Category Archives: 1 Basic Accounting

Preparation expenses for commercial campaigns – how to treat them?

Most companies thrive on advertisement and need it every now and then to fuel their business. Promotions are needed either for new products, new services or just to keep people reminded about current ones. When simply buying a webpage slot or space on a newspaper or a magazine and putting up your advertisement there isn’t a long term project, television commercials usually need a bit more work. Do note here that similar approach may be used for all sorts of advertisement campaign preparation costs and essentially, if promoting your product let’s say on a magazine also has a longer and more expensive preparation period, the same approach should be used.

To fire off for an example a television campaign, you need actors, scenes with text etc. As all of them require quite a lot of money, your company is bearing significant costs just on preparation of the advertisement. Although those expenses incur in the period you seemingly receive the service, think a bit further. What is the actual service you’re buying? Essentially all those costs are done with one aim in mind, to get an advertisement campaign out to the public. This is the end result and eventually the service you are really buying.
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Prepayments for inventory – how to treat them?

Imagine a scenario (maybe a real situation for your company already or may be just happening ahead) – you are required to do an advance payment for some goods that you will be holding for sale when they arrive. They will essentially form a part of your inventory.

One part of the accounting entry is obviously Cr Cash as you give away money, but in return you get the right to retrieve assets. You have made a prepayment for it and as such it should be recognized as a part of assets on the balance sheet.

When you make prepayments for future expenses, they are recognized as prepaid expenses on a separate line under current assets on the balance sheet. However, when you make an advance payments for inventory, those payments done are recognized as a separate financial statement line item, but as a part of inventory (the entry is as follows: Dr Prepaid for inventory, Cr Cash). This way you will clearly show how much inventory your company in reality possesses.
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Accounting for prepayments – the best treatment method

On the balance sheet under current assets there may be prepaid expenses accounts, which in essence are future expenses the company has made an advance payment for. We have previously discussed those prepayments and how to initially treat them on the balance sheet (including relating accounting entries), however what we have come across during our practice, are the different treatments in terms of recognizing the expense in proper period.

Essentially, in accruals based accounting all the expenses must be recognized in the period they relate to and not when either the payment is done or when the invoice is received. When using the accruals based accounting methods, you have to make sure the expense you recognize in current period, also relates to this period (usually determinable by the essence of the expense, i.e. rental payments or advertizing on local newspaper during a specified period etc).
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Costs included and excluded from inventory

Buying, producing and storing inventory during the normal course of business means that you also have to initially price it and know what is and what is not included in the price. It would make sense to add all costs incurred while making or buying the product to the unit price, however it is not always so.

On initial recognition when goods held for sale are bought, the unit price should include all the following costs:
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Value of goods held for sale

Buying and storing inventory during the normal course of business means that you also have to initially price it and find means also to measure it in the future. When we talk about the value of inventory, we talk about two phases – initial recognition and subsequent measurement. They both have unique characteristics when it comes to policies.

On initial recognition when goods held for sale are bought, the unit price should include all the following costs:
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Subsequent measurement of financial assets

When those financial assets (like cash, bank accounts, accounts and notes receivable etc) are initially recognized, at every balance sheet date they need to be again measured. They need to have a true and fair value on the balance sheet and it may not be the value it was initially recognized with. This is called measuring and there are specific terms for certain types of assets.

On initial recognition, the instruments are either measured at the transaction price or at the present value of future payments discounted at the market rate of interest for a similar debt instrument. The last one applies to all instruments which are considered as financing assets, i.e. when the payment is deferred beyond normal business terms. Now, this is initial recognition, however, as said before, the instruments need to be measured at every balance sheet date.
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What are financial assets and how are they initially recognized?

One side of the balance sheet is called ‘assets’ and they consist of various types of assets – there are inventories, accounts receivables, cash, fixed and immaterial assets etc. When some are physical and touchable sort of speak, then others are without any physical substance. Financial instruments considered also as financial assets are those without any physical substance obviously and are defined as contractual right for an asset. Essentially they form a part of assets.

Financial instruments on the asset side of the balance sheet are for example cash, deposits, bank accounts, commercial papers and bills, accounts and notes receivable, bonds, investments into shares etc. Those are all immaterial assets which arise more or less from contractual agreements.
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