Finance Tips

The most common form of privately owned companies, basically in Ireland or United Kingdom is a limited company which is actually a corporation whose shares are held responsible for the Liabilities the companies have. The same case would be with Proprietary Company Ltd which works in Australia. But here if a company has Ltd word at the end of the company’s name would represent that the company is a public company and is to be listed in ASX. The reason behind this factor is plc which Australia does not have.

Like every other thing, the limited has its own pros and cons. There are specific advantages for the members, in being a limited company but disadvantages too, over the other kind of business and as a result several factors are responsible for these things. In comparison to partnership or sloe ownership, limited companies have to do much more paperwork. Also, they are governed by several different sets of rules. Also, several times limited companies are considered as investors unless or until members of the limited company participate in different chores of the companies and contribute in the running of the company. Shares of the members of the company are taken and considered as security in case the members are investors. Also, more and more paperwork is required with regulations unless there is some exemption granted to the company. This is because of the Rules of the Securities and Exchange Commission which applied for all the limited companies.

But on the other hand, the liability of the members of the company is limited. Apart from these advantages, members cannot be held responsible for the debts over their limited company because of the rules of SEC which consider it as separate individual with its own right. Limited companies are held responsible for the debts it incurs and are not the liabilities of its members. So, they actually work more or less like corporation. But certain limitations are obligatory. Continue reading ‘Limited Company: Facts and figures’ »

Understanding the concept of depreciation as it relates to financial accounting can be misleading to students learning how to interpret company financial statements. For instance, people tend to look at depreciation as the de-valuation of a fixed asset, and this assessment is supported by the Webster Dictionary meaning of depreciation; to lower in estimation or esteem. But depreciation, as it applies to financial accounting, means something totally different from determining declining market value of an asset. I had always thought the word depreciation meant diminishing value, and I visualize the lawn mower in my garage depreciating, or declining in market value each year. On the other hand the Seagull S6 Original guitar I bought 7 years ago for $329.00 is worth about $399.00 today. It looks and plays as good as the day I bought it. If I generated revenue playing the instrument I could allocate a certain percentage of the purchase cost of the guitar towards the revenue, resulting in a reduction of income and a corresponding reduction in my tax liability. In actuality depreciation is the application of the matching principle through the partial allocation of non-current asset costs to the revenue generated during the accounting period.

The accounting process involved with the allocation of the asset cost is not as straight forward as one might think, but it is accomplished both systematically and logically using either straight line or accelerated methodologies. The straight line method of depreciation is calculated by subtracting a non-current asset’s estimated salvage value from its cost, then dividing the result by the asset’s anticipated years of usage. This is the simplest and most widely used method of asset depreciation and works well for reporting income to stockholders since it results in lower expenses, and leads to greater reported income. The mathematical calculation of annual depreciation expense using the straight line depreciation method is demonstrated below:

Annual depreciation expense = Cost – Estimated salvage value / estimated useful life

Conversely, companies facing large tax burdens would adopt one of the accelerated depreciation methods, perhaps the declining balance method. This depreciation method doubles the straight line depreciation amount, and then the same value is applied to the un-depreciated amount in subsequent years. The result is more depreciation occurs in the earlier years of the assets life. This is particularly useful for depreciating assets that might be replaced before the end of their useful life; things like computer systems. For example a copy machine is purchased for $20,000 with an expected life of 5 years. Notice the salvage value does not enter into the equation as it does in straight line depreciation. The mathematical calculation of declining balance depreciation is demonstrated below: Continue reading ‘Understanding fixed asset depreciation’ »

Managing a small business involves many roles and responsibilities. In today’s rapid business environment, running a small business demands quick and efficient business handling skills and strong financial management solutions to sustain profit. Sometimes small business owners are forced to handle several things at once to achieve their business targets. They have to juggle between various roles such as Sales, Customer Interaction, Product Development and the most important part of any business; Bookkeeping and Financial Management. Handling all the tasks may be simple when you are in start-up stage. However, if your business started to grow in size and volume, it is better to find some cost-effective account receivable management solutions to chase progress, instead of spending time in same routine billing tasks and responsibilities.

It is a well known fact that, “a properly managed account” is the secret to any business success. But to maintain such accounts, it requires dedicated time and resources. It involves various tasks such as billing, invoice generation, sending the invoice to customers, collection of payments and follow-up for dues. All these accounting activities require some professional attention and efforts. For many small business owners, they don’t find enough time to manage both their company finances and business together. ‘Hiring professionals’ such as CPA is one of the better options to consider for managing your business accounts. However, if your company is too small or if you are looking for some cost-effective solutions, you can contact some professional account management companies that offer better finance management for nominal service charges. Continue reading ‘Account Receivable and Billing Service for Small Business’ »

In accounting terms depreciation is the distribution of an assets cost over its useful life. In other words when a firm purchases an asset it has to make the decision if the asset will economically benefit the organization for more than a year. If the answer is yes than the firm would add this asset as a non current asset on its balance sheet, and would commence depreciating this asset over its useful life. In depreciating the asset the firm is subtracting the value (or the original cost) of the asset that was originally booked when the asset was purchased (under the non current asset section of the firm’s balance sheet) and is then expensing (the calculated accounting period depreciation amount) from the firms revenues earned in the same accounting period. The firm is in essence matching the cost (or value in terms of assets) against the revenues earned by the asset use. Many methods exist to calculate depreciation but I am going to focus on two of the more popular methods: Straight Line and Double Declining Balance.

Straight Line:

In the straight line depreciation method the total cost of the depreciable asset is subtracted from the salvage value of the asset. This number is then divided by the useful life of an asset (in years) to determine the amount will be depreciated from this asset each year. An example of this would be if a firm where to purchase a piece of equipment that cost $5,000 and the salvage value of the asset is calculated at $500 ; the amount to be depreciated would be $4,500 ($5,000-$500=$4,500). The useful life of this piece of equipment for this example is 4 years. Using this data we would calculate the yearly depreciation of this asset to be $1,125 (which would represent a depreciation percentage of 25% per year). Continue reading ‘Tax Benefits of Using Different Depreciation Methods’ »

The financial statement analysis process provides a systematic approach for extracting and evaluating the accounting information needed for a specific business purpose. Although every analysis is different, the process used is likely to be similar.

The financial statement analysis process includes establishing the goal or goals that the analysis is supposed to achieve which helps draw the analyst’s attention to the most relevant information. Typical general goals include screening, diagnosis, forecasting, and reconstruction. A full review of the financial statements and the notes produces a rounded view of the company and may call attention to specific areas that should be analyzed in detail. The selection of techniques to generate the information required depends on the goal of the analysis .As well as ratios, common techniques include common-size statements, vertical analysis, and horizontal analysis. The application of appropriate techniques is often a mechanical process, although care should be taken that differences in ratio calculation, accounting policies, asset valuation, and so on are understood so that a valid comparison between companies can be made. Finally, interpretation of the results requires putting the results in context- for example, by comparing results with industry benchmarks. Continue reading ‘Financial Statement Analysis’ »

Let us start with a simple question. When is it best to use the straight-line method or the Accelerated method when reporting depreciation? But, to answer this question the quadrant would need to understand the differences between the two. Recognize the benefits and faults of each method when put into practice. Is the straight-line depreciation method better suited for tax purposes or should it be used for financial reporting? The quadrant could look to industry; seeing that the straight-line method is used for reporting to stockholders by most firms. To see why we would need to study how the straight-line method works and why it is better used for financial accounting.

The key to understanding anything is to always start with the basics. The simple mechanics of how the straight-line depreciation method works and even what depreciation is. Simply defined depreciation is a term used to spread the cost of an asset over a span of several years. In other words, it is the reduction in the value while that asset is being used by the company or organization. The straight-line depreciation method is one way of recording this reduction in value. This method calculates the annual depreciation expense by taking the cost of the fixed asset minus the scrap value of that asset then dividing by the life span (the number of years the fixed asset will be in use). For example, a fixed asset that depreciates over six years is purchased by a firm. The cost of that asset is $35,000 and it has a scrap value of $5000. The calculated annual depreciation expense will be $5000. This method is used in financial accounting because it allows for the firm or organization to report a higher net income in the earlier years to the stockholders. Financially it makes the company or organization look better to current investors and future investors. But for tax purposes it might not be the company or organization’s first choice for recording depreciation. Often the company or organization will use a method such as the double declining depreciation method because of its benefit to maximize the early tax deduction. Continue reading ‘Straight-Line or Double Down Depreciation Method?’ »