Author Archives: Karl

Expenses for services rendered

When you’re purely in the field of selling services rather than goods, you clearly don’t have physical inventory, but you still sell something. That something is effectively time and what’s being done within the time. Of course to some extent it’s also materials used in the process, but they are marginal to the situation. So, as such your expenses are mostly employee related, but also services bought from third parties that are supportive to the end service you’re providing.

Now whilst with the employee related expenses the accounting is simple – they are charged to expenses when the employee has done his or her job – normally as a monthly wage, with services bought however the accounting is a bit more tricky. Let’s say that you’re providing commercial campaigns (i.e., TV commercials, etc.) for big companies and for that you sometimes need to buy preparation work (i.e., the TV commercial material) that’s going to be launched at a later date. Just to make sure you’re going to meet all deadlines, you’ve already asked the supplier to prepare the video. Now that you receive the video, you also receive an invoice for it. The accounting entry for this transaction is as follows:
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Buying goods held for sale

When your company is dealing with goods, as in purchasing and selling them, something you will have in your accounts is the inventory. Now whilst one thing is their physical safety and keeping, the other thing is the accounting that’s surrounding them.

Goods, when bought, are recognized on your balance sheet when the risks and rewards have been transferred and as such, are recognized at cost. The accounting entries for inventory related transactions are as follows:
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Receiving the money for the sale

You have made the sale and since your customer didn’t pay in cash at the spot of making the sale, you did recognize a receivable against the customer on your balance sheet. All is fine and good and now the date for the real payment arrives. Your customer is a decent company and it’s going to pay up its debt in due time. As such, the accountant over there is making a bank transfer to send the money to your account. The moment you can actually see the transfer is when it arrives to your account, however.

So you open your bank statement for the period (i.e., day, week or a month) and notice that the payment has arrived. The accounting entry for this should be as follows:
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Making the sale

One thing is the selling process, like agreeing over the goods, their price and related conditions, but the other part of the sale and something we’re focusing on, is the accounting treatment of a relevant sales transaction. At the end of the day companies are making sales to earn profits, so accounting for the sale is equally important to ensure the sale is in fact helping to make profits in the accounts. Now, in a regular and most common situations the treatment itself is fairly same.

When the agreement has been reached, the seller usually either ships the goods or renders a service, whichever the case may be, and accounts for the sale. Accounting for the sale is done as follows:
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Presenting interest received on the statement of cash flows – finding the right amount

When you have given out a loan, you should normally also get interest from the loan. The loan interest is usually something that is charged monthly or quarterly and the rate itself is for a year. That’s how the loan works, however, as it’s also cash related movement, it’s disclosed on the statement of cash flows. Now whilst we have already discussed the loan disclosure itself, something that is often mistaken, is the interest.

Namely finding the right amount to be shown as the cash inflow. No, by default it’s not the interest revenue on the statement as it’s accruals based income and not the cash movement by nature. Generally speaking, finding the right amount onto the statement is really easy. Mathematically you start from the brought forward balance on your balance sheet that’s the interest receivable. You add to this the revenue you’ve recognized over the period and take off the interest receivable carried forward at the end of the period that’s recognized on the balance sheet. The general die behind this is the presumption that the brought forward balance has been in fact collected over the period, we add the amount that should also have been collected (i.e., the revenue of the period) and take off all amounts from those two that weren’t for whatever reason collected (i.e., the carried forward balance).
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