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Archive for the ‘Accounting’ Category

Accountancy is a branch of management which studies, how an organization tracks its income and expenditure over a course of time. Accounting plays a key role in presenting a good financial image of an organization by properly balancing its books on regular basis. Apart from balancing books on a regular basis which is essential for any organization, it gives a clear picture of expenses incurred, profits earned and help evaluate plans and make financial plans and budgets for the future. Every organization relies heavily on their accounting department and accounting firms to play the role of balancing books and keeping the finances under control and provide the organization with financial stability.

Accounting is the most important aspect of any business; hence there is a lot to learn, in an accounting profile, especially how a business really works. If you aspire to one day climb to the top of the management hierarchy and see yourself a CFO [Chief Financial Officer] or an MD in the next 15 – 20 years probably, then accounting profile, provides you the kind of challenges and opportunities that will groom you to reach those heights. It is no coincidence that most modern day CFOs, CEO’s and MDs of top companies and financial firms come from an accounting background.

Accounting jobs are always in demand such is the nature and significance of the work. If you are looking to kick off your career as a fresher, then most probably you join a small or a medium size accounting firm as an accounts executive. While the compensation might not be the best, you will reap benefits from the training you will receive and experience while working with them. Instead of an accounting firm, you can also opt to join internal accounts department of the firm. This will provide you job stability and will give an opportunity to understand the business and grow within the organization.

If you are an MBA or have a post-graduate degree specializing in finance, then you might as well opt for starting your career as a junior financial researcher in a firm. For recent graduates who have also done their internship starting as a junior financial researcher in any firm would provide the perfect platform to gain experience and learn. The profile requires the candidate to have sound analytical and research skills, with profound ability to solve quantitative and numeric problems and ability to understand the financial market. If you are recruited from your college campus, then your grades and internship credits also play a vital role here.

Now, we look at the most prestigious accounting job profile, which offers lucrative benefits and higher compensation packages, a CA or Chartered Accountant profile. As we understand, there is a high demand of CAs in today’s market and most firms are prepared to cut down their hiring as a part of cost cutting and looking to hire CAs on temporary, contract or even freelance basis, a more reliable resource, giving rise to a sudden boom in this sector. CAs are different from normal accountants, as they have to clear a 2 year program of chartered accountancy and have to work under a mentor for atleast 3 years. Chartered Accountants not only get excellent monetary benefits, but it provides a great platform to learn under the guidance of a mentor, which will play a significant role in future growth.

For beginners, who wish to choose accounts jobs as their careers, there are specialized accounting courses recommended which will benefit aspiring professionals. For candidates with high aspirations, investments and securities and also an expert in quantitative techniques for analyzing financial trends, markets and products. CFA is a prestigious degree and it is highly recommended to take a step further in their career in senior positions as a security researcher or financial advisor.

The general consensus about accounting is that it is a clear-cut method of recording business figures. This is quite a misconception. In reality, there are many choices as to what numbers are added and how the numbers are added. All this is done within reason so that the business owners can make quality decisions from the information. So what does this mean to accounting profit? First we’ll get a consistent definition of accounting profit.

Accounting profit is a fairly simple calculation, but it can easily be confused with so many other, similar, terms. The basic definition is the difference between the price of all products/services sold and the cost of providing those products/services. The area that gets hazy is exactly what costs are included in bringing items to the market. The 2 categories that costs are placed are explicit and implicit. Accounting profit is calculated using only explicit costs.

Explicit Costs are items or services that money is required to be paid for. When payment is spent directly for something it is considered an explicit cost. Every job will have different costs to account for, but some examples include wages for employees, raw materials, rent, fuel, and interest on loans.

When time is spent on one project or activity instead of another, which is implicit cost. It is also referred to as opportunity cost. Let’s say an accountant chooses to repair his car himself instead of working in his office. If the repair takes 2 hours and the accountant could have been making $100/hr filing taxes then the implicit cost of repairing his car is $200.

There are several ways to increase the gap between selling price and the cost to produce. You can concentrate on lowering the cost by shopping around for lower prices, buying 1 item in bulk, or buying bundles of items from one seller and negotiating the price. One method that has been tried and failed is buying inferior supplies. The appearance of the product will look cheaper and it will not be as durable and if a customer is unsatisfied they will turn other customers away from you.

Another way to increase accounting profit is to increase the value or perceived value to raise the selling price. This can be done a multitude of ways, depending on the product or service. Higher quality material used, better construction methods, complimentary gifts and trinkets, delivery service, or even advertising with endorsements from respected celebrities.

As previously stated, accounting profit can be easily confused with other terms used to describe profit and revenue. When both explicit and implicit costs are added together, it equals total cost. When total income is subtracted by total cost, the outcome is defined as economic profit. As you can see the only difference between accounting profit and economic profit is the implicit or opportunity cost are figure in as well.

One way of remembering accounting profit is that accountant’s generally calculate only the monetary costs needed to pay for operating expenses. This is the case with most profit calculations because a large number of times the opportunity costs vary or are undefined.

Accounting comes in essentially two flavors: cash and accrual basis.Under the cash basis, transactions are recognized when money exchange hands. When you pay bills, you recognize expenses and when you receive funds, you recognize revenues. Financial statements prepared under cash basis shows no accounts receivable or payable and no accruals

Under the accrual basis, expenses and revenues are recognized when they happen, regardless of when they are paid This method tries to match the timing of expenses with revenues associated with them. For example, suppose commissions are paid next year for sales that happened this year. In this case expense is recognized this year, not in the future, when commission is actually paid. Commission expense would be accrued this year. The term “accrual” is used to indicate that an item was recognized now as income or expense.

When you see an amount for sales and expenses on an income statement using the accrual basis of accounting, the numbers may all reflect receivables and payables, not really cash received. For instance, you see a $10,000 rent expense in the financial reports. It doesn’t mean that the firm actually paid $10,000; it could be that $8,000 was paid and $2,000 was recognized now but to be paid in the following period. In other words, the $2,000 was accrued.

Special Accounts–Expenses

You know that a large bill was paid recently, after year-end. The question usually comes up: Is this bill included in the year-end report/budget? In other words, was this expense/bill accrued at year-end? If the amount was accrued, it should be part of expenses and accounts payable in your books. In many firms, an accrued payable account is established separately from the regular payable account to keep the bookkeeping organized.

Expenses can be prepaid, such as an insurance policy that may be valid for a couple of years. Under accrual accounting, prepaid expenses are recognized as time progresses, not all at once. For example, suppose you have a $2,000 premium for a two-year policy. $1,000 is recognized each year as expense in the income statement–not the entire $2,000.

Special Accounts- Revenues

A firm using accrual accounting would handle revenue similarly to expenses. For instance, suppose you provided service this year, but you will get paid next year. You accrue revenue this year, i.e. you recognize the revenue now in the income statement because the work was actually done this year. The journal entry is to debit accounts receivable- accrued and credit the revenue-income statement account.

Sometimes firms receive deposit prepayments for work to be delivered in the future. In this case, the revenue is not recognized in the income statement this year, but when the work is performed. When funds are received, the entry is to debit cash and credit a “deposit” or “deferred revenue” account, reporting in the balance sheet. This situation is common with schools that require deposits prior to the school year –revenues are recognized in the income statement only when school starts.

Other Considerations

Another feature of accrual accounting is the concept of capitalized assets and depreciation. When you purchase a major equipment, under cash basis you would expense it all in the period it was paid. Under accrual basis, you capitalize the equipment and then depreciate it over time through depreciation. If you see “Depreciation Expense” on an income statement, the business is using accrual basis of accounting.

Some firms use a “modified accrued basis” of accounting with elements from both cash and accrual basis. However, banks and investors usually require accrual basis of accounting. Cash basis is simpler, but accrual is a much more reliable basis because it presents a more wholesome financial picture with the presence of accounts receivable, payable, accruals and other information that can give stakeholders a much clearer picture of a business.

Success in accounting learning depends on the proper understanding of the basic accounting concepts, which form the basis for the theory and practice. One of the concepts to learn and understand is Income Statement, which will be described and explained further.

Concept

Income Statement is one of the three main financial statements, in addition including Balance Sheet and Cash Flow Statement. This financial statement indicates changes in the financial position of the business for a particular period of time, i.e. month, quarter or year. In this statement net profit, i.e. increase in owners’ equity, or net loss, i.e. decrease in owners’ equity is reflected for the given period.

Income Statement is related with the Balance Sheet in the terms of net result for the period, i.e. profit or loss for the period from this financial statement goes to the Balance Sheet as an increase or decrease in Retained Earnings (result not distributed to the shareholders as dividends).

Items Included

Considering the structure of Income Statement, it is important that this statement indicates not only net result for the period, but also constituent parts, which make this result. So this statement will include the following:

Revenue: amounts earned for the goods sold or services provided Cost of Sales: cost of goods sold or services provided. In case only goods are being sold, this items will be called Cost of Goods Sold. Here all the cost which are directly related to the revenues earned are included Gross Profit: difference between two mentioned items, which indicate how much business earns from the main operations Operating Expenses: this items consists of the expenses which cannot be directly related to the cost of goods sold or services provided. Examples can be salaries of accountants, administrative office space rent and other Operating Profit: difference between Gross Profit and Operating Expenses Interest Expenses: these expenses are shown separately to indicate financial costs the business incurs and whether it earns sufficient profit to be able to pay interest on time Net Profit (Loss): this is the net result for the period. If it is positive, we have a profit. If it is negative, we have a loss.

Important to notice, that Income Statement is usually prepared on the accrual basis, i.e. income and related expenses are recognized despite the fact that cash was not yet paid or received, but based on the obligation from customers to pay for goods sold or services provided and based on the obligation of the business to pay its liabilities.

The job of a back office accountant is preserving all the records of transactions of the company and maintaining them by arranging them in a ledger book. This seems to be a tedious job to most of the companies. Hiring an accountant who has sound knowledge about the accounts is not easy. First they had to pay the agency or the ad company that will help them to find the right person. Then the overhead cost of expenses of the employee means steadfast flow of the fund. Further, to make sure that all the work is being done properly or not, the company’s arbitration is necessary. Earlier, companies used to follow this long process to resolve the matter of accounts.

However, this is the age of modern business. Herein, outsourcing plays a very vital role in contemporary businesses. Outsourcing is a way of lending services from some second party in lieu of cash. A company can outsource its business functions to other firms that render such services in exchange of money. Service will be rendered according to the instructions and time limit of the customer. When a company is outsourcing accounting services, it means that it is outsourcing the functions of accounting to some service provider that is due to deliver the service on time. Outsourcing accounting services is very common among business enterprises these days. As mentioned before, the other ways of maintaining a detailed calculation of the economic transactions of the company is monotonous and uninteresting. It is costly too. The availability of outsource companies has been a real lifesaver to both small and giant companies. Not only is this service easily available, but outsourcing accounting services is also cost effective.

To prepare a month’s financial report at the end of the month is easy by means of outsourcing accounting services. Everything is preferably done online. You have to start looking for companies that deliver outsourcing accounting services. Always go for a reputed firm to be sure of the reliability factor, because giving someone the responsibility to prepare your financial sheet will mean passing on your company’s financial details to that provider. Although, in most cases, it is secured, but to avoid any hoax, go for a renowned firm. Once, you have made up your mind about outsourcing accounting services, allow him access to your financial records. State your date and time of delivery, and it would be done on the said date without fail.

About the cost of the whole thing, outsourcing accounting services is the cheapest way of getting your accounts settled by a dependable organization. The price charge outsourcing accounting services is very less and is negotiable. Hourly charges are also there, depending on the kind of project assigned. So choose your likable option to fit your need.

Importance of Ratio Analysis

If we were look at a balance sheet or profit and loss account, how would you decide whether the company was doing well or badly? Or whether it was financially strong or financially vulnerable? And what would be you looking at in the figures to help you to make your judgment?

Ration analysis involves comparing one figure against another to produce a ratio, and assessing whether the ratio indicates a weakness or strength in the companies affairs.

The Broad Categories of Ratios

Broadly speaking, basic ratios can be grouped into five categories:

1. Profitability and return

2. Long-term solvency and stability

3. Short-term solvency and liquidity

4. Efficiency (turnover rations)

5. Shareholders’ investment ratios

Within each heading we will identify a number of standard measures or ratios that are normally calculated and generally accepted as meaningful indicators. Each individual business must be considered separately, and a ration that is meaningful for a manufacturing company may be completely meaningless for a financial institution. Try not to be too mechanical when working out ratios and constantly thinks about what you are trying to achieve.

They key to obtaining meaningful information from ratio analysis is comparison. This may involve comparing ratios over time within the same business to establish whether things are improving or declining, and comparing ratios between similar business to see whether the company you are analyzing is better or worse than average within its specific business sector.

It must be stressed that ratio analysis on its own is not sufficient for interpreting company accounts, and that there are other items of information which should be looked at, for example:

• Comments in the chairmen report and directors report

• The age and nature of the companies assets

• Current and future developments in the companies markets, at home and overseas;

• Any other noticeable feature of the report and accounts, such as post balance sheet events, contingent liabilities, a qualified auditors report, the companies taxation position, and so on

In case, consider also who you are advising, a creditor will not be interested in shareholders investment ratios.

Return on Capital Employed

It is impossible to assess profits or profit growth properly without relating them to the amount of funds (capital) that were employed in making the profits. The most important profitability ratio is therefore return on capital employed, which states the profit as a percentage of the amount of capital employed.

Return on capital employed = Profit on ordinary activities before interest and taxation / Capital employed

Capital employed = shareholders’ funds plus creditors: amounts falling due after more than one year’ plus any long term provisions for liabilities and charges

The underlying principle is that we must compare like with like, and so if capital means share capital and reserves plus long term liabilities and debt capital, profit must mean the profit earned by all this capital together. This is profit before interest and taxation, since interest is the return for loan capital.

What does a company return on capital employed tell us? What should we be looking for? There are three comparisons that can be made.

• The change in return from one year to the next can be examined

• The return being earned by other companies, if this information is available, can be compared with the return on capital employed of this company.

• A comparison of the return with current market borrowing rates may be made.

1. What would be the cost of extra borrowing to the company if it needed more loans, and it is earning a return on capital employed that suggests it could make profits to make such borrowing worthwhile?

2. Is the company making it which suggests that it is getting value for money from its current borrowing?

3. Companies are in a risk business and commercial borrowing rates are a good independent yardstick against which company performance can be judged.

However, it is easier to spot a low ratio, than a high one, because there is always a chance that the companies fixed assets, especially property, is undervalued in its balance sheet, and so the capital employed figure might be unrealistically low.

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