Category Archives: 1 Basic Accounting

Whether to depreciate an asset into expenses over a shorter period or fully write it down or off from the balance sheet?

I can see where such a situation may arise from. There’s an asset you’re no longer using and you’re more than likely to either sell it to the scrap yard or if that’s not an option, just get rid of it. It’s no longer usable, requires enhancements, repairs or whatever for it to be usable and as such, it’s not generating any cash flows for your company.

The question is just in the sense that you need to do something with the asset and not bluntly continue depreciating it as you’ve been doing up to this point.  Continue reading →

What’s this “cash generating unit” I hear and read about?

The term “cash-generating unit” or “CGU” is something you come upon when talking about performing an impairment tests for asset or group of assets, that is when you’re assessing whether the assets recoverable amount is lower of its carrying value and whether it is highest of the two, fair value less cost to sell or its value in use.  Continue reading →

Difference between “value in use” and “fair value less cost to sell”

There are two types of values one can find for an asset when we talk about an assets recoverable amount as compared to its carrying value. When we compare the carrying value with the recoverable amount, the latter is considered to be highest of the two, either “value in use” or “fair value less cost to sell”.

By definition “value in use” means the present value of the future cash flows expected to be derived from an asset, where “fair value less cost to sell” is defined as the price that would be received from selling the asset less any costs required and needed to make the sale.  Continue reading →

How should I treat spare parts for machinery in use?

Say you’re using machinery for which you occasionally need spare parts to keep the equipment up and running. It is one thing if you buy the spare parts as they’re needed (they’re expensed in such a situation as they’re bought), however what if you have stocked on some of the parts since they’re either harder to get or the shipment period is too long for the production / usage of the machine to be halted.

Those spare parts may “move” that is they’re used very rarely and only if your equipment breaks down. Should those items be accounted as slow moving stock and valued to zero in your inventory? It is one way to look at the matter, however there’s also another option.  Continue reading →

Assessing the collectability of an individual receivable balance

You’re required most likely by your local accounting policies to assess the collectability of your receivable balances. Normally it’s expected you make the assessment for individual balances based on conditions and indications present.

Such assessment should be made for each balance based on what you know of the client, the economic situation in general, of the client as well as factoring in the deadlines, the volumes and recent payment discipline. The easiest balances are those that are not overdue and you have no reason to think there might be a problem since the payment discipline is good, volumes are stable and so on.  Continue reading →

Writing down group of receivables

It is one thing to write down specific receivables, but what if you also have a considerable amount of smaller receivables (both the balance in total and the quantity of balances it comprises of)? You’re expected to assess each individual receivable balance when considering their collectability, but it’s not feasible that you go over each say 100 balances.  Continue reading →

Inventories in either their cost or net realisable value

Something to note in your everyday accounting is that your inventory should always be accounting it’s lower or either cost or net realisable value. I know that you may have already known that, but are you really accounting your inventory accordingly?

If you’re adding some expenses to your cost of inventory you’re treating it most probably pretty accurately. That is of course if those expenses are really relating to inventories at hand. However, when you’re comparing the cost against the selling price of this specific item, are you earning profit or loss? Is the realisable value higher than the cost?  Continue reading →