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Accounts Payable Vs Accounts Receivable

AP and AR are both important accounting terms used to manage a company’s finances.

AP stands for Accounts Payable, which refers to the amount of money that a company owes to its vendors, suppliers, or other creditors for goods and services that have been received but not yet paid for. Essentially, it’s the amount that a company owes to others.

AR stands for Accounts Receivable, which refers to the amount of money that a company is owed by its customers for goods and services that have been sold but not yet paid for. Essentially, it’s the amount that others owe to the company.

Accounts Payable (AP) is a term used in accounting to refer to the amount of money that a company owes to its vendors or suppliers for goods or services that have been purchased but not yet paid for. AP is considered a liability on the company’s balance sheet.

When a company purchases goods or services on credit, it creates an accounts payable entry in its books. This entry records the amount owed to the vendor, the invoice date, the due date, and other details. Once the company pays the vendor, it records a corresponding entry in its books to reduce the AP balance and reflect the payment.

Managing AP involves processing invoices, reconciling statements, and making payments to vendors in a timely manner. Companies often have AP departments or personnel responsible for these tasks. Efficient AP management is important for maintaining good relationships with vendors and for ensuring that the company’s financial records are accurate and up-to-date.

Accounts Receivable (AR) refers to the money that a company is owed by its customers for goods or services that have been delivered or rendered but not yet paid for. It is an asset on the balance sheet of a company, representing the amount of money that is expected to be received in the future from its customers.

When a company sells its products or services on credit, it creates an account for each customer to whom it extends credit. The account is then recorded as an account receivable, indicating the amount owed by the customer to the company. The company keeps track of these accounts, and once the customer pays, the company records the transaction as a reduction in the accounts receivable balance and an increase in cash or another payment method.

Accounts Receivable are important for a company’s cash flow management, as they represent a significant portion of its current assets. Efficient management of accounts receivable is necessary to ensure that a company has enough cash to cover its operational expenses and to invest in its growth.

In other words, Accounts Payable is the money that a company needs to pay, and Accounts Receivable is the money that a company expects to receive. Managing both AP and AR effectively are crucial for a company’s financial health and cash flow management.

The AP (Accounts Payable) and AR (Accounts Receivable) processes are important financial processes in any organization. Here is a high-level overview of the typical flow of each process:

Accounts Payable (AP) Process Flow:

Purchase Request: The process begins with a purchase request from a department within the organization.
Purchase Order: The purchase request is reviewed and approved by the procurement department, which then issues a purchase order to the vendor.
Invoice Receipt: Once the goods or services are received, the vendor issues an invoice to the organization.
Invoice Verification: The invoice is verified against the purchase order and goods receipt to ensure accuracy.
Approval: The invoice is then approved for payment by the appropriate department or individual within the organization.
Payment: Payment is then made to the vendor according to the payment terms outlined in the contract.
Recording: Finally, the payment is recorded in the organization’s accounting system.

Accounts Receivable (AR) Process Flow:

Sales Order: The process begins with a sales order from a customer.
Invoice Creation: An invoice is created based on the sales order and sent to the customer.
Invoice Delivery: The invoice is delivered to the customer through various channels such as email or mail.
Payment Receipt: The customer pays the invoice either through check, credit card or other payment options.
Payment Verification: The payment received is verified against the invoice.
Payment Recording: The payment is recorded in the organization’s accounting system.
Follow-up: If payment is not received, follow-up is done with the customer to collect the payment.

Note that these are high-level overviews, and the details of the AP and AR processes can vary depending on the organization and the industry.

For Accounts Payable Interview Questions please check out below:

Accounts Payable Interview Q & A Session – Rohitashva Singhvi

For Accounts Receivable Interview Questions please check out below:

Accounts Receivable Interview Q & A Session – Rohitashva Singhvi

March 15, 2023

Accounts Payable Interview Q & A Session

Accounting by Singhvi Online

Accounts Payable interview questions by Singhvi Online

March 15, 2023

How to determine product costing for manufacturing company

Product costing is a crucial aspect of managing a manufacturing concern, as it allows businesses to determine the total cost of producing a product. Knowing the total cost of production is important because it helps in setting a selling price that ensures profitability. In this blog, we will discuss how to do product costing for a manufacturing concern.

Step 1: Determine the direct material cost:
Direct material cost is the cost of raw materials that are used to produce a product. To determine the direct material cost, you need to identify the raw materials used in production and their cost per unit. Once you have identified the raw materials used, multiply the quantity of each material used by their respective cost per unit.
Direct material cost = Cost per unit of raw material X Quantity of raw material used

Basics of General Accounting

Accounting is the process of recording, classifying, summarizing, and interpreting financial information. It is essential for businesses to keep track of their financial transactions and make informed decisions. The primary purpose of accounting is to provide financial information that is useful in making economic decisions.

Key Concepts

Double-Entry System: Each transaction affects at least two accounts. The total debits must equal total credits.
Accounting Equation: Assets = Liabilities + Equity. This fundamental equation must always be in balance.
Financial Statements: The main financial statements are the Balance Sheet, Income Statement, Statement of Retained Earnings, and Cash Flow Statement.
Accrual Accounting: Transactions are recorded when they are incurred, not necessarily when cash changes hands.
GAAP and IFRS: Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS) are the frameworks and guidelines for accounting.

Basic Journal Entries

Journal entries are the building blocks of accounting, recording the business transactions in the books.

Components of a Journal Entry

Date: When the transaction occurred.
Accounts: The accounts affected by the transaction.
Debit and Credit: Amounts to be debited and credited.
Description: A brief explanation of the transaction.

Common Journal Entries

Initial Investment by Owners
- Debit: CashCredit: Owner’s Capital
Date Account Debit Credit ------------------------------------------------ YYYY-MM-DD Cash XXXX Owner's Capital XXXX
Purchase of Equipment for Cash
- Debit: EquipmentCredit: Cash
Date Account Debit Credit ------------------------------------------------ YYYY-MM-DD Equipment XXXX Cash XXXX
Purchase of Inventory on Credit
- Debit: InventoryCredit: Accounts Payable
Date Account Debit Credit ------------------------------------------------ YYYY-MM-DD Inventory XXXX Accounts Payable XXXX
Sales on Credit
- Debit: Accounts ReceivableCredit: Sales Revenue
Date Account Debit Credit ------------------------------------------------ YYYY-MM-DD Accounts Receivable XXXX Sales Revenue XXXX
Payment of Expenses (e.g., Rent)
- Debit: Rent ExpenseCredit: Cash
Date Account Debit Credit ------------------------------------------------ YYYY-MM-DD Rent Expense XXXX Cash XXXX

Advanced Journal Entries

As transactions become more complex, so do the journal entries.

Depreciation of Equipment
- Debit: Depreciation ExpenseCredit: Accumulated Depreciation
Date Account Debit Credit ---------------------------------------------------- YYYY-MM-DD Depreciation Expense XXXX Accumulated Depreciation XXXX
Accrued Salaries (Salaries earned but not yet paid)
- Debit: Salaries ExpenseCredit: Salaries Payable
Date Account Debit Credit ---------------------------------------------------- YYYY-MM-DD Salaries Expense XXXX Salaries Payable XXXX
Prepaid Expenses (e.g., Prepaid Insurance)
- Initial Payment:
  - Debit: Prepaid InsuranceCredit: Cash
  Date Account Debit Credit ---------------------------------------------------- YYYY-MM-DD Prepaid Insurance XXXX Cash XXXX
- At month-end adjustment:
  - Debit: Insurance ExpenseCredit: Prepaid Insurance
  Date Account Debit Credit ---------------------------------------------------- YYYY-MM-DD Insurance Expense XXXX Prepaid Insurance XXXX
Unearned Revenue (e.g., advance payment received for services to be provided later)
- When cash is received:
  - Debit: CashCredit: Unearned Revenue
  Date Account Debit Credit ---------------------------------------------------- YYYY-MM-DD Cash XXXX Unearned Revenue XXXX
- When revenue is earned:
  - Debit: Unearned RevenueCredit: Service Revenue
  Date Account Debit Credit ---------------------------------------------------- YYYY-MM-DD Unearned Revenue XXXX Service Revenue XXXX
Adjusting Entries for Bad Debts (Allowance Method)
- Estimate of bad debts:
  - Debit: Bad Debt ExpenseCredit: Allowance for Doubtful Accounts
  Date Account Debit Credit ---------------------------------------------------- YYYY-MM-DD Bad Debt Expense XXXX Allowance for Doubtful Accounts XXXX
- Write-off of specific accounts:
  - Debit: Allowance for Doubtful AccountsCredit: Accounts Receivable
  Date Account Debit Credit ---------------------------------------------------- YYYY-MM-DD Allowance for Doubtful Accounts XXXX
  Accounts Receivable XXXX

Journal Entries for Provisions

1. Provision for Bad Debts

When estimating the provision:

Debit: Bad Debt Expense
Credit: Allowance for Doubtful Accounts

Date Account Debit Credit ----------------------------------------------------------- YYYY-MM-DD Bad Debt Expense XXXX Allowance for Doubtful Accounts XXXX

When writing off specific bad debts:

Debit: Allowance for Doubtful Accounts
Credit: Accounts Receivable

Date Account Debit Credit ----------------------------------------------------------- YYYY-MM-DD Allowance for Doubtful Accounts XXXX Accounts Receivable XXXX

2. Provision for Warranties

When creating the provision:

Debit: Warranty Expense
Credit: Provision for Warranties

Date Account Debit Credit ----------------------------------------------------------- YYYY-MM-DD Warranty Expense XXXX Provision for Warranties XXXX

When actual warranty claims are made:

Debit: Provision for Warranties
Credit: Cash/Inventory (depending on how the warranty is settled)

Date Account Debit Credit ----------------------------------------------------------- YYYY-MM-DD Provision for Warranties XXXX Cash/Inventory XXXX

3. Provision for Legal Claims

When estimating the provision:

Debit: Legal Expense
Credit: Provision for Legal Claims

Date Account Debit Credit ----------------------------------------------------------- YYYY-MM-DD Legal Expense XXXX Provision for Legal Claims XXXX

When the legal claim is settled:

Debit: Provision for Legal Claims
Credit: Cash

Date Account Debit Credit ----------------------------------------------------------- YYYY-MM-DD Provision for Legal Claims XXXX Cash XXXX

Example Scenario

Let’s consider an example where a company estimates a $5,000 warranty provision at year-end and incurs actual warranty costs of $2,000 the following year.

Creating the provision at year-end:

Date Account Debit Credit ----------------------------------------------------------- YYYY-12-31 Warranty Expense 5,000 Provision for Warranties 5,000

Settling warranty claims the following year:

Date Account Debit Credit ----------------------------------------------------------- YYYY-MM-DD Provision for Warranties 2,000 Cash 2,000

Provision Item Categories

Provisions are set aside for specific liabilities of uncertain timing or amount. They are recorded on both the income statement (as expenses) and the balance sheet (as liabilities). Understanding the categorization of provision items helps ensure accurate financial reporting.

Categories of Provisions

Provision for Bad Debts (Allowance for Doubtful Accounts)
Provision for Warranties
Provision for Legal Claims
Provision for Restructuring
Provision for Environmental Liabilities
Provision for Pension Liabilities

Journal Entries for Provision Items

1. Provision for Bad Debts

Income Statement (Expense):

Bad Debt Expense

Balance Sheet (Liability):

Allowance for Doubtful Accounts

Initial Entry:

Date Account Debit Credit ----------------------------------------------------------- YYYY-MM-DD Bad Debt Expense XXXX Allowance for Doubtful Accounts XXXX

Write-off Specific Bad Debts:

Date Account Debit Credit ----------------------------------------------------------- YYYY-MM-DD Allowance for Doubtful Accounts XXXX Accounts Receivable XXXX

2. Provision for Warranties

Income Statement (Expense):

Warranty Expense

Balance Sheet (Liability):

Provision for Warranties

Initial Entry:

Date Account Debit Credit ----------------------------------------------------------- YYYY-MM-DD Warranty Expense XXXX Provision for Warranties XXXX

Actual Warranty Claim Settlement:

Date Account Debit Credit ----------------------------------------------------------- YYYY-MM-DD Provision for Warranties XXXX Cash/Inventory XXXX

3. Provision for Legal Claims

Income Statement (Expense):

Legal Expense

Balance Sheet (Liability):

Provision for Legal Claims

Initial Entry:

Date Account Debit Credit ----------------------------------------------------------- YYYY-MM-DD Legal Expense XXXX Provision for Legal Claims XXXX

Settlement of Legal Claim:

Date Account Debit Credit ----------------------------------------------------------- YYYY-MM-DD Provision for Legal Claims XXXX Cash XXXX

4. Provision for Restructuring

Income Statement (Expense):

Restructuring Expense

Balance Sheet (Liability):

Provision for Restructuring

Initial Entry:

Date Account Debit Credit ----------------------------------------------------------- YYYY-MM-DD Restructuring Expense XXXX Provision for Restructuring XXXX

Settlement of Restructuring Costs:

Date Account Debit Credit ----------------------------------------------------------- YYYY-MM-DD Provision for Restructuring XXXX Cash XXXX

5. Provision for Environmental Liabilities

Income Statement (Expense):

Environmental Expense

Balance Sheet (Liability):

Provision for Environmental Liabilities

Initial Entry:

Date Account Debit Credit ----------------------------------------------------------- YYYY-MM-DD Environmental Expense XXXX Provision for Environmental Liabilities XXXX

Settlement of Environmental Liabilities:

Date Account Debit Credit ----------------------------------------------------------- YYYY-MM-DD Provision for Environmental Liabilities XXXX Cash XXXX

6. Provision for Pension Liabilities

Income Statement (Expense):

Pension Expense

Balance Sheet (Liability):

Provision for Pension Liabilities

Initial Entry:

Date Account Debit Credit ----------------------------------------------------------- YYYY-MM-DD Pension Expense XXXX Provision for Pension Liabilities XXXX

Settlement of Pension Liabilities:

Date Account Debit Credit ----------------------------------------------------------- YYYY-MM-DD Provision for Pension Liabilities XXXX Cash XXXX

Reserves vs. Expenses

Reserves are generally created for expected future liabilities or losses and are considered part of equity. They are not expenses but are allocations of retained earnings to provide for future contingencies. Examples include:

General Reserve
Capital Reserve

Expenses are costs incurred during the operation of the business and directly impact the profit and loss statement. Provisions, when initially recorded, are treated as expenses. Examples include:

Operating Expenses
Administrative Expenses
Financial Expenses

Legal Provisions and Dividends Categories

Legal provisions and dividends are essential aspects of accounting, representing potential future liabilities and distributions to shareholders, respectively. Let’s delve into the specifics of these categories and their journal entries.

1. Legal Provisions

Legal provisions are set aside for potential legal claims or lawsuits that may arise. These are recognized when it is probable that a liability has been incurred and the amount can be reasonably estimated.

Income Statement (Expense):

Legal Expense

Balance Sheet (Liability):

Provision for Legal Claims

Initial Entry to Record Provision:

Date Account Debit Credit ----------------------------------------------------------- YYYY-MM-DD Legal Expense XXXX Provision for Legal Claims XXXX

When the Legal Claim is Settled:

Date Account Debit Credit ----------------------------------------------------------- YYYY-MM-DD Provision for Legal Claims XXXX Cash XXXX

Example: Suppose a company estimates it will need $10,000 for a potential lawsuit.

Date Account Debit Credit ----------------------------------------------------------- 2024-06-01 Legal Expense 10,000 Provision for Legal Claims 10,000

Later, if the lawsuit is settled for $8,000:

Date Account Debit Credit ----------------------------------------------------------- 2024-12-01 Provision for Legal Claims 8,000 Cash 8,000

2. Dividends

Dividends are distributions of a company’s earnings to its shareholders. There are different types of dividends, including cash dividends and stock dividends.

Types of Dividends:

Cash Dividends
Stock Dividends

Income Statement:

Dividends do not appear on the income statement as they are distributions of profit, not expenses.

Balance Sheet:

When dividends are declared but not yet paid, they are recorded as a liability under Dividends Payable.
Upon payment, this liability is reduced, and cash is decreased.

Declaration of Cash Dividends:

Date Account Debit Credit ----------------------------------------------------------- YYYY-MM-DD Retained Earnings XXXX Dividends Payable XXXX

Payment of Cash Dividends:

Date Account Debit Credit ----------------------------------------------------------- YYYY-MM-DD Dividends Payable XXXX Cash XXXX

Example: A company declares $5,000 in cash dividends to be paid at a later date.

Date Account Debit Credit ----------------------------------------------------------- 2024-06-01 Retained Earnings 5,000 Dividends Payable 5,000

When the dividends are paid:

Date Account Debit Credit ----------------------------------------------------------- 2024-07-01 Dividends Payable 5,000 Cash 5,000

Declaration of Stock Dividends: Stock dividends are distributed in the form of additional shares. The journal entry for stock dividends involves transferring the amount from Retained Earnings to Common Stock and Additional Paid-In Capital.

Declaration of Stock Dividends:

Date Account Debit Credit ----------------------------------------------------------- YYYY-MM-DD Retained Earnings XXXX Common Stock (at par value) XXXX Additional Paid-In Capital XXXX

Example: A company declares a 10% stock dividend on its $1 par value stock, with 1,000 shares outstanding. The market price is $10 per share.

Date Account Debit Credit ----------------------------------------------------------- 2024-06-01 Retained Earnings 1,000 Common Stock (at par value) 100 Additional Paid-In Capital 900

Final Words

Mastering journal entries from basic to advanced levels is crucial for accurate financial reporting and analysis. By understanding these principles, you can ensure the integrity of your financial statements and maintain compliance with accounting standards.

Provisions are essential for recognizing potential future liabilities and ensuring that financial statements accurately reflect the company’s obligations. By properly accounting for provisions, businesses can better manage their financial health and comply with accounting standards.

Provisions are critical for ensuring that potential future liabilities are accounted for and that financial statements reflect a true and fair view of the company’s financial position. Properly categorizing and recording provisions help in maintaining the integrity of financial reporting.

Provisions are liabilities of uncertain timing or amount, often set aside for potential future obligations. Common examples include provisions for bad debts, warranties, or legal disputes. Creating journal entries for provisions typically involves recognizing the expense in the current period and creating a liability for the expected future payment.

Legal provisions and dividends require careful accounting treatment to ensure accurate financial reporting. Legal provisions are recognized as expenses when probable and measurable, while dividends are distributions from retained earnings. Understanding these categories and their journal entries helps maintain financial transparency and accountability.

January 1, 2023

Simple Steps to learn Accounting for Balance Sheet Preparation

Learn how simple Balance Sheet Preparation is, you will easily understand logic behind this with this Image presentation posted below:

The Accounting Equation is a fundamental concept in accounting that represents the relationship between a company’s assets, liabilities, and equity. The equation is as follows:

Assets = Liabilities + Equity

The accounting equation must always be in balance, which means that the total assets of a company must equal the sum of its liabilities and equity. Every financial transaction affects the accounting equation, and it is important for accountants to understand how transactions affect each of the three components of the equation.

Let’s look at a few examples of transactions and how they affect the accounting equation:

A company receives $10,000 cash from a customer for services rendered. This transaction increases the company’s cash account (an asset) by $10,000. Since there is no corresponding increase in liabilities or equity, the accounting equation becomes:

Assets = Liabilities + Equity $10,000 = 0 + $10,000

The company purchases $5,000 worth of supplies on credit. This transaction increases the company’s supplies account (an asset) by $5,000, but it also increases the company’s accounts payable account (a liability) by $5,000 since the company has not yet paid for the supplies. The accounting equation becomes:

Assets = Liabilities + Equity $15,000 = $5,000 + $10,000

The company pays $1,000 in cash for rent. This transaction decreases the company’s cash account (an asset) by $1,000, but it also decreases the company’s retained earnings (a component of equity) by $1,000 since the company’s net income is reduced by the rent expense. The accounting equation becomes:

Assets = Liabilities + Equity $14,000 = $5,000 + $9,000

In summary, every transaction in accounting affects the accounting equation by changing the values of assets, liabilities, and equity. It is essential for accountants to keep track of these changes to ensure that the accounting equation remains in balance.

This image has an empty alt attribute; its file name is Screenshot_10.png — Transaction Image to learn Accounting Transaction in more detail: Image for educational purpose only just used for Balance Sheet preparation

Introduction – The Accounting Equation

From the large, multi-national corporation down to the corner beauty salon, every business transaction will have an effect on a company’s financial position. The financial position of a company is measured by the following items:

Assets (what it owns)
Liabilities (what it owes to others)
Owner’s Equity (the difference between assets and liabilities)

The accounting equation (or basic accounting equation) offers us a simple way to understand how these three amounts relate to each other. The accounting equation for a sole proprietorship is:

The accounting equation for a corporation is:

Assets are a company’s resources—things the company owns. Examples of assets include cash, accounts receivable, inventory, prepaid insurance, investments, land, buildings, equipment, and goodwill. From the accounting equation, we see that the amount of assets must equal the combined amount of liabilities plus owner’s (or stockholders’) equity.Liabilities are a company’s obligations—amounts the company owes. Examples of liabilities include notes or loans payable, accounts payable, salaries and wages payable, interest payable, and income taxes payable (if the company is a regular corporation). Liabilities can be viewed in two ways:(1) as claims by creditors against the company’s assets, and
(2) a source—along with owner or stockholder equity—of the company’s assets.Owner’s equity or stockholders’ equity is the amount left over after liabilities are deducted from assets:Assets – Liabilities = Owner’s (or Stockholders’) Equity.Owner’s or stockholders’ equity also reports the amounts invested into the company by the owners plus the cumulative net income of the company that has not been withdrawn or distributed to the owners.If a company keeps accurate records, the accounting equation will always be “in balance,” meaning the left side should always equal the right side. The balance is maintained because every business transaction affects at least two of a company’s accounts. For example, when a company borrows money from a bank, the company’s assets will increase and its liabilities will increase by the same amount. When a company purchases inventory for cash, one asset will increase and one asset will decrease. Because there are two or more accounts affected by every transaction, the accounting system is referred to as double-entry accounting.A company keeps track of all of its transactions by recording them in accounts in the company’s general ledger.Each account in the general ledger is designated as to its type: asset, liability, owner’s equity, revenue, expense, gain, or loss account.We created a visual tutorial to demonstrate how a variety of transactions will affect the accounting equation and the financial statements. It is available in AccountingCoach PRO along with test questions that pertain to the accounting equation.

Balance Sheet and Income Statement

The balance sheet is also known as the statement of financial position and it reflects the accounting equation. The balance sheet reports a company’s assets, liabilities, and owner’s (or stockholders’) equity at a specific point in time. Like the accounting equation, it shows that a company’s total amount of assets equals the total amount of liabilities plus owner’s (or stockholders’) equity.The income statement is the financial statement that reports a company’s revenues and expenses and the resulting net income. While the balance sheet is concerned with one point in time, the income statement covers a time interval or period of time. The income statement will explain part of the change in the owner’s or stockholders’ equity during the time interval between two balance sheets.

Introduction to the Accounting Equation From the large, multi-national corporation down to the corner beauty salon, every business transaction will have an effect on a company's financial position. The financial position of a company is measured by the following items: Assets (what it owns) Liabilities (what it owes to others) Owner's Equity (the difference between assets and liabilities) The accounting equation (or basic accounting equation) offers us a simple way to understand how these three amounts relate to each other. The accounting equation for a sole proprietorship is: 14x-simple-table-01a The accounting equation for a corporation is: 14x-simple-table-01b Assets are a company's resources—things the company owns. Examples of assets include cash, accounts receivable, inventory, prepaid insurance, investments, land, buildings, equipment, and goodwill. From the accounting equation, we see that the amount of assets must equal the combined amount of liabilities plus owner's (or stockholders') equity. Liabilities are a company's obligations—amounts the company owes. Examples of liabilities include notes or loans payable, accounts payable, salaries and wages payable, interest payable, and income taxes payable (if the company is a regular corporation). Liabilities can be viewed in two ways: (1) as claims by creditors against the company's assets, and (2) a source—along with owner or stockholder equity—of the company's assets. Owner's equity or stockholders' equity is the amount left over after liabilities are deducted from assets: Assets - Liabilities = Owner's (or Stockholders') Equity. Owner's or stockholders' equity also reports the amounts invested into the company by the owners plus the cumulative net income of the company that has not been withdrawn or distributed to the owners. If a company keeps accurate records, the accounting equation will always be

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February 5, 2022

IFRS Standard & Interpretation Updates

Financial statement considerations in adopting new and revised pronouncements

Where new and revised pronouncements are applied for the first time, there can be consequential impacts on annual financial statements, including:

Updates to accounting policies. The terminology and substance of disclosed accounting policies may need to be updated to reflect new recognition, measurement and other requirements, e.g. IAS 19 Employee Benefits may impact the measurement of certain employee benefits.
Impact of transitional provisions. IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors contains a general requirement that changes in accounting policies are retrospectively applied, but this does not apply to the extent an individual pronouncement has specific transitional provisions.
Disclosures about changes in accounting policies. Where an entity changes its accounting policy as a result of the initial application of an IFRS and it has an effect on the current period or any prior period, IAS 8 requires the disclosure of a number of matters, e.g. the title of the IFRS, the nature of the change in accounting policy, a description of the transitional provisions, and the amount of the adjustment for each financial statement line item affected
Third statement of financial position. IAS 1 Presentation of Financial Statements requires the presentation of a third statement of financial position as at the beginning of the preceding period in addition to the minimum comparative financial statements in a number of situations, including if an entity applies an accounting policy retrospectively and the retrospective application has a material effect on the information in the statement of financial position at the beginning of the preceding period
Earnings per share (EPS). Where applicable to the entity, IAS 33 Earnings Per Share requires basic and diluted EPS to be adjusted for the impacts of adjustments result from changes in accounting policies accounted for retrospectively and IAS 8requires the disclosure of the amount of any such adjustments.

Whilst disclosures associated with changes in accounting policies resulting from the initial application of new and revised pronouncements are less in interim financial reports under IAS 34 Interim Financial Reporting, some disclosures are required, e.g. description of the nature and effect of any change in accounting policies and methods of computation.

IFRS9 Financial Instruments (2014) {Effective for annual periods beginning on or after 1 January 2018}

A finalised version of IFRS 9 which contains accounting requirements for financial instruments, replacing IAS39 Financial Instruments: Recognition and Measurement. The standard contains requirements in the following areas:

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For more information, read our previous post: Brief Overview of IFRS & How it’s different from US GAAP – Singhvi Online

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February 4, 2022

Brief Overview of IFRS & How it’s different from US GAAP

“What’s the fuss over IFRS?”

Providing a brief overview of the transition to adoption of IFRS and convergence with US GAAP. While we realize that IFRS will become a future reality, the question lingered regarding the differences between the two accounting standards. I thought it would be useful to assess the areas of major differences. In this short blog post, it will not be impossible to address all the components of IFRS but we’ll try and capture primary differences.

IFRS standards are broader and more principles-based than U.S. GAAP. This represents a hurdle for many U.S. CPA’s because we have been used to narrow “bright line” rules and guidelines on how to apply GAAP. IFRS tends to leave implementation of the principles up to preparation of financial statements and auditors. The regulatory and legal environment in the United States has been primarily responsible for narrower prescriptive interpretation of accounting rules. Adoption of IFRS will require a paradigm shift by accountants in the United States.

Financial statement presentation represents an area where differences exist. For example International Accounting Standards does not provide a standard layout as prescribed by the SEC. One of the big differences is that IFRS requires debt associated with a covenant violation to be presented as a current liability unless there a lender agreement was reached prior to the balance sheet date. US GAAP allows the debt to be presented as non-current if an agreement was reached prior to issuing the financial statements. Another difference in financial statement presentation deals with income statement classification of expenses. The SEC requires presentation of expenses based on function whereas IFRS allows expenses to be presented by either function or nature of expenses. Additional differences exist with presentation of significant items. Variations emerge with disclosure of performance measures such as operating profit. IFRS does not define such items so there can be significant diversity in the items, headlines, and subtotals of the income statement between US GAAP and IFRS.

A big area of divergence is with negative goodwill and research and development. IFRS requires that a reassessment of purchase price allocation be recognized as income while US GAAP allows negative goodwill to be allocated on a pro rata basis and can recognize the excess of the carrying amount of certain assets as an extraordinary gain. US GAAP requires research and development to be expensed immediately in contrast to IFRS which allows it to be capitalized as a finite-lived intangible asset. IFRS allows revaluation to the fair value of intangible assets other than goodwill whereas US GAAP does not permit revaluation.

There are both similarities and differences in the treatment of inventory. US GAAP allows LIFO as an acceptable costing method in contrast to IFRS which prohibits the use of LIFO. There are also some differences in measurement of inventory value. US GAAP states that inventory should be carried at the lower of cost or market. Market is defined as current replacement cost as long as market does not exceed net realizable value. IFRS allows inventory to be carried at the lower of cost or net realizable value which is the best estimate of the amounts which inventories are expected to realize and may or may not be equal to fair value.

While there are differences, the two standards boards are working to bring the two standards closer together. This should make the shift to IFRS easier when it comes time to change. One of the most significant areas where differences are being converged is revenue recognition. Currently US GAAP is more prescriptive than IFRS, especially for application to specific industry situations such as the sale of software and real estate. It will take time and effort to bring the two standards on to the same page. I looked at the two standards with the objective of understanding the key differences. The journey to convergence and adoption of IFRS will be interesting, challenging, and educational to say the least.

The IFRS: History and Purpose

The IFRS is designed as a common global language for business affairs so that company accounts are understandable and comparable across international boundaries. They are a consequence of growing international shareholding and trade. The IFRS is particularly important for companies that have dealings in several countries. They are progressively replacing the many different national accounting standards.

The IFRS began as an attempt to harmonize accounting across the European Union, but the value of harmonization quickly made the concept attractive around the world. They are occasionally called by the original name of International Accounting Standards (IAS). The IAS were issued between 1973 and 2001 by the Board of the International Accounting Standards Committee (IASC). On April 1, 2001, the new IASB took over the responsibility for setting International Accounting Standards from the IASC. During its first meeting the new Board adopted existing IAS and Standing Interpretations Committee standards (SICs). The IASB has continued to develop standards calling the new standards the IFRS.

Framework

The Conceptual Framework for Financial Reporting states the basic principles for IFRS. The IASB and FASB frameworks are in the process of being updated and converged. The Joint Conceptual Framework project intends to update and refine the existing concepts to reflect the changes in markets and business practices. The project also intends consider the changes in the economic environment that have occurred in the two or more decades since the concepts were first developed.

IFRS Defined Objective of Financial Statements

A financial statement should reflect true and fair view of the business affairs of the organization. As these statements are used by various constituents of the society/regulators, they need to reflect an accurate view of the financial position of the organization. It is very helpful to check the financial position of the business for a specific period.

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Learn more about US GAAP Click Here: Generally Accepted Accounting Principles – Rohitashva Singhvi

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February 4, 2022

Financial Accounting – Concepts

Accounting Concepts :: Assumptions & Practices

Business Entity Concept :
In accounting, a business or an organization and its owners are treated as two separately identifiable parties. This is called the entity concept. The business stands apart from other organizations as a separate economic unit.
Going Concern Concept :
A going concern is a business that is assumed will meet its financial obligations when they fall due. It functions without the threat of liquidation for the foreseeable future, which is usually regarded as at least the next 12 months or the specified accounting period (the longer of the two). The presumption of going concern for the business implies the basic declaration of intention to keep operating its activities at least for the next year, which is a basic assumption for preparing financial statements that comprehend the conceptual framework of the IFRS. Hence, a declaration of going concern means that the business has neither the intention nor the need to liquidate or to materially curtail the scale of its operations.
Accounting Period Concept :
An accounting period, in bookkeeping, is the period with reference to which management accounts and financial statements are prepared. In management accounting the accounting period varies widely and is determined by management. Monthly accounting periods are common.
Matching Concept :
In accrual accounting, the matching principle instructs that an expense should be reported in the same period in which the corresponding revenue is earned, and is associated with accrual accounting and the revenue recognition principle states that revenues should be recorded during the period in which they are earned, regardless of when the transfer of cash occurs. By recognizing costs in the period they are incurred, a business can see how much money was spent to generate revenue, reducing “noise” from timing mismatch between when costs are incurred and when revenue is realized. Conversely, cash basis accounting calls for the recognition of an expense when the cash is paid, regardless of when the expense was actually incurred.
Cost Concept :
In accounting, the cost principle is part of the generally accepted accounting principles. Assets should always be recorded at their cost, when the asset is new and also for the life of the asset.
Money Measurement Concept :
The money measurement concept underlines the fact that in accounting and economics generally, every recorded event or transaction is measured in terms of money, the local currency monetary unit of measure.
Dual Aspect Concept :
Each transactions has two aspects > Receiving the Benefit or Giving the Benefit
The dual aspect concept states that every business transaction requires recordation in two different accounts.
Assets = Liabilities + Equity
Revenue Recognition (realization) concept :
The revenue recognition principle is a cornerstone of accrual accounting together with the matching principle. They both determine the accounting period in which revenues and expenses are recognized. (Ex. Services Rendered / Goods Delivered)
Accrual Concept
Accrual of something is, in finance, the adding together of interest or different investments over a period of time. It holds specific meanings in accounting, where it can refer to accounts on a balance sheet that represent liabilities and non-cash-based assets used in accrual-based accounting. (Ex. Events are recorded as they occur regardless when cash is paid/received)
Materiality
Materiality is a concept or convention within auditing and accounting relating to the importance/significance of an amount, transaction, or discrepancy.
Consistency
The concept of consistency means that accounting methods once adopted must be applied consistently in future. That means accounting practices and policies are consistent from one period to the other.
Conservatism
In accounting, the convention of conservatism, also known as the doctrine of prudence, is a policy of anticipating possible future losses but not future gains. This policy tends to understate rather than overstate net assets and net income, and therefore lead companies to “play safe”. When given a choice between several outcomes where the probabilities of occurrence are equally likely, you should recognize that transaction resulting in the lower amount of profit, or at least the deferral of a profit.
Full Disclosure
The full disclosure requires that all material facts must be disclosed in the financial statements. For example, in the case of sundry debtors, not only the total amount of sundry debtors should be disclosed, but also the amount of good and secured debtors, the amount of good but unsecured debtors and amount of doubtful debts should be stated. This does not mean disclosure of each and every item of information. It only means disclosure of such information which is of significance to owners, investors and creditors.

Stay tuned for next blog, Be Well

February 3, 2022

What is Accounting & how it is classified?

Accounting is the systematic process of recording, summarizing, analyzing, and reporting financial transactions of a business or individual.

It serves as the backbone of any financial system, providing a clear picture of an organization’s financial health and guiding decision-making.

Through accounting, businesses can track income and expenses, ensure statutory compliance, and provide investors, management, and regulators with quantitative financial information.

Meaning of Accounting

The primary objectives of accounting include:

Recording Transactions: Maintaining a detailed record of all financial transactions in chronological order.
Financial Reporting: Preparing financial statements that depict the business’s financial status.
Decision Making: Providing data that helps in planning and decision-making for future growth.
Compliance: Ensuring adherence to laws and regulations.
Financial Control: Managing resources effectively to avoid overspending or financial shortfalls.

The Role of Accounting in Business:

Accounting not only records financial transactions but also plays a crucial role in budgeting, forecasting, and strategic planning. It allows businesses to evaluate their performance, understand cash flows, and make informed decisions to optimize profitability.

For example, an organization can use accounting data to identify which products generate the most revenue and which areas are incurring higher expenses, thus enabling the company to adjust its strategy accordingly.Accounting is the systematic process of recording, summarizing, analyzing, and reporting financial transactions of a business or individual.

It serves as the backbone of any financial system, providing a clear picture of an organization’s financial health and guiding decision-making. Through accounting, businesses can track income and expenses, ensure statutory compliance, and provide investors, management, and regulators with quantitative financial information.

Below are the Branches of Accounting:

Financial Accounting:
Financial accounting is the field of accounting concerned with the summary, analysis and reporting of financial transactions related to a business.
It includes the standards, conventions and rules that accountants follow in recording and summarizing and in the preparation of financial statements.
Managerial Accounting
In management accounting or managerial accounting, managers use accounting information in decision-making and to assist in the management and performance of their control functions.
Cost Accounting
Cost accounting is defined as “a systematic set of procedures for recording and reporting measurements of the cost of manufacturing goods and performing services in the aggregate and in detail.
Auditing
An audit is an “independent examination of financial information of any entity, whether profit oriented or not, irrespective of its size or legal form when such an examination is conducted with a view to express an opinion thereon.
Tax Accounting
For understanding tax accounting, you need to understand tax.
Tax: A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity) by a governmental organization in order to fund government spending and various public expenditures (regional, local, or national).
Tax accounting is the subsector of accounting that deals with the preparations of tax returns and tax payments.
Fiduciary Accounting
A fiduciary accounting (sometimes called a “court accounting”) is a comprehensive report of the activity within a trust, estate, guardianship or conservatorship during a specific period.
Project Accounting
Project accounting is a type of managerial accounting oriented toward the goals of project management and delivery.
Forensic Accounting
Forensic accounting, forensic accountancy or financial forensics is the specialty practice area of accounting that investigates whether firms engage in financial reporting misconduct. Forensic accountants apply a range of skills and methods to determine whether there has been financial reporting misconduct.
Political Campaign Accounting
Political campaign accounting is a specialty practice area of accounting that focuses on developing and implementing financial systems needed by political campaign organizations to conduct efficient campaign operations and to comply with complex financial reporting statutes. It differs from traditional management and financial consultancy in that it incorporates election law requirements and the unique requirements of political campaigns.
Accounting Information System
An accounting as an information system is a system of collecting, storing and processing financial and accounting data that are used by decision makers. An accounting information system is generally a computer-based method for tracking accounting activity in conjunction with information technology resources.