Author Archives: Karl

Initial recognition of property, plant and equipment (PPE)

Be the reasons what they may, the management has decided to purchase an asset. It has agreed on a budget and also made certain person responsible for acquiring it. The very moment your company possesses the rights and obligations to the asset, is the moment you recognize the asset on your balance sheet.

Not taking into account any future or subsequent measurement considerations you simply recognize the asset in its cost value. Provided you have not yet paid to the supplier, the entry is as follows:
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Subsequent measurement and entries for finance lease on financial statements

After initial recognition you end up having an asset and a liability on your balance sheet. Now when it comes to subsequent measurement and entries, there are a couple of things relevant to it.

First off is the depreciation. The asset is depreciated the same way as every other asset in the group it was recognized in. Also the useful lives are determined the same as to every other similar asset the company is holding. As a general rule though the useful life should never be longer than the rental period.

The entry every month:

Dr Depreciation expense

Cr Accumulated depreciation

The lease liability is treated as every other long-term liability essentially. Short-term part of it is the amount due in next 12 months and everything else is long-term.
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Initial recognition of finance lease

When you have worked out your contract and deemed it is more a finance rather an operating lease, you need consider it as your own asset. “Finance” essentially means that someone else financed the purchase of your asset. As a result, this ‘someone’ is leasing the asset out to you asking for a rental fee. In accounting this is called a finance lease liability as in essence you acquired an asset with third party resources.

As you no doubt can already figure out, the first steps are to recognize both the asset and the corresponding liability on the balance sheet. The very first entry is as follows:

Db PPE (into the group the asset most suits and in the amount yet to be paid for the asset)

Cr Finance lease liability (the amount yet to be paid for the asset)
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Finance lease – when can we talk about finance lease?

When operating lease is really straightforward and only comprises of one linear expense on the income statement, finance lease is a bit more complicated than that and also comprises of couple of other financial statement lines being affected.

Before we can however start digging deeper into recognizing the finance lease on the balance sheet, we need to determine when we are even talking about finance lease. There are a couple of situations which usually indicate that the contract should be accounted as a finance lease (although the name of it may be ‘operating lease’). Mind you that if already one of those conditions is met, it is high chance the lease is in essence a finance lease.
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Generally speaking of leases – finance and operating leases

You may encounter leases in all sorts of businesses. It can be to lease machinery for production, a car for everyday use or small office supplies like a coffee machine. As such when we talk about leases and leasing, we essentially mean gaining a right to use an asset.

When you lease an asset, you regularly pay a certain amount to the lessor for the right to use the asset. However, in certain types of leases you may also get the obligation to take care of maintenance and all similar costs, so in essence, in addition to the right to use the asset (‘reward’), you also gain the risks. In accounting, the leases where substantial risks and rewards transfer from the lessor to the lessee are called ‘finance leases’. When defining ‘substantial’, we do mean on the scale it is incidental to the ownership itself.
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Counting sheets

When performing the stock count, people doing it need to be able to write down the amounts they have counted. While writing essentially isn’t a problem, a few things need to be kept in mind when dealing with sheets the results are written onto.

Since you want the whole process to be as fair and correct as possible, your count sheets should include as minimal information as possible. However, depending on the type of inventory, there may be couple of specifics you want to consider on the counting sheets.

When there are different types of inventory in stock, you might want to put the unit type on the count sheet – i.e. pieces, boxes, kilograms, tons, meters etc. This way you ensure that the persons counting the stock do know in which units it should be counted.
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Planning the physical stock count

With owning inventory comes also the responsibility to confirm its existence and obviously also the fact if everything in storage is also accounted for on the balance sheet. The way to do it is to perform stock counts every now and then. Depending on the stock level (i.e. how many items there are) and also the turnover and nature of the goods, it may be that stock counts are done on monthly basis or only once a year.

Normally in large production companies with thousands of items on their stock listing the stock counts are done more frequently than in companies with minimal stock. Also the lower the stock turnover the less frequent are stock counts obviously. As a general rule, the stock count needs to be done at least once a year and close to the end of the financial year.

The reason behind this is that you want to be sure of the stock levels on your annual financial statements so hence the closest date you pick to the financial year end, the better.
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