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[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:

1. Prepayments made and charging out of prepayments to P&L for that period
2. Accruals booking and ensuring the reversal of previous month’s accrual
3. Monthly Depreciation and amortization charges
4. Inter-branch reconciling items
5. System generated accounting entries for balancing books of accounts
6. Control account reconciliation accounting entries
7. Bank reconciliation entries like interest payments and receipts
8. Dividends, drawings, preference shares or any equity-related adjustments
9. The material in transit or goods received near to the closing date
10. Goods delivered or final sales made before closing
11. Acquisition entries, investment entries and goodwill
12. Impairment assessment and booking of tangible and intangible assets
13. Deduction of monthly advances
14. Monthly payroll entries
15. 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]

[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:

1. 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.
2. 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.
3. 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.
4. Classes schedule: What options are available to attend classes, is it day time, evening or weekend?
5. Online lectures availability: Is it possible to complete the program and attend lectures online?
6. 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.
7. 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.
8. Time and budget commitment: Will you be able to devote time and the budget for the specified duration of the program.
9. 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.
10. 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.
11. 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.
12. 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.
13. 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).
14. 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.
15. 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.
16. 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.
17. 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.
18. 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.
19. 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.
20. 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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What are the financial statements?

How to obtain financial statements?

What information financial statements provide?

How and why financial statements are useful?

Who prepares financial statements and how often?

Why do investors want to have a look at the financials?

 

If any of these questions keep you anxious and restless, then, I am sure you’ll find comforting answers here, plus you’ll learn a lot additional.

Accounting & finance professional often use the word of financial statements in their life. Similarly, investors, bankers and auditors use this term frequently as well. This term is also used as a short ‘financials’ only, like “where are the financials of 2010” etc. Here the word ‘financials’ refer to ‘financial statements’. If you are new to this field or want to know more details about the type of financial statements and what are their contents, you have come at the right spot.

The term ‘financial statements’ refers to a set of documents or reports which provide financial information about a business or a person. These financial statements are prepared to provide information about the financial situation of the company to external parties. Therefore, sometimes, these are also referred to as ‘external financial statements’ but usually referred to as ‘financial statements’ only (or sometimes as ‘financials’ only).

Financial statements serve below purposes for different readers:

For Shareholders: Shareholders are considered to be primary users of financial statements, they are the owners of the company, and they need to know how is their business performing. So, shareholders use these financial statements to make suitable business decisions or investment decisions.

Potential investors:

Financial statement provide information about profitability, financial strength and liquidity of the company, and potential investors can utilize financials to perform analysis and make suitable investment decisions.

Regulators and tax authorities:

Regulators and tax authorities utilize these financial statements to regulate industries and cross-check tax calculations

Competitors and Industry analysts:

Competitors and industry analysts use financial statements to understand the strategy and performance of the company.

Listed companies and other regulated companies are required to publish their audited financial statements. This the financial information of such companies become public and different stakeholders can obtain these financial statements. However, for private companies, usually the financial statements are not disclosed publicly, and only authorized parties get access to it. These authorized parties may include shareholders, bankers, tax authorities and, of course, auditors.

Financial statements usually contain the following documents (or reports):

1. Statement of Financial Position (or Balance Sheet)
2. Income Statement (or Profit and Loss Account)
3. Statement of Cash Flows (or Cash Flow Statement)
4. Statement of Changes in Equity

 

 

Statement of Financial Position (or Balance Sheet)

A balance sheet is one of the primary financial statements. This document is typically the first one in the set of financial statements. The term balance sheet is used for this document as this statement contains two sides: one is the assets side, and the other is liabilities and equity side. Both sides of the balance sheet should be equal in value and thus, balanced. Therefore, we use the term balance sheet as both sides of this statement are equal in value. All debits and credits are matching in total amounts. If a balance sheet is out of balance, then it means that it is not a balance sheet J.

This statement is also referred to as a statement of financial position as it displays information about the financial situation of the company; it provides information about the financial strength (or weakness of the company). It states how much assets a company owns and how many liabilities it owes. A balance sheet is a beautiful snapshot and an excellent presentation of the company’s assets, liabilities and equity on a single page. (Usually on a single page, though you may expect two pages also).

We can use a company’s balance sheet for calculation of various key and important ratios like current ratio, quick ratio, debt-equity ratio etc. We can use these ratios for multiple financial analysis purposes.

It is pivotal to understand that the balance sheet is a company’s snapshot of its financial strengths (or weaknesses) at a given date only. This one day’s view means that balance sheet provides the situation as of on a particular date, it is not for a specific period etc. Let’s understand that if a balance sheet is prepared as on 31 December 2010, then all the items on balance sheet would provide details of assets, liabilities and equity which are existing as on 31 December 2010. It would not include any elements which have ceased to exist on or before 31 December 2010. It will also not add any item acquired after this date.

For example, if a building is purchased by the company on 25 December 2010, then this building will appear on the balance sheet of the company as on 31 December 2010. However, if the same building were purchased on 5 January 2011, then this building would not appear on the balance sheet of the company dated 31 December 2010.

It is also good to realize that balance sheet numbers are ‘cumulative’ numbers, i.e., these balances are closing figures as at balance sheet date of all the transactions which happened from the inception of the business till the balance sheet date.

If you are planning to invest in a company (whether in it’s bonds or shares) then a balance sheet is an essential source of information which can provide critical information which will help take a right decision. For example, whether the company is highly geared or not, how many liabilities it already owe, what are it’s highest assets and how much cash the company already has, all these information are available from the balance sheet (or statement of financial position) of the company.

 

Income statement

Income Statement is one of the essential items in the financial statements. It provides a significant source of information when a company needs to explain it’s financial performance or when a competitor needs to know the sales of a company. The income statement is also essential when an investor wants to know how much is the profit for the company or when a shareholder wants to know EPS (earning per share). Similarly, when a lender wants to see the finance cost of the company, he can utilize the income statement.

The income statement is also referred to as ‘profit and loss account’ (not ‘profit or loss account’, please). The correct term is ‘profit and loss account’ (and not ‘profit or loss account’). The general structure is that the statement usually starts with the revenue figure, then deducts the cost of sales. After that, there are general and admin expenses, sales and marketing expenses and other expenses. The outcome after deduction of taxes and interest is net profit (also referred to as net profit after tax).

The income statement is also referred to as ‘statement of comprehensive income’ if it includes ‘other comprehensive income’. (As per revised IAS 1)

The income statement is usually prepared for a period, i.e., let’s say for one year. So, if the income statement is prepared for the year ended 31 December 2010, this means that the income statement is a summary of all income and expenses related transactions which happened for the period from 1 January 2010 to 31 December 2010. This periodicity is in contrast to a balance sheet which is representative of one particular day’s reflection of assets, liabilities and equity of the company, while income statement is representative of all the transactions which happened in that period (a year or quarter etc.)

 

 

Statement of Cash Flows (or cash flow statement)

The title of ‘cash flow statement’ was changed to ‘Statement of Cash Flows’ in 2007 under the amendments to IAS 1. As both names depict, the statement describes the movement of cash for a business for a given period. This statement is a useful tool to understand how much money (cash) is generated or consumed by different activities of the company. These business activities are broadly classified as ‘operating’ activities, ‘investing’ activities and ‘financing’ activities.

The statement of cash flows is usually presented at the third spot (after balance sheet and income statement) in the financial statements. The usability of this report is quite limited as compared to the first two statements.

Please read our detailed article on the statement of cash flows here.

 

Statement of Changes in Equity

This report is the fourth and last statement in the set of financial statements. After this, there are usually notes, disclosures and break-ups of different items of financial statements. Statement of Changes in Equity (SOCE) is a shareholder specific statement. It would provide information on whether there has been any change in the equity, i.e., any movement in the shareholders’ equity.

E.g., a dividend is reflected in SOCE as an addition in the dividend reserve and a decrease in retained earnings. Similarly, if new shares are issued, they will be revealed as an addition to the shareholders’ equity of the company. SOCE is especially for shareholders and provides essential information about the movement in the equity, although this statement may not be of great interest to other readers of financial statements.

 

 

General Points related to Financial Statements

Usually, a company’s financial statements are prepared by its accounts team. Depending upon the structure of the department, it is often accounts manager or financial reporting manager who is responsible for the preparation of the financial statements.

Financial statements are usually prepared for the current date (or period) as well as a comparative date (or period). For example, if a company is producing a balance sheet as at 31 December 2010, it’ll also provide figures for last year, i.e., balance sheet as at 31 December 2009. These comparative figures are provided because a comparison of the numbers can be made between two years. Thus a reader of the financial statements will be able to

In large complex organizations, it is usually the CFO who is ultimately responsible for ensuring correct preparation and presentation of financial statements. Although multiple managers and specialists support him.

In small companies, either the financial statements are prepared by the company’s accounts staff itself, or sometimes the external auditors will also provide this service to compile financial reports on behalf of the company. The preparation of financial statements is a service provided in addition to the audit of the financial statements.

As a person having an interest in accounting & finance, I would invite you to download the financial statements of multiple companies and go through their annual reports. These yearly reports would contain financial statements of the company along with other information. Many companies (usually public and listed companies) provide their financial accounts on their websites free of cost, either as a regulatory requirement or to attract more investments from shareholders). A review of these set of financial statements would significantly enhance your knowledge and quench your thirst for reviewing financial statements.

As a reader possessing an interest in accounting & finance, I would invite you to download financial statements of multiple companies and go through their annual reports. These yearly reports would contain financial statements of the company along with other information. Many companies (particularly public and listed companies) provide their financial statements on their websites free of cost, either as a regulatory requirement or to attract more investments from shareholders). A review of these set of financial statements would significantly enhance your knowledge and quench your thirst for reviewing financial statements.

 

Management Accounts

Another important concept when discussing financial statements is that whatever we read above is related to external financial statements. However, companies prepare their internal financial statements also which are referred to as ‘management accounts’. The components of management accounts are usually same i.e., income statement, balance sheet and cash flow statement etc. However, there might be some additional statements like daily cash position, flash report or product-wise profitability report etc.

These management accounts are prepared for the use of management to make the right business decisions. These management accounts are not shared with anyone outside the organization. This area of accounting is governed more by cost accounting or management accounting, while the external financial statements are dealt more under financial accounting. Our article titled Management Reporting would provide you detailed knowledge on this topic.[/vc_column_text][/vc_column][/vc_row]