Category Archives: 1 Basic Accounting

Internally generated intangible asset

There are times when a company generates an intangible asset that it may feel to be separately valued. This asset may very well be a website, software or anything similar that the company uses in its business to either increase revenue or to achieve cost-efficiency. In assessing whether the asset falls into the recognition criteria as an asset and not current period expense, there are two considerations that have to be taken into account.

First off the management needs to identify the asset itself – is it software perhaps or is it a website? Alongside with this identification the management needs to be able to assess and identify the benefits the company will gain from using this asset. They need to be clearly stated and understandable.
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Interest on finance lease liabilities

Finance leases are in other words also called capital leases. Shortly of the meaning of finance lease – it’s an arrangement where the borrower chooses an asset, the finance company will purchase the asset and the borrower will use the selected asset during the period of lease. During this very same period the borrower pays to the finance company series of installments for the use of the asset. Usually the borrower will also have an option to acquire the asset, but that’s not relevant at the moment to the interest calculation methods.
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Simple interest calculation

Regardless of the fact that in Medieval Ages charging for interest was not well looked upon to say the least, in nowadays interest is something we all agree that makes sense. Moreover, it makes sense in the form that you are giving or you are given the ability to use someone else’s asset (whether its money, car or something else). From such activities interest is considered to be as compensation to the lender as he or she could have done something else with the asset, but instead it was given for you to use. As it is reasonable to believe that assets should always earn income or give value, giving it to someone else for use is just another means of an asset generating income really.
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Understanding the residual value

When first recognizing an asset on the balance sheet as a part of property, plant and equipment or part of intangibles, you should come across with the term ‘residual value’. I say that you ‘should’ because most accounting standards (at least the ones based on IFRS) are referring to the need to determine one.

The general rule is that the difference between cost and residual value is charged as depreciation over the useful life on an asset. When cost value is something that is easier to grasp as a definition, the term ‘residual value’ is too many times misinterpreted.
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Accruals – why do we need them?

As you no doubt may already know, accounting in most countries and companies is accruals based. The other method of choice is to recognize everything based on cash movement, but this usually applies to self-employed people and is very strictly regulated in most countries. Anyhow, as most of us need to use the accruals based accounting, the key thing about which is the accruals – what are they and why would you need one?

The key principle to accruals based accounting is the period in which the events and conditions happened that either resulted in an expense or an income for the company. Consequently, it’s this very same period in which those transactions and their effect needs to be recognized.

Recording accounts payables and receivables is one thing. They are based on invoices or similar source for exact amount and due time for the payment. But when it comes to liabilities or income that we are currently exactly not aware of simply because we haven’t received or sent out an invoice it gets mote trickier. To be honest, it’s not that difficult and more just about remembering things.
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Write-down of inventory

A company that is in production or selling of goods, almost definitely has some inventory. It’s an asset that the company is able to use for making sales and thus earning money. This inventory is held for certain product lines, certain markets or for certain companies and people. If something in the course of business of the company or on the market changes, this inventory is ‘under attack’. No, not literally, but the value of it through falling or non-existing sales, negative effect on selling prices or decrease in populations ability to buy those goods. All those conditions indicate that company’s inventory may be overvalued.

Essentially inventory is an asset and as such is recognized at fair value, which almost always is preferably its market value less cost needed to make the sale. If the selling prices are falling through demand-offer ratios, it may be that the company is earning losses through sales and as such the value of the inventory needs to be written down. In such case it’s written down to ‘net realizable value’ meaning market value less costs needed to make the sale. So watch out for those reducing selling prices. If your product is making losses, the first thing to do, is write-down the value, but for future purposes, think for alternatives – cease the production or sales in full, change the materials for cheaper ones or hope it’s just one-time thing and won’t happen again.
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What is recognized as ‘cost of sales’?

Making revenue and recognizing it is one thing, but against all revenue earned you most certainly incur some expenses. It’s the same with everything in the world. To earn something, you first need to give up a thing or two. So as a consequence you have just after revenue on the income statement a line labeled as ‘cost of sales’ or ‘cost of goods sold’. The naming really depends on the type of business and means used to earn revenue. Either its goods you are selling in which case the name is obviously ‘cost of goods sold’, or if its services, than you should replace the word ‘goods’ with ‘services’ and so on. But understandably not all expenses are put under ‘cost of sales’ although it may feel like appropriate. There are different types of expenses one incurs over course of business, but not all are ‘cost of sales’ obviously.
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