Month: December 2019

Direct Cost, Variable Cost, Fixed Cost, Indirect Cost

Post author By admin
Post date December 6, 2019

[vc_row][vc_column][vc_column_text]Do you find it confusing on how to classify costs among direct cost, variable cost, fixed cost and indirect cost? Well, this article is written for you and this will bring an end to the confusion about these classifications of costs.

Executive summary

Before we go on to explore the definitions and examples of direct cost, the variable cost, fixed cost and indirect cost, let’s understand first that the sum of direct costs and indirect costs is equal to total costs.

All Direct Cost + All Indirect Costs = Total Costs

Similarly, the sum of all variable costs and all fixed costs also equals to Total Costs.

All Variable costs + All Fixed Costs = Total Costs

Total costs mean all and every kind of expenses which a company may incur. So, there are two ways of calculating total costs. Now, the critical point is, the total costs would always be the same, whether we calculate by the first formula or by second formula. The answer should be the same and not different.

Another critical point is that Direct costs can be classified into further two types, i.e., Direct Variable cost and Direct Fixed cost. Similarly, indirect costs may be classified into two types, i.e., Indirect Variable Cost and Indirect Fixed Cost.

On the same lines, variables costs can be classified as Direct Variable costs and Indirect Variable Cost. Further, Fixed costs may be classified as Direct Fixed cost or Indirect Fixed cost.

Even if you didn’t understand the concepts till now, don’t worry, let’s start and explore all these types of costs one by one.

Businance.com	Fixed Costs	Variable Costs	Total
Direct Costs	Rent of production factory Security charges of production department Utilities fixed charges of plant Crew salaries Salaries of bus drivers for a tour operator company	Direct material Direct Labor Direct supervision Electricity consumption charges of manufacturing unit Food served on a plane Fuel used by a taxi company Construction workers daily wages Hourly teaching rate of visiting faculty	Fixed Direct costs + Variable Direct Costs = Total Direct Costs
Indirect Costs	Direct material Rent of admin office Salaries of finance staff Staff medical insurance cost Utilities fixed charges of administration Annual license fee	Indirect material Indirect labor and supervision Sales commission Additional packaging cost Utilities variable charges of administration Income tax	Total Indirect Costs
Total	Total Fixed Costs	Total Variable Costs	Total Costs

Direct Costs and its types (definition, examples and explanation)

Direct Cost definition: “A direct cost related to a product or a service is a cost which is incurred directly as a result of producing that product or providing that service.”

In short, any cost related to manufacturing / producing a product is a direct cost. Below are some of the examples of direct costs:

Cost of wood and steel used in manufacturing a chair (furniture industry)
Cost of labour which produced hand-made jackets (manufacturing sector)
Cost of utility bills (electricity, water) of the production plant (
Cost of food served in an aeroplane to the passengers (airline sector)
Salaries of bus driver and crew for a tour operator (tourism sector)
Commission of real estate agent for each unit of an apartment sold (real estate sector)

All of the above-mentioned costs are directly related to the manufacturing of goods or providing services. There is no chance of these goods manufactured or services offered without incurring these costs. Therefore such costs are termed as direct costs as they incur directly as a result of making a product or delivering a service.

As a general rule of thumb, any expenses which are incurred in the production plant will be considered as direct expenses (or direct cost).

Now, let’s discuss what are the two types of direct costs, as mentioned earlier, the two types of direct costs are as below:

Direct Variable cost (also called Variable Direct cost)
Direct Fixed cost (also called Fixed Direct cost)

Direct variable cost

A direct variable cost is that type of direct cost, which is proportional to the activity level, i.e., this cost will increase if more units are products and this cost will decrease if fewer units are produced.

Example 1

For example, the cost of material is a direct variable cost. The more leather jackets a company will manufacture, the more will be the total cost of raw material for that company. The fewer jackets it produces, the less expenditure the company will have to incur on raw material for leather jackets.

Example 2

Another example is the cost of direct labour, i.e., the worker or staff who worked directly on manufacturing that product or delivering that service will be considered as a direct variable cost. Let’s take one example of the construction sector, where construction labour is paid daily for construction work. The number of days the labour will work, the more will be the cost of labour. Thus, it is a variable direct cost.

Example 3

Another example would be the fuel cost of a transport company. The more trips a bus will make, the higher will be the fuel cost. Fuel cost is directly related to the provision of service (pick and drop, city tour, transportation etc.), and it would vary depending upon the level of activity is done in a day. Therefore, fuel cost would be classified under direct variable cost for a transportation company, logistics company, tour operator company, cargo service, airline, bus and railway network etc.

However, it is important to differentiate that same fuel cost will not be a direct cost for some other sectors like an I.T company, a furniture manufacturer or a towel manufacturer as this fuel is not used directly on the production of goods or delivery of services.

Example 4

For a software development company, the salaries of developers can be classified as a direct variable cost. A time record sheet can be kept to track how many hours of each developer are spent on a particular software/project. Then, the salary of that developer will be directly allocated for those number of hours to that particular software/project. The more time a developer will spend coding a particular program, the higher will be salary recharge to that project. Thus, salaries of software developers become a direct variable cost for that service.

Example 5

Electricity consumption charge of a factory where surgical equipment is produced would increase with the increase in the activity level. If more medical products are manufactured, the higher will be the electricity consumption charge. Thus, electricity consumption charge of the manufacturing facility is a direct variable cost as it is being incurred directly on the production process, and it varies as per the activity level. (Please note that we are not referring to fixed-line rent of the electricity meter here, as it would remain fixed regardless of activity level).

Direct fixed Costs

A direct fixed cost is the second type of direct costs (the first being direct variable cost). A direct fixed cost is a cost which is directly related to the production process or service delivery but does not vary as per activity level. This cost would remain the same even if more or fewer units are produced.

It is essential to understand that direct fixed cost is incurred on the core product or the service which is being provided to the customer, and this cost should not increase if the activity level is increased or decreased.

Example 1

Let’s take an example of a manufacturing unit which produces textiles in a rented building. The rent of the building where manufacturing is being done is directly related to the production because production is happening here. However, the lease amount will not increase if the textile unit produces 1,000 shirts or 1,200 shirts in a month. Similarly, rent will not decrease if that textile unit produces 800 shirts. Rent will remain the same. Thus, rent expense of the production facility is considered as a direct fixed cost.

Example 2

Let’s take an example of a university whose core service is to provide education and lectures to the students. The full-time lecturers who are employed at a monthly salary provide this core service to the customers (i.e., students). The salaries of these full-time lecturers remain the same regardless of the number of lectures delivered in a day. This is an example of a direct fixed cost in an educational institution. Please note that if a lecturer is on visiting faculty and charges university at an hourly rate, then, the remuneration of that visiting lecturer would be considered as a direct variable cost.

Example 3

In the healthcare segment, where doctors are employed at a fixed monthly salary, the salaries of such doctors will be considered as a direct fixed cost. The salary is a direct cost because doctors are directly involved in providing the service (i.e., treatment) to the customer (i.e., patient). Since the salary is fixed (regardless of the number of patients treated), it would be considered as a direct fixed cost.

Example 4

If a company registers a patent of a particular formula or a product, the cost of that registration of copyright would be considered as a direct fixed cost. For example, let’s take an example of a manufacturing company which invented a new medicine for the treatment of cough. Now, this medicine and its formula are patented by the company by paying registration and patent fees. Under this patent, the company can manufacture unlimited units of this product, and no other company can use the same formula. The registration cost of this patent is directly related to the manufacturing of this medicine. Because, without having registered this patent, the company could not produce this medicine. But the cost of the patent would remain fixed and will not vary based on the number of units produced. Thus, the cost of registration of patent of a new formula or design or a model for a pharmaceutical company or an automobile company would be considered as Direct Fixed cost.

Example 5

Depreciation expense of the plant, machinery and the manufacturing equipment is a fixed direct cost. The cost is fixed as the rate of depreciation would remain the same (unless there is some situation where depreciation is accelerated based on the usage of the machinery). Similarly, depreciation of the building where manufacturing is carried out will be considered as a direct fixed cost. Similarly, in case of a telecom company, depreciation expenses of the telecom equipment (towers) installed in different areas would be considered as a direct fixed cost. This cost is direct because it is directly related to the provision of telecommunication services, and it remains fixed on a monthly or yearly basis.

Indirect Costs and its types (definition, examples and explanation)

Definition of indirect cost: “An indirect cost is a cost which is not directly related to manufacturing of a product or creating a service”.

So, instead of being the core activity of the business, these are the additional or support functions which facilitate the core activity of the business.

Examples of Indirect Costs are as below:

Salaries of human resource department, finance department, I.T department, administration department etc.
Traveling charges, printing charges, postage charges incurred by support functions (i.e., finance department, HR department, IT department, procurement department etc.)
Rent expense of the support departments
Utility charges incurred by support departments
Depreciation, amortization and impairment of the assets not related to production

There are two categories of indirect expenses:

Variable indirect expenses
Fixed indirect expenses

Variable indirect expenses

Variable indirect expenses are costs incurred in an organization which are not directly related to the manufacturing of a product or providing of service but which vary with the activity level of the company. i.e., if more goods are sold, these expenses will be increased, and if fewer products are sold, these expenses will decrease. Similarly, if more services are provided, these expenses will increase, and if fewer services are provided, these expenses will decrease.

Example 1

The first example of an indirect variable cost we will take is of the ‘indirect material’. An indirect material is a material which is not used in the manufacturing process, but it is used as part of the sales. For example, let’s take the case of a factory outlet which sales shoes. Now, the box in which shoes are handed over to the customer is not a direct cost related to the production of shoes. But still, the cost of a box is a variable cost as it would increase with the increase in the number of sales.

Alternatively, take an example of a retail store which is in the trading business, i.e., it would buy products and then sale ahead without any modification. The direct cost for the retail industry is the cost of the purchase of those products. However, once any product is sold, it is usually handed over to the customer in a polythene bag. This polythene bag is not part of the product cost, which is purchased, so it is not a direct cost, but it is an indirect cost. The cost of polythene would increase with each level of activity, i.e., sales; thus, it would be considered as an indirect variable cost.

Example 2

Let’s take the example of a football stadium which conducts football matches and tickets are sold online through a ticketing partner. This ticketing partner will charge a commission on each ticket sold. Now, the commission of the ticketing partner on the sale of the tickets is not a direct cost for the football stadium because the direct costs are related to the providing of sports facility to the player. However, this cost would increase with each ticket sold through the ticketing partner, and thus will be classified as an indirect variable cost.

Example 3

Let’s say that you are the owner of a restaurant and provide meals to the customers. As part of your business strategy, you also offer free home delivery at the same rate as of dine-in. Now, if a customer places an order to deliver a meal to his doorstep, you need to send this meal to the customer. This has been outsourced to a third party company. This third party would charge say $2 for each delivery of your meal. Now, this cost is another example of an indirect variable cost. This cost is not directly related to the preparation of the meal. However, it would increase with each new level of activity.

Fixed indirect expenses

Fixed indirect expenses are those expenses which are not directly related to the activity level or production level or service providing. Further, these are fixed in a given period and do not change with a change in activity level.

This means that fixed indirect expenses will not increase if more customers buy your product or service.

Example 1

If you are an online retailer and your I.T team is inhouse who handles all IT related issues. The salaries of this IT team would not increase due to the higher number of orders in a month than another. The same applies to the salaries of Finance team, HR team, procurement team and administration team.

Example 2

Another ubiquitous example of indirect fixed cost is the rental expense of office blocks (not of the production block). The building in which all support functions are operating, the rent of those buildings or units would be considered as indirect fixed costs. The rents would not increase or decrease from one month to another if there are a higher or lower number of orders between these two months.

Example 3

All routine office expenses like printing and stationery, courier, postage, electricity, water, pantry expenses and routine repair and maintenance incurred in the support function departments like HR, IT, Finance, Procurement, Administration, Security etc. would be considered as indirect fixed costs. These expenses are not directly related to production or service delivery. These expenses would also not be varying with a change in activity level.

Final Remarks

Correct classification of expenses may seem easy in simple situations. However, it might get extremely complex is today’s dynamic and fast-changing environment. With significant growth in industrialization, it might be challenging to find out what is the correct classification of a particular cost. Correct classification sometimes requires judgment, and there might not be one right answer always. Classification of costs varies industry to industry, requires sharp observation and understanding of the cost nature.

Classification of expenses is a complex task, it varies from industry to industry, and there is significant involvement of judgment. Some theorists have defined classification in a different way than what is outlined here. For example, some theorists would classify the electricity cost of the production department as an indirect variable cost. However, in our approach, we have taken all expenses related to production as direct expenses. It depends on which methodology you use, but you need to be consistent in your methods.[/vc_column_text][/vc_column][/vc_row]

Finance basics Investment Management

Share capital, definitions and types

Post author By admin
Post date December 6, 2019

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The term shares frequently refer to ‘share capital’. The word ‘shares’ is used as a short form of ‘share capital’.

Capital:

Capital usually refers to investment in a business. It is money for starting or investing in a company. Sometimes, the word ‘capital’ is also used as a short form of ‘share capital’. However, the word ‘capital’ includes both shares and long term borrowings.

Share capital:

Share capital refers to the money which is attributable to the owners of the company: This includes common stock and preferred stock (but does not include borrowings and debts).

Ordinary share capital (or common stock):

Ordinary share capital or common stock refers to primary shares of the company. This type of shares of the company contains ownership rights, and this is the most common type of shares. These shareholders have the rights to appoint the company’s directors at the election of shareholders.

These shareholders have the residual interest in the company, i.e., in the case of winding up of the company, whatever remaining assets will remain after payment of all other liabilities, loans, preference dividend, taxes etc. that residual assets will be distributed among ordinary shareholders.

Preference share capital:

Preference share capital is the second type of share capital where preference shareholders are entitled to a predetermined preference dividend. The dividend amount is fixed at the time of issuance of these shares. These shareholders usually do not have voting rights at the annual general meetings of the company. These shares do not have an expiry or maturity date, similar to ordinary share capital.

Authorized share capital:

Every company is run under defined regulations contained in the memorandum of association and the articles of association of the company. These regulations specify an authorized amount of the share capital of the company. The authorized share capital of the company is the maximum amount of share capital which a company can issue. For example, a company’s regulations may state that the authorized share capital is $10,000,000. This clause means that the company can issue a maximum of $10,000,000.

The nominal value of shares:

Nominal value of the stock is the value of the share stated on its share certificate. The nominal value of the share is the par value of one share of the company. Usually, the nominal value of the shares is $1. However, these shares may be traded on a stock market at a value significantly higher than the nominal value, e.g., $5 or $20.

The market value of the shares:

The market value of the shares is the value of the share at which a transaction is carried out in the market. The market value of the shares may be significantly higher (or lower) than the nominal value of the shares.

Issued Share Capital:

Issued share capital means the amount of share capital which has been issued by the company out of its total authorized share capital. Let’s say that if the company’s authorized share capital is $10 M, the company may issue only $2 M out of it at one instance. Later on, the company may issue further shares of $1 M. Thus; company’s issued share capital is always less than or equal to its authorized share capital. It is important to note that the value of the issued shares of the company in the company’s balance sheet will always be represented at the nominal value of the shares. For example, the $2 M issue which we talked about here, is the nominal value of the shares and not the market value.

Let’s say that if the nominal price of a company’s share is $1 per share, and it issues 1 million shares at a market value of $2 per share. In this case, the company’s issued share capital shall be considered as $1 M only. This is because issued share capital is booked at the nominal value of the shares of the company.

Issuance of share capital:

Issuance of share capital means that the company collects share price from the investors and award them shares of the company (in the form of written certificates). Once investors purchase these share certificates, those investors become shareholders of the company.

Share certificates:

Share certificates are the written pieces of paper which contain the number of shares and the name of the shareholder duly authorized by the company. For a shareholder, a share certificate is proof of the share ownership.

Subscribed share capital:

Subscribed share capital is the amount of the share capital, which has been purchased by the shareholders. This is usually equal to the issued share capital. For the sake of understanding, consider the below press release from a company, “We had announced to issued $ 2M share capital, and all of that got subscribed within a week.” This statement means that when the company announced to issue share capital and invited investor to invest money, the investors subscribed (submitted application forms along with fees, etc.) all share capital.

Paid-up Share capital:

Share capital of the company for which the shareholders have made payment to the company. Shareholders are liable to make the payment for the shares after they subscribe to the shares within a particular time. Sometimes, a shareholder may subscribe the share capital by submitting application forms, but later on, does not complete the payment. However, usually, paid-up share capital is equal to the subscribed share capital of the company, which in turn is equal to the issued share capital of the company.

Called up share capital:

This is the part of the share capital for which the subscribers have not made payment of the share capital, i.e., shareholders. For these shares, the company has requested the payment, but payment is not yet made. Called up share capital is a contrast to paid-up share capital. Once the payment for the called up share capital is made, it will be converted into paid-up share capital.

Callable share capital:

This is the part of the share capital for which payment has not yet been requested by the issuer of the capital. The company has the right to call up (i.e., raise demand for the payment against these shares) against this share capital.

Share premium:

Payment made by the shareholders to the issuer company for the purchase of shares in excess of the nominal share price of the company. This means that if the company’s nominal value of shares is $1,000 (i.e., 1,000 shares for $1 each) and the company issued these shares at a price of $1.5 each, i.e., for $1,500 then the additional amount of $500 ($1,500 minus $1,000) will be share premium. Share premium is kept as a capital reserve in the books of the company.

Issuer company:

A company which is issuing its shares to the investors/shareholders is called issuer company.

Capital reserve:

A capital reserve on the balance sheet of the company is a reserve which is not created through routing profit from profit and loss account. This means that this reserve is not created from the profits of the company. Instead, this reserve is directly created from contributions from some other sources. For example, the share premium payment made by shareholders above the nominal price of the share is reserved in the share premium account. This share premium account is an example of capital reserves. Another example of the capital reserve is an asset revaluation reserve which is created as a result of an upward revaluation of property, plant and equipment. A capital reserve cannot be used to pay dividends to the shareholders.

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Audit in general Auditing & Tax

Ten misconceptions about Role of External Auditors

Post author By admin
Post date December 6, 2019

[vc_row][vc_column][vc_column_text]In today’s complex corporate governance requirements, the role of external auditors is quite important and significant. They act as a third party check and provide an independent opinion about the financial statements of the company.

However, there are some general misconceptions about the role of external auditors. It is essential to understand the limitation of an external audit. In the below points, we have listed ten misconceptions about the role of an external auditor and the respective reality.

Misconception 1: External auditors are responsible for the detection and prevention of frauds and errors:

Reality: External auditors are not responsible for the detection and prevention of frauds and errors. However, they may (or may not) come to know about any fraud in the organization. Once they know or suspect that there is a fraud, they have to get further details about it. However, depending upon the quantum of the fraud, they may still not report the same in their audit report. Further, it is the management of the company who is still responsible for the detection and prevention of fraud in an organization.

Misconception 2: External auditors are checking and reviewing all the transactions of a company

Reality: The external audit is carried out in a short period with a limited number of team. It is not practically possible to test and verify every transaction of the company. External auditors only validate a sample of the transactions. This sample of transactions is selected using statistical techniques or based on the past assessment of the auditor or the materiality (high amount or nature) of the transactions. It is still likely that a significant portion of the suspicious transactions remains unchecked.

Misconception 3: External auditors report all errors found in their audit report

Reality: External auditors work as partners of the companies. They do not intend to report errors in their audit reports. Instead, if external auditors find any mistake in the financial statements, they help the organization by suggesting to correct these errors. Often, both auditors and company’s management finalize the financial statements together, reducing the mistakes and miscalculations in the financial statements. Only in the case of a material and pervasive disagreement between auditors and the company’s management, the auditor would report such disagreement in their audit report.

Misconception 4: External auditors ensure that financial statements are free from errors and are accurate

Reality: Based on the limited time, selected sampling and limited staff, an external auditor can’t detect all the errors in the financial statements and make the financial statements accurate and free of errors. External auditors cannot ‘ensure’ that financial statements are free from errors. Instead, they provide their opinion about financial statements which they formulate by performing audit procedures.

Misconception 5: External audit is a guarantee that there is no financial fraud happening in the company

Reality: A well-carpeted scam may still go undetected even if well-reputed external auditors regularly audit the company. Techniques of collusion, window dressing, under-provisioning, overestimating revenues, undercharging depreciation, misleading interpretation, misuse of assets, weak internal controls, politics, reporting selected ratios in annual reports, may still not be detected and reported by external auditors.

Misconception 6: External audit is a confirmation that the operations of a company are being conducted most efficiently and effectively.

Reality: An external audit is not an efficiency check on the operations of the company. A statutory external audit is about providing an opinion on the financial statements. There are separate categories of operational audits which are available to assess operational efficiency. For example, how much material is being wasted during production? How much time is extra being consumed during the hiring process? What are the critical elements missed out in a strategy formulation? Which contracts were awarded to close relatives? Etc. Such instances are not usually reported in a statutory external audit report. A specific operational or fraud investigation audit may be used for such conditions.

Misconception 7: A good external audit report indicates a good management strategy of the organization

Reality: An external audit is not usually about checking the strategic direction of the organization. Did the organization select the best product mix? How successful was the innovation process during the year? What improvements are brought in the customer service? Has hiring and retaining employees improved? How well the company competed in the market? These items are usually not on the agenda of the external auditor.

Misconception 8: A clean audit report means that the company’s chances of success and future profits are high

Reality: Many companies go bankrupt or liquidated even after having a clean audit report. Does it mean that their auditors were not competent? Or they did not perform their responsibilities with honesty? No, it doesn’t say that. It’s because it’s not on the auditor’s part to ensure that a company remains successful and profitable.

Misconception 9: A clear external audit report from external auditors means that the company is paying its taxes correctly

Reality: Statutory audits are not detailed testing of the tax calculation of the company. Instead, external auditors would make a quick analytical assessment of the taxes and whether they seem to be correctly reported. It is not a detailed, line-by-line checking of the tax returns ensuring that all the items are correctly calculated and reported and that the tax laws have been correctly and fully interpreted in the preparation and submission of tax returns.

Misconception 10: External auditors claim that their report is a guarantee of accurate financial reporting.

Reality: External auditors never claim that their report on the financial statement is a guarantee that the financial affairs of the company have been correctly and accurately reported. In fact, they mention in their description that it is the responsibility of the management to prepare and present financial statements correctly. External auditors only provide an opinion about the financial statements, whether, in their opinion, the financial statements of the company are presenting a true or fair view or not.

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Assets Financial Accounting

Prepayments, concepts and accounting

Post author By admin
Post date December 6, 2019

[vc_row][vc_column][vc_column_text]So today’s question is, how to handle prepaid transactions in accounting & bookkeeping. There are below important points in handling prepayments:

First of all, you need to ‘identify’ a prepaid transaction. A prepaid transaction occurs when you have made the payment, but you have not received goods and services in consideration of that payment. Alternatively, you’ll be delivered those goods or services over a while and not instantly upon payment.

A prepaid expense is represented under current assets in the balance sheet. Once the prepaid cost is utilized, it is presented as an expense in the income statement.

General examples of prepaid expenses

Following are some generic examples of prepaid expenses:

Rent paid in advance:

Usually, office and building rentals are paid by businesses in advance for three months or six months or sometimes for one year. So, let’s say if you have spent six months’ rent on 1 January for the period from 1 January to 30 June, you need to record this transaction as a prepaid expense on 1 January. Then, at the end of each month, you need to classify one month’s rent as an expense and reduce your prepaid rent gradually. Thus you’ll be passing debit rent expense and credit prepaid rent account entry at the end of every month.

Medical Insurance paid in advance:

Medical insurance for the employees and their dependents are usually paid for one year in advance (or at the beginning of the insurance period). Therefore, at the beginning of the insurance period, the insurance premium paid should be recorded as a prepaid expense and then it should be amortized subsequently at the end of each month as an expense. Same is true for any property or liability insurance.

Subscriptions paid:

If your organization is a member of any trade association or an activity group and you pay annual subscription of that association in advance at the beginning of each year, then, this annual subscription would be considered as a prepayment for one year when paid at the beginning of the year. You need to amortize this payment every month into expenses and gradually reduce the prepayment account.

Prepayments for goods or services:

If a supplier requires to make a prepayment (or advance) for before they can deliver products or services to you, then, this payment of advance to the supplier would be classified as prepayment until goods or services are provided.

Training program:

If a training program of six months is purchased and payment is made in advance, then this advance payment should be booked as a prepaid expense in the balance sheet. This prepayment will be expensed out every month in profit and loss.

Software fee:

If you have purchased a license for a software for one year (or less), then you can book this amount as a prepaid and charge it out to P&L every month.

Trade license:

In certain countries, a trade license is issued at a high cost for a year. This trade license cost should be recorded as prepaid and then monthly expensed out.

One comprehensive example of prepayment

For example, if you have to place an order for delivery of 500,000 blocks for your next construction project and the supplier of construction material provider has asked for an advance payment of 25% of the value of the order before he can accept the order. Now, let’s say today is 28^th of the month, and you place this order with advance payment of (say) $1,000. You make the payment, and now you want to record this transaction. The delivery of the blocks will come after 15 days, i.e., in the next month and you need to close your books of accounts, and you also need to record this transaction of payment of $1,000.

Above is an example of prepayment transaction where you have made the payment but you didn’t receive any item regarding the payment, yet. So, you’ll record the transaction as follows:

Debit: Advances to suppliers account (a type of prepaid accounts) $1,000

Credit: Bank account $1,000

The ‘advances to suppliers’ account is a general account for any supplier to whom advance is given. This account is one example of prepaid accounts. If you don’t have an advances to suppliers account, you can use a general ‘prepaid expenses account’ also. However, the important thing is, this payment should be classified as a debit amount in the month-end financial statements.

Now, when the construction blocks are received in the next month, you need to record the transaction of receiving blocks. The accounting entry would be as follows:

Debit: Construction material account $1,000

Credit: Supplier payable account $1,000

Now, with the above entry, the receiving of the material is recorded. However, currently, we have a payable to supplier account and a receivable from supplier account (in advances to supplier account). Now, we need to knock-off these two accounting entries to clear the prepayment.

Now, we’ll pass below entry:

Debit: Supplier payable account $1,000

Credit: Advances to supplier account $1,000

This above accounting entry will nullify our prepayment, and thus we’ll have nil balance in our prepayment account.

A short way could have been to credit advances to supplier account debiting material account directly. However, in that case, we would not find any entry in the supplier’s account if we needed to check at a later stage whether we had any transaction or payment to this supplier.

The above was a comprehensive example of one prepayment.

Further important points

It is essential to understand why we have to book payments are prepayments and then reverse these payments later at the time of delivery of goods and services. This accounting treatment is to ensure that we present our financial assets and liabilities correctly in our financial statements. If we have only made the payment and have not received the service, then this payment is an advance and should be classified as a current asset in our balance sheet. However, if we have received requested goods and services, then those payments are expenses (or sometimes assets) and therefore, should be correctly classified.

Sometimes, people get confused about advances and prepayments. All advances are not prepayments. For example, advances paid to staff for their personal needs are not prepayments. So, the rule is, if advance paid will be returned to the business, then it is a simple advance and not a prepayment. However, if the advance paid will not be refunded, instead, some goods will be delivered, or service will be performed, then that advance is a prepayment.

It is essential to differentiate prepayments from securities and deposits. Securities are payments made as a guarantee or collateral; it is a safety for the other party ensuring compliance with the contractual obligations. Deposits are money kept with suppliers’ accounts which are usually returned at the end of the contract period or after a fixed period. We do not amortize securities and deposits, as we do with the prepayments.

Accounting for prepayments can be complicated sometimes. You need to prepare a prepayment schedule to keep a record of all the prepayments. Sometimes, annual payments are made in the middle of the year such that payment partially relates to past and future months. In such cases, ideally, you might have accrued expenses for which payment is made in the middle of the year. Please read our articles on preparing prepayments schedule and accruals accounting for details on handling such complex scenarios.[/vc_column_text][/vc_column][/vc_row]

Business Strategy Introduction to business

Planning and Control

Post author By admin
Post date December 6, 2019

[vc_row][vc_column][vc_column_text]Planning and Control are two words often used together, mostly in the corporate world, usually in the context of performance management or strategy formulation. The objective of planning and Control is to ensure that an organization achieves its goals and avoid any unforeseen adverse circumstances.

We can define planning as “a pathway outlining a series of steps which should are ought to be taken to achieve a goal or an objective”.

So, for example, if you plan to visit the nearest lake on the weekend, you’ll list out the steps to be taken to achieve this goal, which would include allocating a time slot, arranging travel to the place, purchasing or renting items for using on the picnic day etc.

So, in the corporate context, a plan to achieve the objective of profit maximization may include identification of profitable products, purchase or production of those products and then selling such products to customers to achieve the aim of profit.

Some of the examples of planning are as follows:

Identification of market gap and drafting a suitable line of action to enter the market.
Preparing a sales plan (budget) for the first three months of the business.
Allocation of limited resources on different activities for optimum output, for example, how to utilize a limited quantity of material on the production of various products.
Preparing a schedule of activities at the beginning of the day to be done during the day.
Identification of resources to achieve a particular objective, like plan to use social media to recruit talented staff.
During a war, planning is assessing your environment and then coming up with a thoughtful response.

Control is ensuring that plan works out in the planned way. If things are going out of the plan, Control will help things bring back to the track. Controls would handle many risks and uncertainties including laziness, fraud, unprofessionalism, delays, competition, regulatory compliance etc.

For example, keeping a record of all products entering and exiting the warehouse is an example of Control. This Control ensures that there is no misappropriation of goods from the warehouse.

There can be various examples of controls; some of these are listed below:

Setting salaries for the employees to avoid any conflict in future.
Maintaining daily attendance to ensure that everyone comes to work.
Setting credit limits for the customers to avoid significant bad debts.
Keeping limited signatories of bank accounts to ensure the safety of cash at bank.
A compliance team to be assigned responsibilities for ensuring regulatory compliance.
Setting budgets and targets for different expenses and revenue items for cost control and business development, respectively.

The word ‘planning and control’ is often used together, often as a synonym. Some activities can be classified as both as a plan and as a control. For example, a budget is both a plan and Control. A budget is a plan to achieve the desired level of revenue or costs. However, if the budget is not being achieved, an intimation alerts higher management, and thus management takes suitable corrective measures. Thus budget acts as a control mechanism also to report and suggest improvements.

Planning and Controlling is a vital skill in today’s career market. It is one of the desired skills mentioned in most of the job advertisements. Organizations are looking for candidates who can plan in a dynamic ever-changing environment and can control various factors to help an organization achieve its objective.

Planning and control activity is primarily designed at the strategic level of the organization. Board of directors and top management would be entrusted mainly with planning the resources of the organization, controlling the risks and uncertainties and keeping organization progressive and profitable. It is a tool of performance management as well as performance measurement.

Many middle-level managers and operational level staff would also be planning and Control in their daily routines jobs. For example, a machine operator worker has to plan and control the quantity of the raw material being inserted in the production machine and control the flow. A driver has to plan all endeavours and control the vehicle as per the surroundings.

An adequate level of planning and Control can help an organization achieve its objectives; any major draw-back in the planning and Control may lead the organization into astray.[/vc_column_text][/vc_column][/vc_row]

Audit in general Auditing & Tax

Performing audit procedures on trade receivable (debtors) balances

Post author By admin
Post date December 6, 2019

[vc_row][vc_column][vc_column_text]Trade receivables are one of the risky areas in an audit assignment, and it should be tackled professionally and tactfully. There might be a high risk for the overstatement of trade receivables to enhance current assets and the corresponding growth in sales.

As an auditor, first, you need to identify what are the audit risks in trade receivables (debtors) balances and then devise suitable audit procedures to handle these audit risks.

Identification of audit risks on trade receivables

Let’s list out possible audit risks in trade receivables as follows, remember to use ‘what could go wrong’ (WCGW) methodology and generate as many risks as possible in the given circumstances:

Trade receivables stated in the balance sheet may be fictitious and non-existent in reality.
Trade receivables balance provided by the management may be artificially increased to show higher current assets and higher revenue.
Party-wise break-up of receivables might not be available.
Sum of closing balances of individual accounts might not be reconciled with the debtors’ control account total.
The ageing of the trade receivables may not be provided at all.
Ageing of trade receivables figures may not be calculated correctly or maybe deliberately distorted.
Other receivables and prepayments might have been wrongly classified as trade receivables.
Some expenses might have been incorrectly classified as trade receivables instead of booking in profit & loss.
Opening balances in the current year may not be matching with the closing balance of the previous accounting period.
A payment made to a creditor’s account might not have been correctly booked in the creditor’s account; rather, it might have been booked as a receivable debit balance.
The receivable balances might be outstanding for long, and thus provision is required.
A receivable related to the next accounting period may be booked in the current accounting period or a receivable pertaining to the current accounting period may be booked in the next accounting period.
Provision for doubtful and bad debts might not be correctly calculated and booked.
There is a risk that the amount received from receivables is not recorded in the company’s books and the accounts receivables still show outstanding balances.
A consistent methodology is not used for calculation of the provision for bad and doubtful debts.
Certain long outstanding old receivables might have been netted off against trade payables.
Proper segregation of duties may not exist. For example, if the same person is performing any two or more of following responsibilities, i.e., receipting money, preparing bank reconciliation statement, issuing invoices to the customer, depositing money in the bank accounts etc.
There might be some logical error in the system, and the ageing report is not correctly generated.
Receivables might have been booked before conditions of revenue recognition are met in compliance with applicable accounting standard (like IFRS 15 or IFRS 17).

Audit procedures on trade receivables

Well, once you have identified what could go wrong, i.e., audit risks on trade and accounts receivables, it would be relatively easy to devise suitable audit procedures to tackle these risks. Audit procedures should be designed to target audit risks. Each audit procedure should help in catering one or more audit risks, partially or fully.

Below are possible audit procedures for auditing trade receivables:

Obtain a list of trade receivables, party-wise balances and their respective ageing.
Obtain a schedule of provision for bad and doubtful debts, broken down into party-wise provisions.
Review the increasing or decreasing trend of the receivables with previous accounting periods and assess if it is in line with the general economic environment and the company’s financial performance.
Perform substantive analytical procedures to understand the trends and critical movements in the balances of trade receivables.
Inquire with the management on the significant variances (if any) in the movement of trade receivables.
Send balance confirmation letters to a selected sample of receivables.
Check subsequent positioning of the receivables, i.e., check the movement in the balance after the reporting date but before audit report issuance.
Keep a sharp eye on any reversals passed after the reporting period.
Check for any dishonoured cheques of material amounts subsequent to closing period.
Propose adjustment entries in the receivables balance to the management of the company.
Critically analyze the assumptions used for the calculation of the provision for doubtful receivables. Use the historical trends, industry practice and subsequent collection details in your assessment.
Perform cut-off procedures to ensure that receivables are reported in the correct accounting period.
Critically inquire the reasoning of the change of the provisioning policy, ensuring that the management duly approved the policy.
Carefully review the movement of any long outstanding balances ensuring that the collection is made and the balance is not just netted off against any payable balance.
Perform a system check on the ageing report generated from the system, take help of I.T team if required to ensure that the system is calculating ageing correctly.
Check if receipts are daily reconciled with the amounts collected in cash and bank.
Check if the cash collection option is limited to authorized individuals only, and a proper reconciliation is prepared.
Inquire if a receipt is issued against each collection ensuring that no collection remains unaccounted in the books of the accounts of the company.
Check that opening balances of receivables and provision for doubtful debts are correctly brought forward in the current accounting period.
Match the balances of the trade receivables break-up and the provision break-up with the financial statements and the notes to the financial statements.

Ageing of receivables

Ageing of trade receivables is the break-up of balances by the number of days with which it is outstanding. For example, if a customer purchased goods worth $1,000 one year ago, and then he purchased another goods of $500 three months ago and did not pay both of these amounts as at the closing date, in that case the ageing of this receivable would $1,000 above 365 days and $500 above 90 days and the total outstanding would be $1,500.

Audit documents related to trade receivables

Below is the list of documents which are usually standard in the process of auditing trade receivables:

Process document detailed understanding of the receivables cycle
Management’s policy document containing policy for receivables collections and provisioning
Confirmation letters for debtors
Post-dated cheques received from customers
Bank reconciliation statements and bank statements
General ledgers of receivables and bank accounts
Cut-off testing document

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Uncategorized

Introduction to the closing of books of accounts

Post author By admin
Post date December 6, 2019

[vc_row][vc_column][vc_column_text]Have you ever wondered why accountants are more busy at the end of the months? Well, please don’t expect a joke here. This month-end closing is a serious topic. Accountants perform a particular task at each month-end, which is referred to as ‘closing of books’.

This term has multiple names and may be referred to as ‘closing of books of accounts’ or ‘monthly closing’ or ‘yearly closing’ or ‘quarterly closing’ etc.

So what they do when they ‘close the books’? Does this mean that they close the books and stop working? If this was the case, then accountants should have been relaxed. But this is not the case. Closing of books means that you are ensuring that you have recorded all accounting transactions correctly, which should be recorded in that month or in that accounting period. Once you are sure that you have booked all the accounting entries, then you can close that accounting period or month and start the next accounting period.

Once an accounting period is closed, no further accounting entry can be passed (usually) in that month. Therefore, before closing the books of accounts, the accounting and finance team need to make sure that they have recorded all the transactions, and nothing is missed out. This monitoring includes ensuring that all prepayments, accruals, bank reconciliation entries, depreciation entries, system-generated entries have been correctly recorded.

Below are the usual items for which closing journal entries are passed at the time of closing of books of accounts:

Prepayments made and charging out of prepayments to P&L for that period
Accruals booking and ensuring the reversal of previous month’s accrual
Monthly Depreciation and amortization charges
Inter-branch reconciling items
System generated accounting entries for balancing books of accounts
Control account reconciliation accounting entries
Bank reconciliation entries like interest payments and receipts
Dividends, drawings, preference shares or any equity-related adjustments
The material in transit or goods received near to the closing date
Goods delivered or final sales made before closing
Acquisition entries, investment entries and goodwill
Impairment assessment and booking of tangible and intangible assets
Deduction of monthly advances
Monthly payroll entries
Recording of various provisions including bonus provision (employees love bonus provision)

Closing books of accounts is usually a system driven setup. Once there is a confirmation to close the books of accounts, you can give the command in the accounting software to close the books of accounts. The accounting system will then lock that accounting period and a new accounting period will be opened.

Usually, all good companies close their monthly accounts as early at 5^th of the following month. For example, the accounting books for the accounting month of January 1950 will be closed by 5 February 1950. Similarly, the accounting period for the month ended 28 February 1950 will be closed by 5 March 1950. (Please don’t be carried away by the year 1950, this is just given as an example, the article is not that much old).

Many companies prepare quarterly financial statements, and thus they close their quarterly accounts almost similar to their month-end closing deadline. Annual closing of books of accounts usually takes a more extended period than monthly or quarterly closing. This delay is because annual results are typically subject to a full-fledge audit, and these financial statements are presented to various stakeholders. Nevertheless, yearly closing would also be done maximum by 10^th of the following month. For example, the closing of books of accounts for the year ended 31 December 1950 will be done maximum by 10 January 1951.

Once books are closed, any accounting entry shall be passed in the next accounting period only. Some companies may close their books of accounting for a month before the actual month-end closing date, e.g., some companies may close their books on 25^th or 28^th of the current month. This closing date is usually referred to as the cutoff date. This practice is used to ensure that financial reporting timelines to group and regulators are met on time. Early closing of books of accounts would provide sufficient time to the companies to complete the closing process and generate the financial results.

Closing of books of accounts is crucial from an owner’s or investor’s point of view. Because only after the closing of the books, a business will be able to determine how much profit it earned or what is the financial position and performance of the company. So, if you are an owner of a small business, please insist on monthly closing and monthly preparation of financial statements so that you are aware of the latest economic situation of the company.

The outcome of the closing of books of accounts is the final list of closing balances of all the accounts (also called trial balance). Once the trial balance is finalized, that is the final stage of the closing process. After the closing, the next step is the preparation of financial statements. Please read our article on the preparation of financial statements here.[/vc_column_text][/vc_column][/vc_row]

Basics of financial accounting Financial Accounting

Meaning of ‘Account’

Post author By admin
Post date December 6, 2019

[vc_row][vc_column][vc_column_text]The word ‘account’ has multiple meanings in different contexts, so you need to check the background before drawing meaning out of the word ‘account’.

If the speaker of the word ‘account’ is an ‘accountant’, then you can relate this word pretty quickly. There are multiple definitions, as stated in this article. An accountant is a person who takes care of different accounts, i.e., he makes sure that all accounting entries are correctly recorded in appropriate accounts. For example, a credit sale made to Mr A is recorded in the account of Mr A and not in the account of Mr B.

Recording of entries in the correct accounts is of utmost importance in accounting. However, today’s topic is more about discussing the term ‘account’.

Consider an account as an exclusive box. The box (or account) is for a specific title/person. Any transaction with that title shall be recorded in that box (or account). Let me give you an example from the old days. Let’s say that a vendor keeps a box for each of its credit customers. Whenever goods are sold to that credit customer on credit, the vendor adds stones in the box designated for that customer. Each stone indicates the sale of a particular weight/value. So, at any time, the vendor can count the number of rocks in that person’s box to calculate the total amount of the credit sale made to that person.

Similarly, after the writing was developed, an account (or a box) was created for each customer. Any transaction with that customer is recorded in that account (exclusive box) and kept it there. So that at any time, accounting can be done for that particular customer that how much is outstanding.

In today’s modern world, a bank account is an example of ‘account’. This bank account is an exclusive recording of transactions dealt with a particular party. Finally, an account statement is a listing of all those transactions. Keeping an account for each party ensures that transactions don’t get mixed. Let’s say that if Mr Jonathan deposits the money, then it should belong to Mr Jonathan only (and not to Mrs Jonathan).

In accounting, there are five broad categories of accounts in accounting, i.e., Assets, Liabilities, Income, Expenses and Capital. These accounts are kept not only for persons and parties but also for non-living items. For example, there will be a separate account for furniture, a different account for cars and a distinct account for electrical equipment.

Not only this, for each different kind of expense, there is a different account. For example, there is an account for ‘utility’ expenses, another account for ‘travel expenses’ and another account for ‘marketing expenses’. There might be hundreds of accounts for different costs in large multinational companies.

A listing of all accounts along with their closing balances is called a trial balance. Some large multinational companies may have hundreds or even thousands of line items on their trial balance. This bigness might be primarily due to multiple accounts for the same nature of item but different locations. For example, there would be one account for taxi expenses for California branch and same account for Texas branch. Thus, this would lead to an increased number of accounts for different locations, although the nature of expense is the same.

It is of utmost importance to make sure that you record transactions in the correct account only, i.e., a transaction for cash sale should be recorded in cash account (as a debit) and sales account (as credit). The recording of transaction in a relevant account is of utmost importance to maintain correct books of accounts. Then only any financial statements prepared would be of right presentation.

Please ensure that you find out the correct classification always, for example, do not book repair expenses in the account of rent expenses. This classification is incorrect and would lead to an inappropriate presentation of financial statements.

Sometimes, it is not so easy to identify the correct account for recording a transaction. For example, if you paid professional fees of your employees, is it your cost of ‘professional subscription’, or ‘staff benefits’ or ‘training & development’?

Similarly, if there is a door repair incurred in the office, should this be accounted for under ‘office expenses’ or ‘repair & maintenance expenses’ or ‘ad-hoc expenses’?

Well, sometimes there is a judgmental call, and sometimes it is industry practice on how to classify a particular asset. For example, a box of tissue purchased for the pantry would be usually classified as ‘pantry expenses’ along with other consumables like tea, coffee, milk etc. However, the same box of tissues, if used in the office area or reception area, would be considered as ‘general office expenses’.

That’s a lot about expenses; however, about customers and suppliers also, at least one account is opened for each party. Imagine about a company which has thousands of customers. So, in this case, control accounts are used to control a significant number of accounts of the same nature. A control account ensures that a consolidated recording is made in the control account as well as individual entries in the individual designated accounts of the company. You can read about control accounts in our article on control accounts in more detail.

Companies often use variance analysis techniques to find out key trends and identify areas which need attention. For example, if a utility account is showing an increase of 30% in the utility cost as compared to last period, then, management needs to investigate further that what is the cause of this increase. By this way, organizations control cost and keep an eye on the hikes. However, it is important that only correct and relevant transactions are recorded in each account. It is possible that on investigation it is revealed that some of the cleaning cost was also included in the utility expense account. So, variance analysis can highlight not only risky areas but also errors in the bookkeeping and expense recording.[/vc_column_text][/vc_column][/vc_row]

Uncategorized

20 Factors to consider while selecting the right MBA program

Post author By admin
Post date December 6, 2019

[vc_row][vc_column][vc_column_text]Many professionals, at one stage of their life, feel stuck in their current role and industry. They want to move further but are not able to find suitable opportunities. This situation usually happens between the time of 7 to 15 years of experience. At this time, some professionals are on the lookout to advance their careers or start their businesses. One of the options which come to their mind is a Master of Business Administration (MBA) degree.

These professionals who consider pursuing an MBA degree can be from any background and field. They may be doctors, engineers, finance professionals, lawyers or even entrepreneurs. So, If you are also one of such persons who is considering pursuing an MBA program then in this article, we’ll discuss briefly the factors which a person should consider while deciding to pursue MBA and from which institute, if at all.

This article will answer questions like:

How to select the right MBA program?

How to find the right MBA program?

Which MBA program is best?

Which university is best to do MBA?

What factors to consider for an MBA?

Should I be doing an MBA or not?

There are mainly two broad categories of MBAs, i.e., full-time MBA and part-time MBA (which is usually referred to as executive MBA). There are different brands under part-time MBA like Executive MBA, Global MBA, International MBA, Online MBA, Global Executive MBA, Exec. MBA in Strategy & management etc. However, more or less, the programs are the same.

A full-time MBA is usually for the candidates who either have recently completed their graduation or who are at a very early stage of their career, i.e., 2-3 years of experience only. If you are a recent graduate, then a full-time MBA is for you. To study a full-time MBA, you need to be present at the campus and attend classes usually on weekdays and in day timing. Thus, you have to sacrifice your day-job and study full-time.

Full-time MBA is usually of lesser duration (say one year) as compared to executive MBA. The annual fee of full-time MBA is higher than the yearly charges of executive MBA. However, the total cost of the program of Executive MBA may be higher (or sometimes lower) than full-time MBA. There are many online MBA options available now, which are usually cheaper than the on-campus MBA. If you are finding an affordable MBA program, try checking on online MOOC websites like coursera.com and edx.com.

An executive MBA is usually of double the duration than full-time MBA. However, this is not always the case. Some universities are offering one year executive MBA as well (although such universities are rare). Most of the executive MBA programs run for around two years (as opposed to 1 to 1.5 months full-time MBA programs).

An executive MBA is usually challenging considering that the candidates at this program are mostly married, having children and handling full-time job or business. So, juggling responsibilities of work and family, they have to accommodate studies as well. Completing an executive MBA program is no fun, you have to do a lot of research work, study significantly, read journals, attend lectures, visit university, appear in exam and complete the capstone project.

It is essential to realize that an MBA is a generic management qualification. It does not teach you any particular technical skill like engineering, science or IT. Therefore, an MBA can be most beneficial if you already possess the technical expertise, and you are proficient enough in that specialized field. MBA would add a significant advantage to your profile, and you’ll be best able to reap the benefits of the program. However, if you are only a management professional (like BBA or bachelors of management, etc.) then, your MBA would be comparatively less beneficial to you. In this case, it would be more advisable to you to do some short courses on the technical side of your interest.

Well, there is no one single best MBA. Rather, there are different factors with different weightage. You need to evaluate these factors and then make a decision. Choosing the right MBA is one of the most important decisions of your life. You need to consider the following factors carefully:

Cost of the program: MBA programs range from $10,000 to $200,000. These fees fall in a vast range, and you need to make sure that you can meet the costs of the program.
Duration of the program: The length of MBA programs usually ranges from 1 to 2 years. So, there is a time commitment involved. For this period, you’ll not be able to have any other significant time commitments.
MBA Objective: Some people enrol in an MBA for better career prospects, while some do to start or enhance their business. So, thoroughly consider your objective for start MBA. Do you want to start your own business or you want to change your industry, or you want to get promoted in your existing company? Choose your right MBA program based on the analysis of your objective and the matching content of the MBA program. Some MBAs focus on entrepreneurship and some on specific industries.
Classes schedule: What options are available to attend classes, is it day time, evening or weekend?
Online lectures availability: Is it possible to complete the program and attend lectures online?
Ranking of the university: University’s ranking is one of the most critical factors which you might consider in choosing the right school. When checking the ranking, ensure that ranking being checked is correct. There are several rankings criteria, and you need to find an accurate and reliable listing.
Ranking of MBA program: In addition to checking the ranking of the university, you also need to check the ranking of the MBA program. It is possible that the university’s ranking is high, but it’s MBA program’s ranking is low. Similarly, the same university may have multiple MBA programs, so you need to check the ranking of that particular MBA program which you are considering.
Time and budget commitment: Will you be able to devote time and the budget for the specified duration of the program.
Program content: There are hundreds of MBA programs out there and all of them are not same. There is a difference in the curriculum. Please spend some time thoroughly going through the subjects and the full content of the program. Make sure that the curriculum is matching with your interests, and this is the kind of knowledge you want to spend your energy and time on.
Country of stay: Prefer university in the country where you want to stay in future. For example, if you are planning to live in the UK after completing MBA, then prefer a UK university. Similarly, if you want to live in the US after completing MBA, then prefer a US university.
Title of degree: Better ask for a sample of the certificate which is awarded to successful candidates. See if look, feel and title of the program motivates you. Read out the title carefully and assess its impact on your resume or your sense of achievement. Usually, the titles are ‘MBA’, ‘Master in Business Administration’, ‘Global Master in Business Administration’, ‘Online MBA’, ‘Online Global MBA’, ‘Executive MBA’, ‘Executive Master in Business Administration’. Etc.
Funding options: Don’t be scared of high university fees and cancel the plan to get an MBA. There are many scholarships and funding options available for MBA programs. Each university lists out the details of funding options on their website.
Lost salary: If you are committing yourself full time to an MBA program, then, you’ll not be able to do your day job. You will have to put a resign or take unpaid leaves for 1 or 2 years. The loss of income for the study period is an additional cost of your MBA (in addition to fees and other expenses).
Senior’s Advice: Take advice from someone who has already studied at a business school. This first-hand advice would be significantly helpful for you to choose the right school and the right time to commence MBA journey.
LinkedIn profile analysis: Check the LinkedIn profiles of the alumni of that business school. Study and analyze their career journey. If you believe that they got significant benefit from their MBA and were able to achieve good positions, then that is a positive motivator for you to consider that MBA program.
Political factors: Consider the political factors in the country where you are planning to apply for MBA. A politically unstable country or any expected political upturn may create negative impacts on your institute and your MBA.
Social factors: If you have to travel to another country for an MBA, consider the social behaviour of that country and the linguistic barriers which you may face.
Commuting: If you are working and have to attend classes as well, make sure that your commute should not be killing. You need to have a manageable lifestyle and ensure to keep your routine comfortable.
Health issues: If you are going through any particular health-related problems, it is advisable first to take care of these matters. MBA studies are challenging and would require significant energy. You’ll undergo a large amount of stress and pressure while trying to catch up with the requirements of the program.
Campus Life: When you visited the campus, did you feel that the environment is enriching, bright, social, happy and thrilling? Did you feel like you want to spend time here and quench your thirst of learning management? You may be spending a significant and precious time of your life on the campus, so be sure to have a pleasant one. It is needless to say that you should have wifi access in the campus.

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Assets Financial Accounting

Significance of Intangible Assets and their Accounting treatment

Post author By admin
Post date December 5, 2019

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Introduction and examples of intangible assets

Intangible assets are those assets which cannot be physically touched. This ‘intangibleness’ is because they do not have a physical presence. Instead, most of the intangible assets have a virtual presence, either in the form of software or something in the understanding of people’s mind.

For example, a movie recorded by a film producer is an intangible asset stored in the soft form in the camera. You may not touch that film physically, but that movie is produced after spending millions of dollars and may have a significant market value.

There are many other examples of intangible assets like:

Registered trademark and logo: You would have seen many companies having a small ‘®’ in their trade name or their slogan. This sign represents a registered trademark. That company have spent money on designing, composing and registering this trademark. No other company can use the same trademark. This trademark is an asset which distinguishes this company’s products from other companies’. Therefore, this is an asset for this company and
Examples of trademarks and logos are four circles in a row for Audi, five rings (three up and two down) for Olympics, the ‘just do it’ slogan for Nike, slightly eaten apple for Apple and the picture of the founder of KFC for KFC.
A brand recognition A book: Yes, it seems that a book has a physical presence, but the value of the book written by a great author doesn’t lie in the physical appearance of the book. The value is in the story or script of that book, that is the intangible part of that asset. The actual price of the book may be a few dollars, but the copyright of publishing that book or the intellectual property of that book may have the value in millions.
A software: A software doesn’t have a physical presence, although we can see it on computer screens, and we may purchase software for a few dollars as a retail customer, but having the right to sale that software is an intangible asset worth millions. Similarly, the person who produced that code for the creation of software possesses a significant value as an intangible asset in the form of programming of that software.
A chemical formula: let’s say that a company devised a specific chemical formula which is helpful in producing any substance or medicine or product, then that chemical formula is also an intangible asset, i.e., the knowledge of that chemical formula is an intangible asset which can be capitalized (if conditions are met). For example, the recipe to prepare Coke drink is secret and is an intangible asset of Coca-Cola.
A photograph taken from an ordinary mobile or camera may also be classified as an intangible asset if that photograph is hugely appreciated and liked. Now, the picture would be saved in the computer; thus, it is intangible, but due to its high likeness, it may be sold with copyrights. Many photographs are being sold on shutterstock.com and similar websites. This is the trading of intangible assets.

Recognition of intangible assets

Question:

Can all intangible assets be recorded as assets in the balance sheet of a company?

Answer:

No, both as per US GAAP and IFRS, there are certain conditions which need to be met for recognition of intangible assets. Once these conditions are met, then only an intangible asset can be recognized on the balance sheet of a company.

Conditions under IFRS are:

The first condition is that the cost of the asset should be measured reliably; this means that the cost incurred to create or prepare that intangible asset should be measured reliably. If it is not clear that which costs have incurred or if no expenses have incurred, the intangible asset cannot be recognized.

It is essential to reiterate the point that any internally generate asset can only be recognized at the cost. For example, if an asset is manufactured/designed/prepared for $1,000 then the asset would be recognized at the cost of $1,000 only. We cannot recognize an asset at a value higher than it’s original cost.

The cost would include direct labor and direct material etc. less any disposal value. For example, if in making a movie, actors were paid amount X and some furniture was purchased for amount Y, and this furniture was later sold at amount Z then in this case, the amount capitalized as an intangible asset would X + Y – Z.

The second condition is that it is probable that future economic benefits will flow to the entity. Now, the future economic benefits will flow to the entity only if that asset is technically feasible and commercially viable. This means that the asset should have technical feasibility, i.e., the product or item on which you are working to build, it should be technically feasible. You should not be investing in something which is not possible. IFRS doesn’t allow the recognition of such intangible assets. For example, if you are trying to build a formula to convert sand into gold and you are spending money on it, and you can measure the cost incurred, but this is something which is not technically feasible. So the investment on formula of converting sand into gold cannot be recognized as an intangible asset.

Further, as stated above, the product should be commercially viable. This means that there should be a market demand for this asset and it should be sold at a value which would be beneficial for the company. For example, customers should be willing to purchase this intangible asset (or any product made using this intangible asset) at a price which is beneficial for the company.

However, in exceptional circumstances, if the technical feasibility is established and there are successful results, then that formula can be recognized as an intangible asset.

Other than the regulations and rules, let’s talk about some practices about intangible assets. Do companies always want to recognize intangible assets? No, not necessarily. Especially if the amounts are small, companies and management would prefer to charge out this expenditure in profit and loss account. This accounting approach is adopted because recognition would lead to further requirements such as calculation of amortization in small amounts every year.

All intangible assets (other than goodwill) need to be amortized over their useful life. Amortization is simply another name for depreciation. However, the depreciation is for tangible assets, while amortization is for intangible assets. This is the difference between amortization and depreciation.

If it has been established that accounting entries need to be passed and asset needs to be recognized, then initial recognition of intangible assets should be recorded as Debit: intangible asset and Credit: Bank (for the amount spent on intangible asset).

Goodwill is the most famous example of intangible assets. However, it is a unique kind of intangible asset. Goodwill is the market value of the name of a brand. Let’s say that you purchase an iPhone just because of the goodwill of Apple. This is something other than all other tangible and intangible assets. Please read our detailed article on goodwill to understand it’s nature, calculation, impairment etc.

It is important to note that financial assets (stocks, shares, debentures, loans, receivables, etc.) are not generally classified as intangible assets. They are separately dealt with as financial assets and have their separate accounting treatments.[/vc_column_text][/vc_column][/vc_row]

Business & Finance

What is an accounting transaction and an accounting event?

Post author By admin
Post date December 4, 2019

[vc_row][vc_column][vc_column_text]The word ‘transaction’ is commonly used in business and finance circles. We hear sentences like “how many transactions you did today”, “how much are your monthly transactions”, “What is the value of this transaction” and “I have not done any transaction recently” etc.

If we try to put a formal definition of a transaction, it would be something like this:

“a transaction is a performance of a deal between two or more parties having a financial impact which can be measured reliably.”

An easy example would be: Company Dokia purchases one laptop from Walmart for $500 on cash.

Now, we need to dig down deep into this definition to understand it’s components:

First of all, it is a ‘performance of a deal’. So, it is not merely entering into a deal or doing an agreement or a contract. Instead, the transaction is an ‘actual performance’ of that agreement or arrangement. Just entering into a contract would not be considered as a transaction.

The second important point is that it has to be between two parties, at least. One person cannot do a transaction on its own. Let’s say that if sales department borrows a car from the HR department for three months, this cannot be recorded as a transaction in books of accounts of the company, because both departments are under the same organization.

Thirdly, there should be a financial impact. In the above-given example of purchase of laptop from Walmart, there is a financial impact on Company Dokia. However, if there is a deal performed between two entities without any economic impact, then this is not an accounting transaction. For example, Company Dokia makes a deal with Walmart to invite each other’s CEOs at their respective premises and show them around their offices. So, in this deal, there is no (apparent) financial impact. So, this deal of visiting CEOs will not be recorded and considered as an accounting transaction.

It is essential to understand the difference between an accounting transaction and an accounting event. Sometimes, an event may happen, which has a financial impact. So, this event shall also be recorded in the books of accounts of the organization. However, this cannot be termed as a financial transaction. For example, if an employee of company Dokia accidentally drops the laptop purchased from Walmart, this will be considered as an accounting event and will not be considered as an accounting transaction.[/vc_column_text][/vc_column][/vc_row]

Executive summary

Direct Costs and its types (definition, examples and explanation)

Direct variable cost

Example 1

Example 2

Example 3

Example 4

Example 5

Direct fixed Costs

Example 1

Example 2

Example 3

Example 4

Example 5

Indirect Costs and its types (definition, examples and explanation)

Variable indirect expenses

Example 1

Example 2

Example 3

Fixed indirect expenses

Example 1

Example 2

Example 3

Final Remarks

Shares:

Capital:

Share capital:

Ordinary share capital (or common stock):

Preference share capital:

Authorized share capital:

The nominal value of shares:

The market value of the shares:

Issued Share Capital:

Issuance of share capital:

Share certificates:

Subscribed share capital:

Paid-up Share capital:

Called up share capital:

Callable share capital:

Share premium:

Issuer company:

Capital reserve:

Misconception 1: External auditors are responsible for the detection and prevention of frauds and errors:

Misconception 2: External auditors are checking and reviewing all the transactions of a company

Misconception 3: External auditors report all errors found in their audit report

Misconception 4: External auditors ensure that financial statements are free from errors and are accurate

Misconception 5: External audit is a guarantee that there is no financial fraud happening in the company

Misconception 6: External audit is a confirmation that the operations of a company are being conducted most efficiently and effectively.

Misconception 7: A good external audit report indicates a good management strategy of the organization

Misconception 8: A clean audit report means that the company’s chances of success and future profits are high

Misconception 9: A clear external audit report from external auditors means that the company is paying its taxes correctly

Misconception 10: External auditors claim that their report is a guarantee of accurate financial reporting.

General examples of prepaid expenses

Rent paid in advance:

Medical Insurance paid in advance:

Subscriptions paid:

Prepayments for goods or services:

Training program:

Software fee:

Trade license:

One comprehensive example of prepayment

Further important points

Identification of audit risks on trade receivables

Audit procedures on trade receivables

Ageing of receivables

Audit documents related to trade receivables

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Introduction and examples of intangible assets

Recognition of intangible assets

Question:

Answer:

Conditions under IFRS are: