Finance Tips

Accounts receivable represent amounts due from customers who have purchased merchandise on credit and who have agreed to pay within a specified period or when billed by a company. Since all accounts receivable represent a portion of purchased merchandise on credit it is a given that some of the income represented within the account will not actually be received by the company. Due to this business phenomenon it becomes necessary for any company to account for this loss on the balance sheet. Commonly named bad debts expense this has become a major focal point in recent financial history because of the credit crisis in the subprime mortgage industry. For companies that issued subprime mortgages there is an internal assumption that a large portion of the accounts receivable or credit debt will not be repaid. The reason a company can handle such a large amount of risk is due to overall sales volume. By having a large clientele base revenues can be increased enough to cover the overall loss, but as recent history shows one shift in the current economic climate can have drastic consequences to not just one industry but to the global economy depending on how leveraged the world economy is to any one economic environment. In the case of the US mortgage market we found that it was not only the mortgage companies but all of the subsidiary investors which took on a portion of the risk by chasing large rewards, these risks created an overly leveraged market. As investors continued to build housing in the hope of riding increases in housing prices they created an excess in housing inventory, which in turn devalued the houses on the market as well as those being built. When localized household wealth declined mortgage lenders lost capital and the ability to fund refinancing and the necessity for an increase in the adjustable rates on existing home loans. Since there was already too much risk inherent in the market those borrowers who were questionable to begin with defaulted at an ever increasing rate until the market collapsed around them. These defaulted borrowers have to be accounted for on the books, and this is what we will take a closer look at.

When a purchaser buys merchandise on credit certain entries must be made to the accounting ledger. Let’s say NEC Inc. sells some coffee cups on credit. If we assume the cups were already produced and in inventory then Cost of Goods Sold (COGS) is debited for the manufacturing cost and Inventory is credited for the same amount, say 7,000 dollars. This takes care of the internal cost of producing those cups. Next Accounts Receivable is debited $10,000 and the Sales account is credited $10,000. Now NEC Inc. has transferred the COGS to the customer but instead of increasing cash flow it has only increased the money owed in the form of accounts receivable. Like your average consumer credit card when goods or services are sold from one company to another some form of payment timeline is agreed to, but for ease of use we will assume the retailer who purchase the cups agreed to pay the total amount in full that the end of the month. However, just few days later a natural disaster strikes and not only is the retailer completely destroyed but all possible liable parties are affected to the point where they cannot pay their debts. Now NEC Inc. has 10,000 dollars the on the books that should have become cash flow but instead will never be recouped. Continue reading ‘Matching Receivables: How to Account for Bad Debt’ »

Depreciation in accounting is used to spread an asset’s cost over the number of years it will be useful to the entity. It is used to reflect the decreasing value of the asset over time due to wear-and-tear, usage, technological outdating, etc… The original purchase affects the entity’s cash account one time. For the remaining useful life of the item, the assets are affected on the balance sheet as accumulated depreciation and the expenses are affected on the income statement as depreciation expenses. Depreciation is a way to spread the expense of an asset over the span of its useful life, as long as that span is longer than one accounting period. Many different types of assets are depreciable including tangible assets (buildings, equipment, machinery) and intangible assets (software, patents, copyrights). There are several types of depreciation methods used in bookkeeping today. A few are outlined below.

Straight-line depreciation method is graphically exactly what the name implies. It is a straight, horizontal line on a graph of annual depreciation expense versus years of life. It is one pre-determined standard amount that is divided over the estimated useful life span of the asset. This expense is then recorded once per year for the appropriate length of time. This can be calculated by taking the difference of the original cost minus the salvage value (or the amount that the item can be sold for at the end of its useful life to the entity) divided by the useful life. This calculation will give you the amount to be recorded as depreciation each year. For example, if an asset is purchased for $125,000, it’s salvage value is $5,000 ($125,000 – $5,000 = $120,000), and it is estimated to last the entity 6 years ($120,000/ 6 years = $20,000/year) an accumulated depreciation of $20,000 should be recorded each year for the next 6 years.

Related to straight-line depreciation is units-of-production depreciation. Instead of spreading the total asset depreciation over a span of time, it is spread over the amount of units it is expected to produce in its useful life. The depreciation is constant for each unit produced, but if some years are more fruitful in production than others, the amount recorded as depreciation will vary. This is most relevant with an asset that has a useful life closely related to its output. For example, if the same asset listed above was estimated to be able to produce 60,000 units of product in its lifetime ($120,000/60,000) each unit produced should be recorded as an accumulated depreciation of $2. If in 2007 the entity was able to produce 12,000 units, $24,000 should be recorded as accumulated depreciation. Likewise if in 2008 the entity was able to produce 16,000 units, an accumulated depreciation of $32,000 should be recorded for that year. Continue reading ‘Depreciation for Financial Accounting’ »

The Flaw of Accounts Receivable in Financial Accounting to Non-accountants

In my previous publication, The Unresolved Flaws in Financial Accounting I addressed some of the complex flaws in financial accounting that add to the confusion and frustration non-accountants face in trying to decipher financial reports. This time, I look at accounts receivable.

Accounts receivable is an asset account in a balance sheet. It allows a company to hold revenues and expenses within the period they occur which is a generally accepted accounting principle. This recognizes transactions irrespective of when actual payments take place. What this means is that when a firm sells on account, it considers future payments for its goods and/or services as assets thus increasing revenue.

To a non-accountant investor or stockholder, this recording appears easy to understand on a newly released balance sheet. The truth is that there are other entries that derive from the accounts receivable recording. The net realizable value of this account is the actually amount that the firm expects it will actually receive in payments. Off the back, that means that the amount recorded in accounts receivable though making assets look good will not be actualized. This amount is however an estimate based on previous experiences, trends, and ratios.

The net realizable value creates another account, the allowance for bad debt expense. This account holds the difference between what that actual accounts receivable and the net realizable value. Most firms use an aging method, usually in 30-day blocks to make adjustments to the value of their assets on the balance sheet. These uncollectible payments are described as “contra assets” because they reduce the vale of previously declared assets.

Most non-accountants do not understand the forward and backward entries and adjustments to pages and pages of detail reporting regardless of how many pages of accompanying notes there are. The question becomes, why not subtract the estimated bad debt from the account receivable entry? The problem is that though the firm knows or rightfully estimates that some payments will not be received, it cannot write-off an account unless it specifically knows which accounts will be in default.

The danger with this estimated is that if the allowance for bad debt is under estimates, then accounts receivable and net income will be overstated and returns on investments and equity (ROI and ROE) will be inaccurate. This usually is the case when an entity wants to appear conservative in its estimates of uncollectible debts. Continue reading ‘The Flaw of Accounts Receivable in Financial Accounting to Non-accountants’ »

This is a fact that many companies hesitate to increase their work force only due to the fear of managing complex payroll systems of increased workforce. Irrespective of the size of the business, every company has to manage complex payroll system in UK like managing wages and salaries of the employees, taxation, annual leave etc. that require special skill and knowledge to efficiently manage these tasks. Payroll processing task consumes most of the time of any organization that stresses and drain-out employees thereby affecting their performance and their contribution towards the organization. To get out of this traumatic experience many organizations in UK outsource their payroll task to a third party, having extensive experience in payroll related task and are served by qualified and certified accountants.

Accounting and payroll process of any organization requires complex calculations, thus there is always a possibility of error. To eliminate the chance of error and to maintain accuracy in payroll and accounting, outsourcing payroll and accounting job has become quite common in UK. A company outsourcing its payroll and accounting job can completely concentrate on their core areas of working that will eventually leads to the company’s growth and development. To choose a reliable payroll processing company, one should go for a company that hold specialization in the domain and has good reputation among its clients. Moreover outsourcing payroll work can avoid unnecessary delay in payment or can also avoid occasional errors in the payroll process.

Outsourcing of payroll task is advantageous in many respects and it frees the organization from the stress of maintaining details of every employee and they are also prevented from keeping one self updated with the employment and other important laws that keep on changing frequently. One simply has to find out a reliable company in UK that render payroll services at quite economical price and are renowned for perfection in their task. Reliable and reputed payroll companies in UK is acknowledged for their accuracy and timeliness and are trustworthy for keeping the confidential information of organizations safe and secured. These Payroll companies in UK operate without any hassle as they hold extensive experience and knowledge for efficiently managing the payroll of any company irrespective of their size and strength. Continue reading ‘Payroll Services Is Mostly Outsourced in UK for Accuracy and Timeliness’ »

Payroll service is a service that provides payroll accounting and managing solutions to companies. There are many such companies operating in UK that offer extensive payroll and accounting services to various medium and small size companies. Most of the companies in UK do not want to invest on hiring an accounting team or want to spend on creating a payroll administration process. Hence, they manage their accounting and payroll administration by outsourcing these works to payroll service provider operating in UK. The main service for the UK payroll service provider is the preparation of payroll for other businesses and this service is mostly provided by the Certified Public Accountants.

Services Rendered Under UK Payroll Services

A specialized and experienced payroll processing company in UK carries out some tedious and time consuming job of payroll and accounting that is really difficult to manage without an experienced and qualified account professional. Some of the payroll task that is associated with almost all the organizations in UK includes:

• Providing employees with the pay checks printouts on the payday.
• Depositing employee pay into employee bank accounts, whenever required.
• Maintaining and calculating employees state as well as local taxes.
• Calculating the tax amount of employers, which they have to pay, such as medical claims and provident funds etc.
• File payroll reports for employees, both quarterly as well as annually.
• Coordinate with tax authorities on behalf of organizations to deposit withheld amounts.
• Payroll service providers file annual employee tax documents.

Benefits of Availing Payroll Services in UK Continue reading ‘UK Payroll Services providing Relief from Payroll & Accounting Job’ »

The act of Barbequing or Grilling has been around as long as humans. Cavemen quickly realized that food tasted good after it was cooked over an open fire. Barbequing has become a standard American tradition for families. The reasons as clear as to why, not only does the food that comes from barbequing have a taste that is unmatched by other cooking methods, but barbequing presents a reason for families to gather together.

Gas grills work by a spark igniting the gas within the grill. Gas grills typically have a knob or button in which you push, which in turn activates a small hammer. The hammer hit’s the top of an ignition crystal. Then the burner mixes the gas with oxygen and spreads it all over the cooking surface.

Gas grills come in all shapes and sizes, which makes then ideal for just about any type of barbequing party. Smaller gas grills give you the portability needed to plan barbeque parties away from home. Larger gas grills are handy and efficient for cooking larger amounts of food quickly, and without the mess of other types of grills.

So after deciding that you indeed are in the market for a barbeque grill, there are several factors that you must consider when you purchase your first gas grill. Continue reading ‘Gas Grills Using’ »