout the financial world. IFRS enables the ability to see exactly what has been
happening with a company and allows businesses and individual investors to make educated financial decisions.

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IFRS is standard in the European Union (EU) and many countries in Asia and South America, but not in the United States. The Securities and
Exchange Commission won't switch to International Financial Reporting Standards in the near term, but will continue reviewing a proposal to
allow IFRS information to supplement U.S. financial filings. Countries that benefit the most from the standards are those that conduct a lot of
international business and investing.

Key Differences

The primary difference between the two systems is that GAAP is rules-based and IFRS is principles-based. This disconnect manifests itself in
specific details and interpretations. Basically, IFRS guidelines provide much less overall detail than GAAP. Consequently, the theoretical
framework and principles of the IFRS leave more room for interpretation and may often require lengthy disclosures on financial statements. On
the other hand, the consistent and intuitive principles of IFRS are more logically sound and may possibly better represent the economics of
business transactions.

Perhaps the most notable specific difference between GAAP and IFRS involves their treatment of inventory. IFRS rules ban the use of last-in,
first-out (LIFO) inventory accounting methods. GAAP rules allow for LIFO. Both systems allow for the first-in, first-out method (FIFO) and the
weighted average-cost method. GAAP does not allow for inventory reversals, while IFRS permits them under certain conditions.

Another key difference is that GAAP requires financial statements to include a statement of comprehensive income. IFRS does not consider
comprehensive income to be a major element of performance and therefore does not require it. This difference leaves some room for mixing
owner and non-owner activity within IFRS-based financial statements.

The conservatism principle

The conservatism principle is the general concept of recognizing expenses and liabilities as soon as possible when there is uncertainty about the
outcome, but to only recognize revenues and assets when they are assured of being received. Thus, when given a choice between several
outcomes where the probabilities of occurrence are equally likely, you should recognize that transaction resulting in the lower amount of profit,
or at least the deferral of a profit. Similarly, if a choice of outcomes with similar probabilities of occurrence will impact the value of an asset,
recognize the transaction resulting in a lower recorded asset valuation.

Under the conservatism principle, if there is uncertainty about incurring a loss, you should tend toward recording the loss. Conversely, if there is
uncertainty about recording a gain, you should not record the gain.

The conservatism principle can also be applied to recognizing estimates. For example, if the collections staff believes that a cluster of receivables
will have a 2% bad debt percentage because of historical trend lines, but the sales staff is leaning towards a higher 5% figure because of a sudden
drop in industry sales, use the 5% figure when creating an allowance for doubtful accounts, unless there is strong evidence to the contrary.

The conservatism principle is the foundation for the lower of cost or market rule, which states that you should record inventory at the lower of
either its acquisition cost or its current market value.

The principle runs counter to the needs of taxing authorities, since the amount of taxable income reported tends to be lower when this concept is
actively employed; the result is less reported taxable income, and therefore lower tax receipts.

The conservatism principle is only a guideline. As an accountant, use your best judgment to evaluate a situation and to record a transaction in
relation to the information you have at that time. Do not use the principle to consistently record the lowest possible profits for a company.

Types of Accounts

3 Different types of accounts in accounting are Real, Personal and Nominal Account. Real account is then classified in two subcategories –
Intangible real account, Tangible real account. Also, three different sub-types of Personal account are Natural, Representative and Artificial. In
this article, we will see the 3 golden rules of accounting with examples. Let’s begin.

Types of Accounts – Real, Personal and Nominal Account

Accounting is a process of recording, classifying and summarizing financial transactions in a significant manner and interpreting results thereof.
Accounting is both science and art.

For every type of entity, whether it is large in size or small in size, it is very important to have a proper system of accounting for proper
management of an entity’s business operations. An accountant must have a good understanding of the terms used in accounting and types of
accounts.

An account is the systematic presentation of all the transactions related to a particular head. An account shows the summarized records of
transactions related to a concerned person or thing.

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For Examplee: when the entity deals with variouss suppliers and cusstomers, each of thhe suppliers and cuustomers will be a separate account.

An account may hings which can bee tangible as well as intangible. For example – land, building, furniture, etc. are things.
m be related to th

An account iss expressed in a staatement form. It haas two sides. The left-hand
l side of an
a account is calledd a Debit side wheereas right-hand sidde is
called as Creddit side. The debit is denoted as ‘Dr’’ and credit is denooted as ‘Cr’.

Classification
n of Accounts in Accounting
A

 Peersonal Account

 Reeal Account

o Tangiblee Real Account

o Intangiblle Real Account

 Noominal Account

Personal Acccount

These accounnts types are related to persons. Thesse persons may be natural persons likke Raj’s account, Rajesh’s
R account, Ramesh’s accountt,
Suresh’s accoount, etc.

These personns can also be artifiicial persons like partnership

p firms, companies,
c bodiess corporate, an association of personns, etc.

For examplee – Rajesh and Suresh trading Co., Charitable

C trusts, XYZ
X Bank Ltd, C company
c Ltd, etc.

There can be personal representative accounts as well.

For examplee – In the case of Salary,

S when it is payable
p to employeees, it is known hoow much amount is payable to each of
o the employee. But
B
collectively itt is called as ‘Salarry payable A/c’.

Rule for this Account

Debit the receeiver.

Credit the Givver.

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For Example – Goods sold to Suresh. In this transaction, Suresh is a personal account as being a natural person. His account will be debited in
the entry as the receiver.

Learn more about Accounting here in detail

Real Accounts

These account types are related to assets or properties. They are further classified as Tangible real account and Intangible real accounts.

Learn more about Accounting Cycle here in detail.

Tangible Real Accounts

These include assets that have a physical existence and can be touched. For example – Building A/c, cash A/c, stationery A/c, inventory A/c, etc.

Intangible Real Accounts

These assets do not have any physical existence and cannot be touched. However, these can be measured in terms of money and have value. For
Example – Goodwill, Patent, Copyright, Trademark, etc.

Real Account Rules

Debit what comes into the business.

Credit what goes out of business.

For Example – Furniture purchased by an entity in cash. Debit furniture A/c and credit cash A/c.

Learn more about Classification of Accounting here in detail

Nominal Account

These accounts types are related to income or gains and expenses or losses. For example: – Rent A/c, commission received A/c, salary A/c,
wages A/c, conveyance A/c, etc.

Rules

Debit all the expenses and losses of the business.

Credit the incomes and gains of business.

For Example – Salary paid to employees of the entity. Salary A/c will be debited when the expenses are incurred. Whereas, when an entity
receives any interest, discount, etc these are credited whenever these are received by the entity.

There are some other accounts in accounting as well:

 Cash Account – This account is used for keeping the records of payments done by cash, withdrawals, and deposits.

 Income Account – Purpose of this account is to keep the record of the income sources of business.

 Expense Account – This account tracks the expenditure of the business.

 Liabilities – If there is any debt or loan then that amount comes under liabilities.

 Equities – If there is an investment of the account owner or common stocks, retained earnings then these will fall under equities.

Examples on Types of Accounts

Write the accounts affected and applicable rule in the below-mentioned transactions.

1. Goods purchased for cash.

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 2. Cash Sales.

3. Sale of fixed assets

4. Payment of expenses.

Answer –

1. Debit Purchase account and credit cash account.

Rule Applicable: – Debit increase in expense or an asset. Credit decrease in assets.

2. Debit Cash account and credit sales account.

Rule Applicable: – Debit Increase in assets. Credit Decrease in revenue or assets.

3. Debit Expenses account and credit cash/bank account.

Rule Applicable: -Debit Increase in expense. Credit Decrease in assets.

What is an account?

Definitions of Account

In accounting, an account is a record in the general ledger that is used to sort and store transactions. For example, companies will have a Cash
account in which to record every transaction that increases or decreases the company's cash. Another account, Sales, will collect all of the
amounts from the sale of merchandise. Most accounting systems require that every transaction will affect two or more accounts. For example, a
cash sale will increase the Cash account and will increase the Sales account.

The term account is also used in transactions where suppliers sell goods to customers and grant credit terms such as net 10 days. In those
situations, a supplier is selling goods on account and the customer has purchased goods on account. The supplier has also increased the balance in
its current asset account entitled Accounts Receivable and the customer will increase the balance in its current liability account entitled Accounts
Payable.

Revenue recognition principle

The revenue recognition principle states that one should only record revenue when it has been earned, not when the related cash is collected. For
example, a snow plowing service completes the plowing of a company's parking lot for its standard fee of $100. It can recognize the revenue
immediately upon completion of the plowing, even if it does not expect payment from the customer for several weeks. This concept is
incorporated into the accrual basis of accounting.

A variation on the example is when the same snow plowing service is paid $1,000 in advance to plow a customer's parking lot over a four-month
period. In this case, the service should recognize an increment of the advance payment in each of the four months covered by the agreement, to
reflect the pace at which it is earning the payment.

If there is doubt in regard to whether payment will be received from a customer, then the seller should recognize an allowance for doubtful
accounts in the amount by which it is expected that the customer will renege on its payment. If there is substantial doubt that any payment will be
received, then the company should not recognize any revenue until a payment is received.

Also under the accrual basis of accounting, if an entity receives payment in advance from a customer, then the entity records this payment as a
liability, not as revenue. Only after it has completed all work under the arrangement with the customer can it recognize the payment as revenue.

Under the cash basis of accounting, you should record revenue when a cash payment has been received. For example, using the same scenario as
just noted, the snow plowing service will not recognize revenue until it has received payment from its customer, even though this may be a
number of weeks after the plowing service completes all work.

Expense recognition principle

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The expense recognition principle states that expenses should be recognized in the same period as the revenues to which they relate. If this were
not the case, expenses would likely be recognized as incurred, which might predate or follow the period in which the related amount of revenue is
recognized.

For example, a business pays $100,000 for merchandise, which it sells in the following month for $150,000. Under the expense recognition
principle, the $100,000 cost should not be recognized as expense until the following month, when the related revenue is also recognized.
Otherwise, expenses will be overstated by $100,000 in the current month, and understated by $100,000 in the following month.

This principle also has an impact on the timing of income taxes. In the example, income taxes will be underpaid in the current month, since
expenses are too high, and overpaid in the following month, when expenses are too low.

Some expenses are difficult to correlate with revenue, such as administrative salaries, rent, and utilities. These expenses are designated as period
costs, and are charged to expense in the period with which they are associated. This usually means that they are charged to expense as incurred.

The expense recognition principle is a core element of the accrual basis of accounting, which holds that revenues are recognized when earned and
expenses when consumed. If a business were to instead recognize expenses when it pays suppliers, this is known as the cash basis of accounting.

If a company wants to have its financial statements audited, it must use the expense recognition principle when recording business transactions.
Otherwise, the auditors will refuse to render an opinion on the financial statements.

What is the monetary unit assumption?

Definition of Monetary Unit Assumption

The monetary unit assumption as it applies to a U.S. corporation is that the U.S.dollar (USD) is stable in the long run. That is the USD does not
lose its purchasing power. Note that this is the assumption.

As a result of the monetary assumption, accountants at a U.S. corporation do not hesitate to add the cost of a parcel of land purchased in 2019 to
the cost of another parcel of land that had been purchased in 1970. (See example below.)

Another part of the monetary unit assumption is that U.S. accountants report a corporation's assets in dollar amounts (rather than reporting details
of all of the assets). If an asset cannot be expressed as a dollar amount, it cannot be entered in a general ledger account. For example, the
management team of a very successful corporation may be the corporation's most valuable asset. However, the accountant is not able to
objectively convert those talented people into USDs. Hence, the management team will not be included in the reported amounts on the balance
sheet.

Example of Monetary Unit Assumption

Let's illustrate the monetary unit assumption with the following hypothetical example. A U.S. corporation purchased a two-acre parcel of land at a
cost of $40,000 in 1970. Then in 2019 the corporation purchased an adjacent (nearly identical) two-acre parcel at a cost of $500,000. After the
2019 purchase is recorded, the balance in the corporation's general ledger account Land is $540,000. Therefore, the corporation's balance sheet
will report its four acres of land at a cost of $540,000. There is no adjustment for the vast difference in purchasing power between the 1970 dollar
and the 2019 dollar.

Balance (accounting)

In banking and accounting, the Balance is the amount of money owed, (or due), that remains in a deposit account.

In bookkeeping, “balance” is the difference between the sum of debit entries and the sum of credit entries entered into an account during a
financial period.[1] When total debits exceed total credits, the account indicates a debit balance. The opposite is true when the total credit exceeds
total debits, the account indicates a credit balance. If the debit/credit totals are equal, the balances are considered zeroed out. In an accounting
period, "balance" reflects the net value of assets and liabilities. To better understand balance in the accounting equation.

Balancing the books refers to the primary balance sheet equation of:

Assets = liabilities + owner's equity (capital)

The first "balancing" of books, or the balance sheet financial statement in accounting is to check iterations (trial balance) to be sure the equation
above applies, and where assets and liabilities are unequal, to equalize them by debiting or crediting owner's equity (i.e. if assets exceed
liabilities, equity is increased, if liabilities exceed assets, equity is decreased, both in the amount needed to balance the equation).

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In addition to the balance sheet, the other primary financial statement (the P&L or Profit and Loss Statement) also is balanced against the balance
sheet, generally by the use of a "plug" such as imputed interest.

Debit Balance and Credit Balance

A ledger account can have both debit or a credit balance which is determined by which side of the account is greater than the other. Debit
balance and credit balance are often terms often used in the accounting world hence it is important to understand the distinction and their exact
meaning.

Debit Balance

While preparing an account if the debit side is greater than the credit side, the difference is called “Debit Balance”. So, if Debit Side > Credit
Side, it is a debit balance.

Credit Balance

When the credit side is greater than the debit side the difference is called “Credit Balance”. So, if Credit Side > Debit Side, it is a credit balance.

What is a plant asset?

What is a Plant Asset

A plant asset is an asset with a useful life of more than one year that is used in producing revenues in a business's operations. Plant assets are also
known as fixed assets.

Plant assets are recorded at their cost and depreciation expense is recorded during their useful lives.

Plant assets (other than land) are depreciated over their useful lives and each year's depreciation is credited to a contra asset account Accumulated
Depreciation.

Plant assets and the related accumulated depreciation are reported on a company's balance sheet in the noncurrent asset section entitled property,
plant and equipment. Accounting rules also require that the plant assets be reviewed for possible impairment losses.

Examples of Plant Assets

Plant assets include:

 Land (not depreciated)

 Land improvements

 Buildings

 Machinery and equipment

 Office equipment

 Furniture and fixtures

 Vehicles

 Leasehold improvements

 Construction work-in-progress (which is not depreciated until the asset is placed into service)

What Are Financial Statements?

Financial statements are written records that convey the business activities and the financial performance of a company. Financial statements are
often audited by government agencies, accountants, firms, etc. to ensure accuracy and for tax, financing, or investing purposes. Financial
statements include:

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  Balance sheet

 Income statement

 Cash flow statement.

Using Financial Statement Information

Investors and financial analysts rely on financial data to analyze the performance of a company and make predictions about its future direction of
the company's stock price. One of the most important resources of reliable and audited financial data is the annual report, which contains the
firm's financial statements.

The financial statements are used by investors, market analysts, and creditors to evaluate a company's financial health and earnings potential. The
three major financial statement reports are the balance sheet, income statement, and statement of cash flows.

5 Main Elements of Financial Statements: Assets, Liabilities, Equity, Revenues, Expenses

Financial statements are the important reports of the entity that provide the entity’s financial information at the specific period of time to be used
by many stakeholders such managements, employees, the board of directors investors, shareholders, customers, suppliers, bankers, and other
related stakeholders.

These statements are prepared as the requirement of management, owners, shareholders, governments, and other related authority organization.

The completed set of financial statements contain five statements and five elements. Here are the five statements:

 Statement of Financial Position or Balance Sheet,

 Statement of Financial Performance, or Income Statement,

 Statement of Change in Equity,

 Statement of Cash flow, and

 Noted to Financial Statements

The above financial statements build-up by five key elements of Financial Statements. For example, in Balance Sheet, there are three main
elements contain on it such as Assets, Liabilities, and Equities.

In the income statement, there are two key elements contain on it such as revenues and expenses. All of these elements are clearly defined and
explained in the IASB’s Framework.

These Financial Statements contain five main elements of the entity’s financial information, and these five elements of financial statements are:

 Assets,

 Liabilities,

 Equity,

 Revenue, and

 Expenses

Assets:

The official definition of assets are defined by IASB’s Framework for preparation and presentation of financial statements are the resources
control by the entity as the result of past events and from which the future economic benefits are expected to flow the entity.

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Right here could mean the right to use or control the physical assets or the intellectual property or it could be linked to the other entity’s
obligation to pay or transfer the assets to the entity. For example, the account receivable is the assets of the entity.

Here are examples of assets:

 Land

 Building

 Property

 Computer equipment

 Cash in bank

 Cash on hand

 Cash advance

 Petty cash

 Inventories

 Account Receivables

 Prepaid expenses

 Goodwill

 And other assets that meet the definition of assets above.

Assets are considered the first element of financial statement and they report only in the balance sheets. They are staying on the top of the balance
sheets.

Related article How do cash dividends Impact financial statements?

In general, assets are classified into two types based on the company’s policies and in accordance with international accounting standard. The
first class of assets is current assets which refer to short-term assets and these kinds of assets are not depreciated. The movement or usages of
them are directly charged to the income statement.

For example, the usages of inventories are charged as operating expenses or costs of goods sold in the income statement. Some of the current
assets are justed move from one accounting item another.

For example, accounts receivable are moved to cash in bank or cash on hand when the entity collects the payment from customers.

The second types of assets are fixed assets. These kinds of assets normally refer to assets that use more than one year and with large amounts as
well as are not for trading or holders for price appreciation.

In other words, fixed assets are the resources based on nature are converted into cash or cash equivalent in more than one year accounting period.

It is based on the company’s policies to recognize which amount should be classed as current assets and which amount should go to fixed assets.
Yet, the policies should be aligned with current practice or market as well as reflected the real economic value.

Fixed assets are decreasing value from period to period because of their usages or because of impairment of their economic value.

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Depreciation and impairment of fixed assets are charged into the income statement and they report cumulatively in the contra account to fixed
assets in the balance sheet which is called accumulated depreciation.

Assets of the entity at the specific period can be calculated by the accumulation of liabilities and equities or total current assets plus total fixed
asset.

Liabilities:

The official definition of liabilities define by IASB’s Framework for preparation and presentation of financial statements are the present
obligations arising from the past events, the settlement of which is expected to result in an outflow from entity resources embodying economic
benefit.

Here are examples of Liabilities in Financial Statements:

 Bank Loan

 Overdraft

 Interest payable

 Tax payable

 Account payable

 Noted payable

 Borrowing from parent company

 Intercompany account payable

 Salary payable

Related article Budgeted Cash flow statement

Liabilities are classified into two different types: Current liabilities and Non-current Liabilities. Current Liabilities refer to the kind of liabilities
that expected to settle within 12 months after the reporting date.

For example salaries payable are classed as current liabilities because they are expected to pay to an employee in the following month.

Non-current liabilities refer to liabilities that expected to settle in more than 12 months. For example, a long term loan from the bank that the term
of payments is more than 12 are classed as non-current liabilities. Liabilities records only in the balance sheet and they are considered as the
second element of financial statements.

Liabilities can be calculated by eliminating the total equities from total assets or accumulation of total current liabilities and total long-term
liabilities.

Equity:

Equity is officially defined by IASB’s Framework for preparation and presentation of financial statements, is the residual interest in the assets of
the entity after deducting all its liabilities.

Example: By solving the above definition, Equities = Assets – Liabilities. The good example of Equity are Ordinary Shares Capital and Retained
Earnings. That means equity increase or decrease depending on the movement of assets and liabilities.

For example, if assets are increasing and the liabilities are stable, then equities will increase. However, if assets are stable and liabilities are
increased, the equity will decrease.

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The items that records in equity are:

 Share capital

 Retain earning or retain losses

 Revaluation gain

 Dividends payment

Revenues:

The official definition of revenues defined by IASB’s Framework for preparation and presentation of financial statement is increase in the
economic benefits during the accounting period in the form of inflows or enhancements of assets or decrease of liabilities that result in increases
in equity, other than those relating to contributions from equity participants.

The example of revenues is sales revenues from selling of goods or rendering of services, interest incomes from banks deposits, dividend
received from equity investments.

Related article Operating Expenses on the Income Statement

In the income statement, income sometimes called sales revenues or Revenues. These are referred to the same things.

There are two accounting principles used to records and recognize revenues. First, it uses a cash basis, and second, it uses accrual basis.

Cash basis, income is recognized at the time cash are received while accrual basis, income is recognized at the time risks and reward are
transferred from sellers to buyers.

Expenses: Operating Expenses or Administration Expenses

The official definition of Expenses defined by IASB’s Framework for preparation and presentation of financial statement is decreased in
economic benefits during the accounting period in the form of outflows or depreciation of assets or incurred of liabilities that result in decreases
in equity, other than those relating to distributions to equity participants.

Expenses here refer to expenses that occur for daily operational costs. Those expenses are:

 Salaries expenses

 Depreciation

 Interest Expenses

 Tax expenses

 Utility expenses

 Transportation Cost

 Marketing Expenses

 Rental Expenses

 Repair and maintenance

 Internet Fee

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  Telephone fee

Expenses are records as operational cost in the income statement in the period they have occurred. Sometimes they called period cost or
administrative cost. These expenses are different from capital expenditure which are paid for purchasing fixed assets.

What is a deferred expense?

Definition of Deferred Expense

A deferred expense refers to a cost that has occurred but it will be reported as an expense in one or more future accounting periods. To
accomplish this, the deferred expense is reported on the balance sheet as an asset or a contra liability until it is moved from the balance sheet to
the income statement as an expense. This is done to achieve the accountants' matching principle.

Examples of Deferred Expenses

Let's assume that a large corporation spends $500,000 in accounting, legal, and other fees in order to issue $40,000,000 of bonds payable. Instead
of charging the $500,000 to expense in the year that the fees are paid, the corporation will defer the $500,000 to the contra liability account Bond
Issue Costs. Then over the bonds' life of 25 years, the $500,000 will be amortized (systematically moved) to expense at the rate of $20,000 per
year ($500,000 divided by 25 years).

Another example of a deferred expense is a $12,000 insurance premium paid by a company on December 27 for insurance protection during the
upcoming January 1 through June 30. On December 27, the $12,000 is deferred to the balance sheet account Prepaid Insurance, which is a current
asset account. Beginning in January it will be moved to Insurance Expense at the rate of $2,000 per month. The deferral was necessary to match
the $12,000 to the proper year and months that the insurance is expiring and the company in receiving the insurance protection.

What is a slip system in the case of a banking company?

The slip system is used with the double entry system. Money is created with debt. They must balance. You can enter the information digitally or
with slips of paper. (checks)

Advantages of Slip System:

The advantages of this system are:

(i) it reduces the possibility of errors and frauds;

(ii) it saves a lot of time since it is prepared by the customers themselves;

(iii) it provides a good system of internal check etc.

Disadvantages of Slip System:

The system is also not free from snags. It suffers from the risk of loss, misappropriation or destruction of slips since they are loose.

In this system, posting is made from slips prepared inside the organization itself or from slips filled in by its customers. So entries are not made in
the books of original entry or subsidiary books, but posting of entries is done from slips. In a banking company, the main slips are pay-in-slips,
withdrawal slips and cheques and all these slips are filled in by clients of the bank. These slips serve the basis of entry in the ledgers and control
accounts in the General Ledger are prepared on the basis of analysis of these slips

Without specifying the context, the acronym SLIP could stand for many things. Some examples are listed below, but please see the related links
for more possibilities:

 SLIP = Serial Line Internet Protocol

 SLIP = Serial Line Interface Protocol

  SLIP = System-Level Interconnect Prediction

  SLIP = Sobriety Lost Its Priority

Calculating Trend Percentages

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 Trend percentages are similar to horizontal analysis except that comparisons are made to a selected base year or period. Trend
percentages are useful for comparing financial statements over several years because they disclose changes and trends occurring
through time.
Trend percentages, also referred to as index numbers, help you to compare financial information over time to a base year or period.
You can calculate trend percentages by:
 Selecting a base year or period.
 Assigning a weight of 100% to the amounts appearing on the base-year financial statements.
 Expressing the corresponding amounts on the other years’ financial statements as a percentage of base-year or period amounts.
Compute the percentages by Analysis year amount / base year amount and then multiplying the result by 100 to get a percentage.

Wasting Asset
What it is:
A wasting asset is a property or security that has a limited life and loses value over its life.
How it works/Example:
Assets have a useful life, usually based on the period of time that they have productive capacity. As the asset is used, it depreciates,
eventually having little or no residual value. During the period of depreciation, the asset is called a "wasting asset." For example,
natural resources, such as gas and timber, are wasting assets that eventually are used and then have no remaining value.
In the capital markets, this can also be true. Some securities have a deadline for their purchase or sale. In some cases, the security loses
value as it gets closer to the deadline. This is known as time decay.
For example, an option with a fixed end date for its execution may be worth less and less as the end date approaches. This is
particularly relevant with regard to derivatives that are built on the movement of a particular underlying security. As the end date
approaches and it becomes clearer to which direction the security will move, the risk is lower. Therefore, the market value of the
derivative falls accordingly.

What is a special journal?

Definition of a Special Journal
A special journal (also known as a specialized journal) is useful in a manual accounting or bookkeeping system to reduce the tedious
task of recording both the debit and credit general ledger account names and amounts in a general journal.
Example of a Special Journal
One example of a special journal is the sales journal which is used exclusively for a company’s sales of merchandise to customers
that are allowed to pay at a future date. The sales journal will have only one column in which to enter the amount of each sales
invoice. At the end of the month the total of the column is debited to Accounts Receivable and credited to Sales. Throughout the
month, the individual sales invoices will be posted to each customer’s record found in the company’s subsidiary ledger for Accounts
Receivable.
The benefits of using a special journal instead of the general journal for the repetitive transactions have been eliminated with today’s
inexpensive yet powerful accounting software. For example, when a sales invoice is prepared by using accounting software, both the
general ledger and subsidiary accounts will be updated instantly and accurately.
More Examples of Special Journals
In addition to the sales journal (used for recording sales on credit), there are other special journals which were popular in manual
accounting systems. The following special journals were more efficient than recording all transactions in the general journal:
 Cash disbursement journal for recording checks written.
 Cash receipts journal for recording cash sales and other money received.
 Purchases journal for recording purchases on credit of goods to be resold. (Cash purchases are recorded in the cash disbursement
journal. Purchases of items such as equipment are recorded in the general journal.)

What does IFRIC stand for?

IFRIC stands for International Financial Reporting Interpretations Committee
What is Conceptual Framework?
Definition: The Accounting Conceptual Framework (ACF) is a set of accounting objectives and fundamentals, developed by the
International Accounting Standards Board (IASB) to ensure uniformity in interpretation across various accounting methodologies.
What Does Conceptual Framework Mean?
What is the definition of conceptual framework? The accounting conceptual framework is a theory that details the basic reasoning
underlying the financial statements and financial reporting in general.
The ACF clearly defines the objectives and users of the financial statements. It ensures consistency of comprehension and provides a
base for discussion (and dispute resolution) amongst the practitioners by setting up principles of uniform interpretation of the line
elements in financial statements. This helps auditors prepare legible reports that can be understood around the globe. It defines the
basic characteristics that make the accounting information useful right from detailing the elements of financial statements (Income,
assets, liabilities and provisions etc.) to reporting their purpose and standard comprehension.
Example

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 Different companies and countries follow different methods of financial accounting and reporting. This might not always be due to
choice but also a requirement of the business model itself. For example, a company working with the distributorship model records its
sale when the goods leave the factory against a purchase order from the distributor. On the other hand, a company working under the
consignment sale model can record a sale only when goods are actually sold to customer (and not the sale channel intermediaries). As
such, there arise differences in financial accounting and reporting, which magnify upon reaching the analysis and reporting stage.
Having a fixed set of definitions of each line item, hence, becomes useful and rather indispensable to ensure conceptual consistency
amongst the audience of the report. It also helps the potential investor better gauge and compare the performances of target companies,
regardless of their physical location and differences in business models.

What is an adjusted trial balance?

Definition of an Adjusted Trial Balance

The adjusted trial balance is an internal document that lists the general ledger account titles and their balances after any adjustments have been
made. The adjusted trial balance is not a financial statement, but the adjusted account balances will be reported on the financial statements.

The adjusted trial balance (as well as the unadjusted trial balance) must have the total amount of the debit balances equal to the total amount of
credit balances.

Examples of Adjusted Trial Balances

In a manual accounting system, an unadjusted trial balance might be prepared by a bookkeeper to be certain that the general ledger has debit
amounts equal to the credit amounts. After that is the case, the unadjusted trial balance is used by an accountant to indicate the necessary
adjusting entries and the resulting adjusted balances. The adjusted balances are summed to become the adjusted trial balance.

An adjusted trial balance can also refer to a trial balance where the account balances are adjusted by the external auditors. The adjusted balances
become the adjusted trial balance.

What is a Temporary Account?

A temporary account is an account that is closed at the end of every accounting period to start a new period with a zero balance. This is done in
order to avoid a mix-up of the balances between two or more accounting periods. The objective is to see the profits or revenues, as well as the
accounting activity of individual periods.

For example, Company ZE recorded revenues of $300,000 in 2016 alone. Then, another $200,000 worth of revenues was seen in 2017, as well as
$400,000 in 2018. If the temporary account was not closed, the total revenues seen would be $900,000.

The company may look like a very profitable business, but that isn’t really true because three years-worth of revenues were combined. In order to
properly compute for the year’s total profits, as well as the total expenses, the temporary account must be closed, and a new record created at the
beginning of a new accounting period.

Examples of Temporary Accounts

There are basically three types of temporary accounts, namely revenues, expenses, and income summary.

1. Revenues

From the name itself, this refers to the total amount of money earned by a company that needs to be closed at the end of the accounting year. The
revenue type of temporary account, when closed, requires the accountant to create a debit entry for the revenues. For example, if the total revenue
recorded was $20,000, then a debit of the same amount should be written in the revenue account that will create a zero balance again.

Then, in the income summary account, a corresponding credit of $20,000 is recorded in order to maintain the balance of the entries. After the
credit entry is done, the revenue account is closed and then transferred to another temporary account, which is the income summary account.

2. Expenses

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Expenses are an important part of any business because these keep the company going. The expenses account is a temporary account that shows
everything that the company spent on its operations, including advertising and supplies, among other expenses.

For example, at the end of the accounting year, a total expense amount of $5,000 was recorded. The amount is transferred to the income summary
by crediting it onto that account, consequently zeroing the balance on the expenses account. Accordingly, the $5,000 worth of expenses is also
recorded as debit to the expenses account.

3. Income Summary

The income summary is a temporary account of the company where the revenues and expenses were transferred to. After the other two accounts
are closed, the net income is reflected. Taking the example above, total revenues of $20,000 minus total expenses of $5,000 gives a net income of
$15,000 as reflected in the income summary.

Since the income summary is a temporary account, it needs to be transferred to the capital summary by making a debit of the same amount from
the income summary and making a credit of it to the capital account.

What is the Drawings Account?

A drawings account is otherwise known as a corporation’s dividends, the amount of money to be distributed to its owners. It is not a temporary
account, so it is not transferred to the income summary but to the capital account by making a credit of the amount in the latter.

For example, the drawings account contains $5,000. The accountant then needs to make a debit of $5,000 from the drawings account and a credit
of the same amount to the capital account.

Temporary Account vs. Permanent Account

A temporary account, as mentioned above, is an account that needs to be closed at the end of an accounting period. It aims to show the exact
revenues acquired by a company for a specific period.

A permanent account, on the other hand, possesses the following characteristics:

 It is not closed at the end of every accounting period and may stay open throughout the life of the company.

 The account includes equity, liabilities, and assets accounts and is also called a real account.

 A permanent account’s balances are continued in the next accounting period, which means the end of the previous period is the
beginning of the next one.

Accounting Working Papers

Accounting working papers offers a quantum leap in working paper preparation with linked worksheets, automatic tax calculators, pre-filled
information, colour highlighted cells for staff to follow and adjusting journals that are automatically prepared.

Accounting Working Papers Features

 Central home page showing the working paper status of all working papers being “Completed”, “To Be Done” or “Not
Applicable”

 Over sixty linked MS Excel template worksheets

 Template worksheets designed to be as user friendly as possible with minimal additional data entry or questions to be
answered

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  Calculators within the worksheets automatically prepare journal entries for depreciation, Div 7A, UPE, tax, dividends, private
usage and FBT, with other journal entries prepared where required.

 Commentary on the tax or accounting treatment of transactions in highlighted cells

The difference between the periodic and perpetual inventory systems

The periodic and perpetual inventory systems are different methods used to track the quantity of goods on hand. The more sophisticated of the
two is the perpetual system, but it requires much more record keeping to maintain. The periodic system relies upon an occasional physical count
of the inventory to determine the ending inventory balance and the cost of goods sold, while the perpetual system keeps continual track of
inventory balances. There are a number of other differences between the two systems, which are as follows:

 Accounts. Under the perpetual system, there are continual updates to either the general ledger or inventory ledger as inventory-related
transactions occur. Conversely, under a periodic inventory system, there is no cost of goods sold account entry at all in an accounting
period until such time as there is a physical count, which is then used to derive the cost of goods sold.

 Computer systems. It is impossible to manually maintain the records for a perpetual inventory system, since there may be thousands of
transactions at the unit level in every accounting period. Conversely, the simplicity of a periodic inventory system allows for the use
of manual record keeping for very small inventories.

 Cost of goods sold. Under the perpetual system, there are continual updates to the cost of goods sold account as each sale is made.
Conversely, under the periodic inventory system, the cost of goods sold is calculated in a lump sum at the end of the accounting
period, by adding total purchases to the beginning inventory and subtracting ending inventory. In the latter case, this means it can be
difficult to obtain a precise cost of goods sold figure prior to the end of the accounting period.

 Cycle counting. It is impossible to use cycle counting under a periodic inventory system, since there is no way to obtain accurate
inventory counts in real time (which are used as a baseline for cycle counts).

 Purchases. Under the perpetual system, inventory purchases are recorded in either the raw materials inventory account or merchandise
account (depending on the nature of the purchase), while there is also a unit-count entry into the individual record that is kept for each
inventory item. Conversely, under a periodic inventory system, all purchases are recorded into a purchases asset account, and there are
no individual inventory records to which any unit-count information could be added.

 Transaction investigations. It is nearly impossible to track through the accounting records under a periodic inventory system to
determine why an inventory-related error of any kind occurred, since the information is aggregated at a very high level. Conversely,
such investigations are much easier in a perpetual inventory system, where all transactions are available in detail at the individual unit
level.

This list makes it clear that the perpetual inventory system is vastly superior to the periodic inventory system. The primary case where a periodic
system might make sense is when the amount of inventory is very small, and where you can visually review it without any particular need for
more detailed inventory records. The periodic system can also work well when the warehouse staff is poorly trained in the uses of a perpetual
inventory system, since they might inadvertently record inventory transactions incorrectly in a perpetual system.

What Is a Partnership? How Does It Work?

A partnership in a business is similar to a personal partnership. Both business and personal partnerships involve:

 Pooling money toward a common purpose

 Sharing individual skills and resources, and

 Sharing in the ups and downs of profit and loss.

A business partnership is a specific kind of legal relationship formed by the agreement between two or more individuals to carry on a business as
co-owners. The partners in a business partnership invest in the business, and each investor/partner has a share in the profits and losses.

The partnership as a business must register with all states where it does business. Each state his several different kinds of partnerships that you
can form, so it's important to know the possibilities (explained below) before you register.

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Some partnerships include individuals who work in the business, while other partnerships may include partners who have limited participation
and also limited liability for the debts and lawsuits against the business.

A partnership, as different from a corporation, is not a separate entity from the individual owners. A partnership is similar to a sole proprietor or
independent contractor business because in both of these businesses the business isn't separate from the owners, for liability purposes.

The partnership income tax is paid by the partnership, but the profits and losses are divided among the partners, and paid by the partners, based
on their agreement.

Types of Partners in a Partnership

Depending on the type of partnership and the levels of partnership hierarchy, a partnership can have several different types of partners. This
article on different types of partners explains the difference between:

 General partners and limited partners. General partners participate in managing the partnership and have liability for partnership
debts. Limited partners invest but do not participate in management.

 Equity partners and salaried partners. Some partners may be paid as employees, while others have only a share in ownership.

 The different levels of partners in the partnership. For example, there may be junior and senior partners. These partnership types
may have different duties, responsibilities, and levels of input and investment requirements.

Types of Partnerships

Before you start a partnership, you will need to decide what type of partnership you want. You may have heard the terms:

 A general partnership is composed of partners who participate in the day-to-day operations of the partnership are who have liability
as owners for debts and lawsuits. There may also be limited partners

 A limited partnership has one general partner who manages the business and one or more limited partners who don't participate in
the operations of the partnership and who don't have liability.

 A limited liability partnership (LLP) is similar to the limited partnership, but it may have several general partners. An LLP is
formed by partners in the same professional category (accountants, architects, etc.) and the partnership protects partners from liability
from the actions of other partners. Each state has different categories of professionals that it allows to form an LLP.

How Partners are Paid

Partners are owners, not employees, so they don't get a paycheck. Each partner receives a distributive share of the profits and losses of the
business each year. Payments are made based on the partnership agreement, and the partners are taxed individually on these payments.

In addition, some partners may receive a guaranteed payment which isn't tied to their partnership share. This payment is usually for services like
management duties.

Requirements for Joining a Partnership

An individual can join a partnership at the beginning or after the partnership has been operating. The incoming partner must invest in the
partnership, bringing capital (usually money) into the business and creating a capital account. The amount of the investment and other factors,
like the amount of liability the partner is willing to take on, determine the new partner's investment and share of the profits (and losses) of the
business each year.

The Importance of a Partnership Agreement

When a partnership is formed, one of the first acts of the partners should be to prepare and sign a partnership agreement. This agreement
describes all the responsibilities of the partners, sets out each partner's distributive share in profits and losses, and answers all the "what if"
questions about what happens in a number of typical situations.

One good example of how a partnership agreement is important involves the situation when a partner leaves the partnership. If there is no
partnership agreement to spell out how to handle everything, state law determines everything.

The partnership agreement should include:

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  Details on the duties and responsibilities of each active partner,

 Roles of specific partners who have day-to-day management,

 How and when contributions must be made, and

 How distributions are set.

Methods of Goodwill Valuation

Goodwill is the value of the reputation of a firm built over time with respect to the expected future profits over and above the normal profits.
Goodwill is an intangible real asset which cannot be seen or felt but exists in reality and can be bought and sold. In partnership, goodwill
valuation is very important. Thus, we will here discuss the various methods of Goodwill Valuation.

Goodwill Valuation

A well-established firm earns a good name in the market, builds trust with the customers and also has more business connections as compared to
a newly set up business. Thus, the monetary value of this advantage that a buyer is ready to pay is termed as Goodwill. The buyer who pays for
Goodwill expects that he will be able to earn super profits as compared to the profits earned by the other firms. Thus, goodwill exists only in the
case of firms making super profits and not in the case of firms earning normal profits or losses.

Goodwill is recorded in the books only when some consideration in money or money’s worth is paid for it. Thus, in the context of a partnership
firm, the need for valuation of goodwill arises at the time of:

1. Change in the profit sharing ratio amongst the existing partners

2. Admission of a new partner

3. The retirement of a partner

4. Death of a partner

5. Dissolution of a firm where business is sold as going concern.

6. Amalgamation of partnership firms

Methods of Valuation of Goodwill

The choice of the method of goodwill valuation depends entirely on the partners or the partnership deed when they have made it.

1. Average Profits Method

i] Simple Average: Under this method, the goodwill is valued at the agreed number of years’ of purchase of the average profits of the past
years. Goodwill = Average Profit x No. of years’ of purchase

ii] Weighted Average: Under this method, the goodwill is valued at an agreed number of years’ of purchase of the weighted average profits of the
past years. We use the weighted average when there exists an increasing or decreasing trend in the profits giving the highest weight to the current
year’s profit.

 Goodwill = Weighted Average Profit x No. of years’ of purchase

 Weighted Average Profit = Sum of Profits multiplied by weights/ Sum of weights

Explore more about Treatment of Goodwill

Treatment of Goodwill

 Accounting Treatment of Goodwill- Death/Retirement of Partner

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  Accounting treatment of Goodwill- Change in PSR.

 Accounting Treatment of Goodwill in case of Admission of Partner

 Concept of Goodwill

2. Super Profits Method

(i) The Number of Years Purchase Method: Under this method, the goodwill is valued at the agreed number of years’ of purchase of the super
profits of the firm.

 Goodwill = Super Profit x No. of years’ of purchase

 # Super Profit = Actual or Average profit – Normal Profit

 # Normal Profit = Capital Employed x (Normal Rate of Return/100)

(ii) Annuity Method: This method considers the time value of money. Here, we consider the discounted value of the super profit.

 Goodwill = Super Profit x Discounting Factor

3. Capitalization Method

(i) Capitalization of Average Profits: Under this method, the value of goodwill is calculated by deducting the actual capital employed from the
capitalized value of the average profits on the basis of the normal rate of return.

 Goodwill = Normal Capital – Actual Capital Employed

 # Normal Capital or Capitalized Average profits = Average Profits x (100/Normal Rate of Return)

 # Actual Capital Employed = Total Assets (excluding goodwill) – Outside Liabilities

(ii) Capitalization of Super Profits: Under this method, Goodwill is calculated by capitalizing the super profits directly.

 Goodwill = Super Profits x (100/ Normal Rate of Return)

What Is an Accounting Standard?

An accounting standard is a common set of principles, standards and procedures that define the basis of financial accounting policies and
practices. Accounting standards improve the transparency of financial reporting in all countries. In the United States, the Generally Accepted
Accounting Principles form the set of accounting standards widely accepted for preparing financial statements. International companies follow
the International Financial Reporting Standards, which are set by the International Accounting Standards Board and serve as the guideline for
non-U.S. GAAP companies reporting financial statements.

Understanding Accounting Standard

Accounting standards relate to all aspects of an entity’s finances, including assets, liabilities, revenue, expenses and shareholders' equity. Specific
examples of an accounting standard include revenue recognition, asset classification, allowable methods for depreciation, what is considered
depreciable, lease classifications and outstanding share measurement.

History of Accounting Standards and Purpose

The American Institute of Accountants, which is now known as the American Institute of Certified Public Accountants, and the New York Stock
Exchange attempted to launch the first accounting standards in the 1930s. Following this attempt came the Securities Act of 1933 and the
Securities Exchange Act of 1934, which created the Securities and Exchange Commission. Accounting standards have also been established by
the Governmental Accounting Standards Board for accounting principles for all state and local governments.

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Accounting standards specify when and how economic events are to be recognized, measured and displayed. External entities, such as banks,
investors and regulatory agencies, rely on accounting standards to ensure relevant and accurate information is provided about the entity. These
technical pronouncements have ensured transparency in reporting and set the boundaries for financial reporting measures.

What is accounts receivable?

Definition of Accounts Receivable

Accounts receivable is the amount owed to a company resulting from the company providing goods and/or services on credit. The term trade
receivable is also used in place of accounts receivable.

The amount that the company is owed is recorded in its general ledger account entitled Accounts Receivable. The unpaid balance in this account
is reported as part of the current assets listed on the company's balance sheet.

When goods are sold on credit, the seller is likely to be an unsecured creditor of its customer. Therefore, the seller should be cautious when
selling goods on credit.

Good accounting requires that an estimate should be made for any amount in Accounts Receivable that is unlikely to be collected. The estimated
amount is reported as a credit balance in a contra-receivable account such as Allowance for Doubtful Accounts. This credit balance will cause the
amount of accounts receivable reported on the balance sheet to be reduced. Any adjustment to the Allowance account will also affect
Uncollectible Accounts Expense, which is reported on the income statement.

Example of Accounts Receivable

A manufacturer will record an account receivable when it delivers a truckload of goods to a customer on June 1 and the customer is allowed to
pay in 30 days. From June 1 until the company receives the money, the company will have an account receivable (and the customer will have an
account payable).

What are Capital Expenditures?

Capital expenditures refer to funds that are used by a company for the purchase, improvement, or maintenance of long-term assets to improve the
efficiency or capacity of the company. Long-term assets are usually physical, fixed and non-consumable assets such as property, equipment, or
infrastructure, and that have a useful life of more than one accounting period.

Also known as CapEx or capital expenses, capital expenditures include the purchase of items such as new equipment, machinery, land, plant,
buildings or warehouses, furniture and fixtures, business vehicles, software, or intangible assets such as a patent or license.

The expenditure amounts for an accounting period are usually stated in the cash flow statement. Capital expenditures normally have a substantial
effect on the short-term and long-term financial standing of an organization. Therefore, making wise capex decisions is of critical importance to
the financial health of a company. Many companies usually try to maintain the levels of their historical capital expenditure to show investors that
the managers of the company are investing effectively in the business.

Types of Capital Expenditures

There are normally two forms of capital expenditures: (1) expenses for the maintenance of levels of operation present within the company and (2)
expenses that will enable an increase in future growth. A capital expense can either be tangible, such as a machine, or intangible, such as a patent.
Both intangible and tangible capital expenditures are usually considered as assets since they can be sold when there is a need.

It is important to note that funds spent on repair or in conducting continuing, normal maintenance on assets is not considered capital expenditure
and should be expensed on the income statement whenever it is incurred.

Importance of Capital Expenditures

Decisions how much to invest in capital expenditures can often be extremely vital decisions made by an organization. They are important because
of the following reasons:

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1. Long-term Effects

The effect of capital expenditure decisions usually extends into the future. The range of current production or manufacturing activities is mainly a
result of past capital expenditures. Similarly, the current decisions on capital expenditure will have a major influence on the future activities of
the company.

Capital investment decisions usually have a huge impact on the basic character of the organization. The long-term strategic goals, as well as the
budgeting process of a company, need to be in place before authorization of capital expenditures.

2. Irreversibility

Capital expenditures can hardly be undone without the company incurring losses. Since most forms of capital equipment are customized to meet
specific company requirements and needs, the market for capital equipment that has been used is generally very poor.

Once the capital equipment is purchased, there is little room to reverse the decision since the cost can often not be recouped. For this reason,
wrong capital investment decisions are often irreversible, and poor ones lead to substantial losses being incurred. Once acquired, they need to be
employed for use.

3. High Initial Costs

Capital expenditures are characteristically very expensive, especially for companies in industries such as production, manufacturing, telecom,
utilities, and oil exploration. Capital investments in physical assets like buildings, equipment, or property offer the potential of providing benefits
in the long run but will need a huge monetary outlay initially, much greater than regular operating outlays. Capital costs often tend to rise with
advanced technology.

4. Depreciation

Capital expenditures lead to an increase in the asset accounts of an organization. However, once capital assets start being put in service, their
depreciation begins, and they continue to decrease in value throughout their useful lives.

Challenges with Capital Expenditures

Even though capital expenditure decisions are very critical, they can also be a source of difficulties:

1. Measurement Problems

The process of identifying, measuring, and estimating the costs relating to capital expenditures may be quite complicated. Moreover, some
effects, such as the improvement of employee morale because of a new facility, cannot be captured fully in a spreadsheet.

2. Unpredictability

Organizations making large investments in capital assets do so expecting predictable outcomes. However, such predictions are not guaranteed and
may not happen as expected. The costs and benefits of capital expenditure decisions are usually characterized by a lot of uncertainty. Even the
best forecasters sometimes make mistakes. During financial planning, organizations need to account for risk to mitigate potential losses, even
though it is not possible to eradicate them.

3. Temporal Spread

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The costs, as well as benefits related to the capital expenditure, are usually stretched over a relatively long period of time for both industrial
projects and infrastructural projects. Such a temporal spread leads to problems in discount rate estimation and the establishment of equivalence.

Cost Benefit Constraint

Definition

The term cost / benefit constraint refers to an accounting constraint that states the cost of providing information must be measured against the
benefit derived from the use of that same information.

Explanation

Constraints accounting is a financial reporting approach that is consistent with the framework outlined by the Financial Accounting Standards
Board (FASB). Cost / benefit along with materiality are considered the leading constraints within this framework.

In the past, accountants would informally attempt to balance the expediency and practicality of obtaining information reported in a company's
financial statements. Today, many companies apply a cost / benefit constraint, which means the benefits derived from the information must
exceed the cost to provide it to the readers.

From a practical standpoint, the cost portion of this constraint is fairly easy to quantify. For example, there are costs associated with gathering,
assembling, storing, processing, analyzing, auditing, and disseminating data.

The benefits associated with this information are oftentimes more difficult to quantify. For example, the information may provide the preparer
and reader with a more accurate assessment of taxes owed or resources available to the business. However, assigning a value to this information
is sometimes problematic.

In practice, companies oftentimes require a cost / benefit analysis when establishing or modifying their internal accounting processes.

VISIBLE TRANSACTION

FORM 'M' / LETTERS OF CREDIT / EXPORT

Form 'M'

Visible trade involves the import/export of physical goods. All applications for import of physical goods are processed with Form 'M' while Form
'NXP' is used for processing exports.

Form M is a mandatory statutory document to be completed by all importers for importation of goods into Nigeria. The life span of a Form M is
180 days (for general merchandise) and 365 days (for plant and machinery), after which an extension of 180 days (for general merchandise) and
365 days (for plant and machinery) can be granted on the Form M by the Authorized Dealer. Any further extension has to be approved by the
Central Bank of Nigeria (CBN). It is therefore mandatory for all importers to complete and register Form 'M' with Authorized Dealers at the time
of placing orders whether the transaction is valid for foreign exchange or not. This is currently initiated electronically on Trade Portal provided
by the Central Bank of Nigeria in conjunction with the Nigeria Customs Service.

Letters Of Credit

A Letter of Credit (LC) is a mode of payment used for the importation of visible goods.
It is a written undertaking given by a Bank (issuing Bank) at the request of it's customer (applicant), in which the Bank obligates itself to pay the
exporter (seller/beneficiary) up to a stated amount within a prescribed time frame upon presentation of stipulated documents that conform to the
terms and conditions of the documentary credit.

The major participants in an LC transaction are:

 The Buyer/Importer/Applicant i.e the customer requesting LC to be issued.

 The Seller/Exporter/Beneficiary i.e the Recipient of the LC.

 The Issuing Bank - which gives the written undertaking.

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  Advising Bank/Seller's Bank i.e the bank that advises the LC to the beneficiary.

 The common types of LCs are:

 Unconfirmed LC

 Confirmed LC

Unconfirmed LC
Any LC that has only the payment obligation of the issuing bank.

Confirmed LC
Any LC that carries the payment obligation of at least two banks being the issuing bank and any other bank i.e the confirming bank.

The seller may either request a named bank to confirm the credit or just ask for confirmation by any reputable bank.
Confirmation comes at a cost since it is a service rendered by the confirming bank. The cost of confirmation can be borne by either the applicant
or the beneficiary depending on the agreement between them and the instruction given to the opening bank.

For an LC payable at sight, payment would be made upon presentation of credit compliant documents while for deferred payment LC, payment is
made at a later date (in accordance with the agreed date stated in the L/C e.g 60 days from bill of lading date or invoice date e.t.c).

Bills for Collection (Documentary Collection)

Bills for Collection is also a mode of payment used for the importation of visible goods to Nigeria.
A Bill for Collection is defined according to Uniform Rule for Collection (URC 522) as the handling of documents (financial and/or commercial)
by banks in accordance with instructions received from the exporter in order to:

 Obtain payment or acceptance or

 Deliver documents against payment and/or acceptance or

 Deliver documents on other terms and conditions.

The major participants of a Bill for Collection transaction are:

 The Buyer/Importer/Applicant

 The Seller/Exporter/Beneficiary

 The importer's bank/Collecting bank

 The exporter's bank/Remitting bank

EXPORT

The Form NXP is a mandatory statutory document to be completed by all exporters for shipment of goods outside Nigeria.

According to the CBN Circular reference TED/A-D/50/99, anyone willing to engage in export business is required to register with the Nigeria
Export Promotion Council (NEPC). In addition, any export transaction should have the following documents:

 A duly completed NXP Form ( 6 Copies)

 A Proforma Invoice

 Nigerian Export Promotion Council (N.E.P.C) Certificate.

 Corporate Affairs Commission (C.A.C) Certificate

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  Request For Information (R.F.I) Form

 A Contract agreement, where applicable.

 Relevant Certificate of Quality issued by one or more government agencies.

 Shipping documents e.g Bill of Lading, Commercial invoice e.t.c

 Other certificates e.g Form EUR-1 for goods being exported to Europe.

The shipping documents to be submitted to the bank by the exporter include:

• Bill of Exit
• Bill of lading
• Final invoice
• EUR certificate (A certificate issued after pre-shipment inspection, for goods going to Europe)
• Commercial Invoice
• Packing List
• Certificate of Origin
• Clean Certificate of Inspection (CCI)

Customs Duty Collection

All importation into the country must be done by opening a form M, whether valid for FX or not. Customs duty payment can only be processed at
the bank where the form M was opened except where the Bank that approved the form M is not a Duty Collecting Bank.

Payment Instruments: A customer can pay duty using any of the following:

 Cash

 FCMB draft

 The customer’s FCMB cheque

 Other bank’s draft and cheque (receipt is issued after draft/cheque has cleared)

 Electronic transfers

 NDCC (Negotiable Duty Credit Certificate)

Shipping Documents/Endorsements

This relates to the collection of shipping documents for visible import transactions.

Those activities range from:

 Collection of shipping documents on importation of goods to Nigeria from exporter/exporter's bank/correspondent bank.

 Collection of all Exchange Control Documents from customers

 Upload documents on the Central Bank of Nigeria Single Window Trade Portal for issuance of Pre-Arrival Assessment Report
(PAAR)

 Report (RAR)

 Endorsement and release of shipping documents

We also provide Export Financing services under:

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  Pre-shipment via stock financing facility.

 Post-shipment by way of Rediscounting and Refinancing facilities.

INVISIBLE TRANSACTION.

The processing of invisible transactions is also done by the Foreign Operations Unit. Form A is a mandatory statutory document to be completed
by all individuals for payment of services outside Nigeria.

Invisible transactions are essentially payment for services i.e there are no tangible goods involved. There are different types of invisible
transactions. Some of which are:

 Course Fees

 Dividend Remittances

 Payment for Medical Services outside Nigeria

 Technical Service Fee Remittance

 Personal Home Remittance

 School Fees Remittance etc.

 Documentation requirements for invisible transactions are as listed in the Foreign Exchange Manual

Trade Service Desk

Trade service team is positioned to cater for the needs of our Trade customers. The team gives advisory services on transactions and also train
customers on all trade transactions/products.

All inquiries should be forwarded to allstaffofits@fcmb.com

Unexpired cost

An unexpired cost is any cost that has not yet been charged to expense because it still represents some residual value. This cost is frequently
associated with revenue that has not yet been recognized; under the matching principle, an unexpired cost is maintained on the books as an asset
until the associated revenue is recognized, at which point the asset is charged to expense. Examples of unexpired costs are:

 A company prepays $12,000 for 12 months of advertising. After three months, $9,000 of this prepayment is still an unexpired cost,
because the associated advertising has not yet occurred.

 A company acquires $5,000 of merchandise. Until the goods are sold, the $5,000 is an unexpired cost. Once the related sale is
recognized, the $5,000 is charged to expense.

Expired cost

An expired cost is a cost that has been recognized as an expense. This happens when an entity fully consumes or receives benefit from a cost
(sometimes resulting in the generation of revenue). An expired cost may also be construed as the total loss in value of an asset. A cost for which a
portion is still recorded as an asset and a portion has been recognized as an expense can be considered a partially expired cost.

For example, a company spends $10,000 to acquire product catalogs, which it records as a prepaid expense in January. It hands out the catalogs
during a trade show in March, at which point it charges the $10,000 cost to marketing expense. The $10,000 becomes an expired cost in March.

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As another example, a company pays $100 for office supplies in June. Though the supplies may not be used for several months, it is not worth the
time of the accounting staff to recognize such a small cost over several reporting periods. Instead, the $100 is charged to expense as incurred,
which means it is an expired cost in June.

10 Common Bookkeeping Mistakes & How to Avoid Them

For the small business owner, bookkeeping is often seen as one of the necessary evils that we all must face. The tedious and mundane task of
bookkeeping can often take up hours and hours of time. This is the primary reason that well over one-half of all small business owners do not
keep their finances up to date on a monthly basis. Bookkeeping, as mundane as it may appear, is actually your biggest secret weapon when it
comes to business management and growth. It is only with accurate and consistent measurement of a company’s financials and other key
indicators that we as business owners can effectively manage and expand our businesses.

Here are the 10 most common bookkeeping mistakes you need to avoid:

1. Improper or poor record keeping. Improper or poor receipt and record keeping is common for businesses. It is easy to lose receipts or forget
about those small expenses that seem insignificant. Maintaining accurate records on a monthly basis and with a proper filing system can save you
time and money on your income taxes. It can also provide the necessary documentation in the event that you are audited by the IRS. In case of a
potential audit, accurate records of income and expenses could end ups saving you thousands of tax dollars.

2. Improperly categorizing expenses. If you or someone you have hired does not have the knowledge of formal bookkeeping practices, this can
become a problem. Accurately tracking income and expenses in the correct categories ensures proper measurement of profitability. Knowing the
different tax treatments of each income and expense category can result in significant tax savings, as well.

3. Not reconciling bank accounts. Not having separate bank accounts for personal and business activities can become an issue. If you are
audited, you may need to provide complete records of business-related activities that are separate from your personal expenses. Make sure that
your bank statements are properly reconciled every month. This will help to minimize errors and identify potential issues.

4. Not having backups. We live in a world of heavy dependence on technology where issues can suddenly arise. There is always a chance that
something could happen to your data, and you need to be prepared. It is important for every business to back up their data to avoid potential
losses.

5. Neglecting sales tax. With many businesses, not reporting sales tax and not accounting for it is a common error in bookkeeping. Oversight in
collection and reporting of sales taxes can result in significant fines and penalties. Alternatively, incorrect data entry may result in a higher total
sales amount and overstated sales taxes due.

6. Not classifying employees correctly. Businesses often have a combination of both employees and independent contractors. Make sure these
are properly classified to avoid misfiling and overpayment of taxes.

7. Bad petty cash management. Business owners often operate with a small amount of petty cash, but they have little or no knowledge of how to
track it. Be sure to set up a system which allows you to track the cash kept on hand for the business and what it is being used for. Buying a petty
cash lock box from your local office depot and obtaining receipts for all disbursements is a great way to start.

8. Poor communication. It is important to have strong communications between the bookkeeper and company employees. Keep your
bookkeeper involved and integrated with what’s going on inside the business. This helps the bookkeeper to create financial statements which
reflect the true operational needs of your business.

9. Neglecting to track reimbursable expenses. Many small business owners pay for expenses out of their personal funds. As time passes, there
is increased risk that these expenses get overlooked. Failure to account for these reimbursable expenses can result in lost money as well as lost tax
deductions. Create a policy to make it easy for the company to easily and consistently track and record reimbursable expenses.

10. Wasting too much time. Many business owners try to do bookkeeping themselves or do not have the professional help they need. Although
we all know that time is money, many business owners do not put enough VALUE on their time. How you value your time is extremely
important to your business. Leave the tedious and time-consuming task of bookkeeping to the professionals. A bookkeeper will know what to
record, how to record it, and most importantly, the accounting changes that affect a business on an ongoing basis. This alone can not only save
you time, but it also free up more of your time so you can focus on growth and taking your business to the next level.

Now that you have read through the 10 most common bookkeeping mistakes, take a look at your business and determine whether any of these
apply to you. Now is the time to make some easy changes to upgrade your bookkeeping system and turn that mundane task of bookkeeping into
your secret weapon for business management and success!

The allowance for doubtful accounts

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Overview of the Allowance for Doubtful Accounts

The allowance for doubtful accounts is a reduction of the total amount of accounts receivable appearing on a company’s balance sheet, and is
listed as a deduction immediately below the accounts receivable line item. This deduction is classified as a contra asset account. The allowance
represents management’s best estimate of the amount of accounts receivable that will not be paid by customers. It does not necessarily reflect
subsequent actual experience, which could differ markedly from expectations. If actual experience differs, then management adjusts its estimation
methodology to bring the reserve more into alignment with actual results.

Estimation Techniques for the Allowance for Doubtful Accounts

There are several possible ways to estimate the allowance for doubtful accounts, which are:

 Risk classification. Assign a risk score to each customer, and assume a higher risk of default for those having a higher risk score.

 Historical percentage. If a certain percentage of accounts receivable became bad debts in the past, then use the same percentage in the
future. This method works best for large numbers of small account balances.

 Pareto analysis. Review the largest accounts receivable that make up 80% of the total receivable balance, and estimate which specific
customers are most likely to default. Then use the preceding historical percentage method for the remaining smaller accounts. This
method works best if there are a small number of large account balances.

You can also evaluate the reasonableness of an allowance for doubtful accounts by comparing it to the total amount of seriously overdue accounts
receivable, which are presumably not going to be collected. If the allowance is less than the amount of these overdue receivables, the allowance is
probably insufficient.

You should review the balance in the allowance for doubtful accounts as part of the month-end closing process, to ensure that the balance is
reasonable in comparison to the latest bad debt forecast. For companies having minimal bad debt activity, a quarterly update may be sufficient.

Companies have been known to fraudulently alter their financial results by manipulating the size of this allowance. Auditors look for this issue by
comparing the size of the allowance to gross sales over a period of time, to see if there are any major changes in the proportion.

Inventory cost

Inventory cost includes the costs to order and hold inventory, as well as to administer the related paperwork. This cost is examined by
management as part of its evaluation of how much inventory to keep on hand. This can result in changes in the order fulfillment rate for
customers, as well as variations in the production process flow. Inventory costs can be classified as follows:

1. Ordering costs. These costs include the wages of the procurement department and related payroll taxes and benefits, and possibly
similar labor costs by the industrial engineering staff, in case they must pre-qualify new suppliers to deliver parts to the company.
These costs are typically included in an overhead cost pool and allocated to the number of units produced in each period.

2. Holding costs. These costs are related to the space required to hold inventory, the cost of the money needed to acquire inventory, and
the risk of loss through inventory obsolescence. Most of these costs are also included in an overhead cost pool and allocated to the
number of units produced in each period. More specifically, holding costs include:

o Cost of space. Perhaps the largest inventory cost is related to the facility within which it is housed, which includes
warehouse depreciation, insurance, utilities, maintenance, warehouse staff, storage racks, and materials handling
equipment. There may also be fire suppression systems and burglar alarms, as well as their servicing costs.

o Cost of money. There is always an interest cost associated with the funds used to pay for inventory. If a company has no
debt, this cost represents the foregone interest income associated with the allocated funds.

o Cost of obsolescence. Some inventory items may never be used or will be damaged while in storage, and so must be
disposed of at a reduced price, or at no price at all. Depending on how perishable the inventory is, or the speed with which
technology changes impact inventory values, this can be a substantial cost.

3. Administrative costs. The accounting department pays the wages of a cost accounting staff, which is responsible for compiling the
costs of inventory and the cost of goods sold, responding to other inventory analysis requests, and defending their results to the
company's internal and external auditors. The cost of cost accounting personnel is charged to expense as incurred.

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As the preceding list reveals, the cost of inventory is substantial. If not properly monitored and adjusted, inventory costs can eat into profits and
cash reserves.

Reversing entries

A reversing entry is a journal entry made in an accounting period, which reverses selected entries made in the immediately preceding period. The
reversing entry typically occurs at the beginning of an accounting period. It is commonly used in situations when either revenue or expenses were
accrued in the preceding period, and the accountant does not want the accruals to remain in the accounting system for another period.

It is extremely easy to forget to manually reverse an entry in the following period, so it is customary to designate the original journal entry as a
reversing entry in the accounting software when it is created. This is done by clicking on a "reversing entry" flag. The software then
automatically creates the reversing entry in the following period.

What Is Fair Value?

Fair value is a term with several meanings in the financial world.

In investing, it refers to an asset's sale price agreed upon by a willing buyer and seller, assuming both parties are knowledgable and enter the
transaction freely. For example, securities have a fair value that's determined by a market where they are traded.

In accounting, fair value represents the estimated worth of various assets and liabilities that must be listed on a company's books.

The Basics of Fair Value

In its broadest economic sense, fair value represents the potential price, or the value assigned, to a good or service, taking into account its utility,
supply and demand for it, and the amount of competition for it. Although it infers an open marketplace, it is not quite the same as market value,
which simply refers to the price of an asset in the marketplace (not intrinsic worth).

Accounting Worksheet

What is an Accounting Worksheet?

An accounting worksheet is a tool used to help bookkeepers and accountants complete the accounting cycle and prepare year-end reports like
unadjusted trial balances, adjusting journal entries, adjusted trial balances, and financial statements.

Format

The accounting worksheet is essentially a spreadsheet that tracks each step of the accounting cycle. The spreadsheet typically has five sets of
columns that start with the unadjusted trial balance accounts and end with the financial statements. In other words, an accounting worksheet is
basically a spreadsheet that shows all of the major steps in the accounting cycle side by side.

Each step lists its debits and credits with totals calculated at the bottom. Just like the trial balances, the work sheet also has a heading that consists
of the company name, title of the report, and time period the report documents.

Example

Here is what Paul’s Guitar Shop’s year-end would look like in accounting worksheet format for the accounting cycle examples in this section.

What Is Free On Board (FOB)?

Free On Board (FOB) is a shipment term used to indicate whether the seller or the buyer is liable for goods that are damaged or destroyed during
shipping. "FOB shipping point" or "FOB origin" means the buyer is at risk and takes ownership of goods once the seller ships the goods. For
accounting purposes, the supplier should record a sale at the point of departure from its shipping dock. "FOB origin" means the purchaser pays
the shipping cost from the factory or warehouse and gains ownership of the goods as soon as it leaves its point of origin. "FOB destination"
means the seller retains the risk of loss until the goods reach the buyer.

Free On Board (FOB) Explained

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Contracts involving international transportation often contain abbreviated trade terms that describe matters such as the time and place of delivery,
payment, when the risk of loss shifts from the seller to the buyer, and who pays the costs of freight and insurance. The most common
international trade terms are Incoterms, which the International Chamber of Commerce (ICC) publishes, but firms that ship goods in the United
States must also adhere to the Uniform Commercial Code (UCC). Since there is more than one set of rules, the parties to a contract must
expressly indicate which governing laws they used for a shipment.

How Free On Board Works

Assume, for example, that Acme Clothing manufactures jeans and sells them to retailers such as Old Navy. If Acme ships $100,000 in jeans to
Old Navy using the term FOB shipping point, Old Navy is liable for any loss while the goods are in transit and would purchase insurance to
protect the shipment. On the other hand, if the goods are shipped FOB destination, Acme Clothing retains the risk and would insure the shipment
against loss.

What are Credit Terms?

Definition: Credit terms or terms of credit is the agreement between a seller and buyer that lists the timing and amount of payments the buyer
will make in the future. In other words, this is the contract that describes the specific details of the seller’s payment requirements that the buyer
must meet into order to purchase goods on account.

What Does Credit Terms Mean?

Most companies have credit policies set up with vendors or customers, so purchases can be made on account. These credit purchases help speed
up commerce and increase sales because it allows customers to purchase items before they actually have the funds to buy them.

Example

Before a credit sale can be made, credit terms must be established. Most terms are dictated by industry practices and the specific goods sold in
those industries. A standard term rate that applies across most industries is 2/10 N/30—often called 2/10 net/30.

This is the standard way to write out and abbreviate term details. Here is a cypher to understand the code:

Percent discount if paid in cash / days to cash discount is available

Net amount of payment due / number of total days in credit period

These terms mean that a customer can receive a 2 percent discount on his purchase if he pays the entire balance in cash within 10 days. This is
often referred to as the cash discount period. If the discount isn’t taken, the customer must pay the full invoice amount within 30 days of the
purchase. This 30-day credit period is a sort of short-term financing for the customer. They can purchase goods without actually coming up with
the cash immediately. They can then sell the goods to retail customers and pay for the goods within 30 days. This way the credit purchaser is
never out of any cash.

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