Author Archives: Karl

When to do confirmation letters

As a general rule the management is obliged to ensure the balances are always correct. In practice the balances are confirmed mostly once a year though, and as such you want to make sure it’s as close to year end as possible.

The best option would be to confirm the balances as at year end date. This way you ensure the statements you sign off are in fact correct. If this for whatever reason is not possible – either due to very tight reporting schedule or odd end of financial year resulting in year-end closing procedures to be in a very busy season, etc. – as close as possible to the financial year end date is the second best option.
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Picking who to send confirmation letters to

As the year end is getting closer, it is also the time to start thinking about doing confirmation letters – both for accounts receivables and payables. Whilst some may think that it’s the supplier’s problem to confirm their receivables, it in fact isn’t so. It is the management’s responsibility to ascertain all assets and liabilities balances are shown in correct amounts.

However the question of who to send the letters to still remains. As most things in life and in accounting, it depends. In case where you have numerous clients with different balances from very small to very considerable amounts, it makes sense to leave out those that are very small. The same approach applies to payables balances, however please note that it only makes sense in case there are hundreds of those balances. Just decide on a limit over which you confirm all balances and make sure that those below the set limit don’t compose a considerable amount in total.
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Basic Accounting – Phone bills

We have just received a phone bill for 150 at the start of the month. Usually they are not paid right away, but on the due date of the payment.

Accounting Entries

So first we have to “register” the phone bill. We are going to add 150 to expenses and accounts payable.

Debit Credit
Expense 150
Accounts Payable 150

Now when you have paid for the phone bill, you have given money for it, you decrease accounts payable and cash for 150.

Debit Credit
Accounts Payable 150
Cash 150

Reporting

When you receive a phone bill and you haven’t paid for it then you should add that under Current liabilities. In our example we are adding 150 under Current liabilities – Trade and other payables.
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Basic Accounting – Buying office supplies

We are going to show what entries you need to do when you have just bought yourself some office supplies for 100. As office supplies are usually used for the less than a year and they aren’t separately all that expensive, there is no point in depreciating them and they are written right away into expenses.

Accounting Entries

When buying supplies like this we need to increase Office expenses and decrease Cash by 100.

Debit Credit
Office Expenses 100
Cash 100

Reporting

We are going to assume that you had Cash of 2,000 in balance sheet before buying office supplies.

First in balance sheet we are going to decrease 100 from Current Assets – Cash and cash equivalents, resulting in Cash balance of 1,900.
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Competitors reading your report

Another interesting bunch of people reading the annual report are the competitors. They are generally looking to see how you’re doing, what are the financial ratios, market share etc. Something they also always look at is how much are you earning and what is your gross margin.

As you may have guessed, it is a fine balance this sharing information part in your annual report. On one hand the legislation, accounting and reporting framework ask you to disclose as much as possible to enable readers make just decisions. The regulation usually asks to also disclose information that is more or less confidential or something you certainly don’t want competitors to know. Either it is rental agreement terms, loan information, acquisitions pricings etc.
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Benefits of an organized annual report

There are so many things you need to watch out when preparing an annual report – complete table of content, numbered pages, proper headers, footers, appropriately ordered notes etc. And it’s only the structure of the report – the content itself needs to be neat and tidy as well – same terminology, no typos, cross-references where applicable etc. All that fuss and for what?

Having an organized annual report does have its benefits. First off it is readable to any outside party – they can follow the information from accurate table of content, trace what they are looking for by using the cross-references and if the report starts off with financial statements and they are followed by the notes, it will all also be in logical sequence. A number one goal for the annual report is to be readable, understandable and clear.
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Days payable outstanding

Another ratio to implicate the period company takes or needs depending on the situation to pay off its debt is the days payable outstanding. It is often shown in financial statements when the management comments on the overall performance for the year, but also in various materials and reports used by investors obviously.

As the formula shows ((accounts payable / cost of sales) x number of days) it clearly displays the number of days a company needs to settle its debt. Now it should be obvious that the longer the period, the longer the suppliers need to manage with their previous debt collections, any bank overdraft or other means of financing. Anything that takes longer than industry average may cause financial difficulties. Hence as a general rule, if the period is getting longer than expected, it is an indication of imminent problems to both sides really. On one hand the supplier has problems with its receivables being collected and the company owning to the supplier is having either problems with financing its debt or may lose its supplier because it may go bankruptcy due to poor accounts receivable management.
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