Author Archives: Karl

Accounts payable turnover ratio

The ratio widely used in financial statements as a part of management report (also comments on main ratios applying for the year’s performance) and in addition to this, the ratio used in impairment tests to measure the cash outflows.

Simply put the ratio shows at which rate the company is paying off its debt. In a way it can be called as a short-term liquidity ratio obviously, but it also shows management commitment, taking responsibility and attitude towards its suppliers. The smaller the number, the longer is the period. The longer the period is, the more time is used to pay off the debt and hence the company is keeping its suppliers at the short end with the money really. It all depends on the relationships and industry standards and practices; however, the longer you wait to pay for your suppliers, the more it’s probable that they will face financial difficulties. Obviously no costumer appreciates this.
Continue reading →

Silly mistakes in the annual report

You most probably prepare the annual report just this once in a year. For you it’s not that important as you have your everyday accounting issues and things to do, but the management, owners and maybe even some third party is so eager to get the report. Where your interest is fairly low, it is to be expected that mistakes are bound to happen. You may forget something; simply overlook mistakes or discrepancies and so on.

One thing that would prevent this from happening is obviously timely preparation and starting with it earlier, however, what also helps, is having a checklist. The more detailed the list, the better it is. It ensures you have all the right and needed stuff done, helps you to remember things you usually overlook and keep record of what is already done to the annual report. As the preparation is a long process, keeping track is crucial.
Continue reading →

Timely preparation of the annual report

Although the financial year may not yet be over, it’s most probably getting close to the end. And what happens in the end is a complete chaos and overtime. It all comes with the expense of family, your own time and sanity more or less. The closer the finalizing the annual report to the year end is, the worse it gets. You have to close the year, make all the yearend procedures, communicate and be part of audit if applicable and needed, and as if this wasn’t enough, you need to prepare, amend and present the management board with an annual report for the financial year. And all this needs to be done in a very limited timeframe.

Now to focus a bit more on the annual report – in most parts it stays the same every year. The numbers change, and all respective text alongside with them, but the structure stays the same more or less over the years. To avoid some of this mentioned above and make your life easier, we suggest starting with the preparation of the annual report already in autumn – a couple of months before the financial year ends. You may go over bits of it with your auditor to ensure there are no major amendments coming later on, put in all prior year figures, add in texts applicable to this year, make all design changes if possible and suitable and so on. Basically take the report to the stage that it only needs financial year end numbers and an update (and if needed, some new) to the texts already prepared earlier.
Continue reading →

Selling of assets

Normally, when disposing assets, the company’s management should have the aim to sell it. This way you simply don’t make a loss or get rid of an obsolete asset, but also earn something in the process. There is a really good chance that someone else may have use for it as it’s not that old for them, suits their business strategies more or they want the spare parts of it. Whatever the reason, but the party selling the asset, gets the proceeds which obviously is good in essence.

So, when the management has decided to sell the asset and in case there is a buyer, the asset is traded. It changes owners and as such the financial statements of the seller also change. It no longer possesses the asset and as such, it should also be derecognized from the financial statements.
Continue reading →

Disposing of assets

As part of everyday operations some assets become obsolete, outdated, break or simply don’t respond to company’s needs or strategic development plans anymore. What happens then is that the asset is either sold, destroyed, given away or taken apart for any possible spare parts. Either way it will not exist in its original state and nature in the company.

In accounting certain entries should obviously done as a result also. In reality the asset is more or less non-existing so in accounting it should also be written off from the balance sheet. The balances usually in financial statements relating to assets are: property, plant and equipment class in cost, accumulated depreciation and depreciation of the period (in the income statement). Now that the asset is decided by the management to be disposed, the asset is disposed from the balance sheet from this point onwards.
Continue reading →

Basic Accounting – Buying a Car

We have just bought our company a car. In this case we are going to assume that this car was paid in full right away and the useful life of it has been set to 5 years (60 months). Car purchase price was $12,000 and date it was bought, was March 1, 2011.

Accounting Entries

The car is an asset to your company. We are going to add the car under Assets – Vehicles – Debit $12,000. Next we need to decrease Cash – Credit $12,000.

Debit Credit
Vehicles 12000
Cash 12000

Now we have to calculate the depreciation for the car. The car will be depreciated for 60 months, so we will divide paid amount with months (60) – 12,000/60 = 200. This will be the amount that will be depreciated into expense every month for 5 years. The $200 will be added to Depreciation Expenses (Depreciation Expenses – Debit 200) and Accumulated Depreciation (Accumulated Depreciation – Credit 200). Adding the monthly depreciation to Accumulated Depreciation on your balance sheet decreases your Assets thus reflecting the value of the asset (over the periods it loses its value as its being used and gets older).
Continue reading →

Subsequent additions to an asset – how to treat them?

Every now and then it may happen that you need to buy something additional to an existing asset. It may either need an upgrade or addition to it, doesn’t really matter, however there are a few things that need to be kept in mind when treating these additions.

One obvious question is if it even meets the PPE definition criteria? Are you using it for more than 12 months? For an example paper to the printer is not a PPE item although it is needed for a printer to actually do what it’s meant to do. So prior to making the recognition, do think if the addition in essence is a PPE item? Is it going to be used to create revenue or decrease expenses? Will any future profits or benefits run into the company from using it?
Continue reading →