Category Archives: Financials

Cash in transit

When you have dealings with cash, you’ll definitely have the need to transfer physical cash to the bank on your bank account. The cash receipt is gaining an asset for sure on your balance sheet, but it’s what happens with it inside the group what matters.

The initial cash related entry may be something like this (a very simplistic one):

Dr Cash

Cr Revenue

So eventually you may have loads of cash physically at your premises. Since holding cash there may not be the safest place, you probably want to take it into the bank. Depositing the cash on your bank account is usually more useful provided you don’t have cash dealings of your own with suppliers, employees etc. In case you’re not the one taking money to the bank on your own, you will probably use a special service for this. Continue reading →

Prepayments received

As it happens, in normal course of business you may be paid in advance for something that you still have to do. You will be given resources to use and as such, you have taken a liability on your balance sheet. You are given money in return for a promise to provide a service or sell something in near future. As such the company has a legal liability and this is recognized as one.

When the prepayment is received the entry in the accounting is this:

Dr Cash or cash equivalent

Cr Prepayment received

With this you increase the liability for future actions that you have to do (i.e. revenue still to be earned) and on the other side you gain an asset (resources received).
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Prepaid expenses – how to account them

There are times when you are either asked to make a prepayment for certain services or goods, or you simply decide to make an advance payment regardless of the reason behind it. When you make a prepayment, you give away money against a promise to receive something in near future. As such the payment done is accounted for as an asset on the balance sheet. The company has a legal right to receive the service for an example, thus it’s recognized as an asset for the company.

When first making the prepayment, the accounting entry is as follows:

Dr Prepaid expense account

Cr Cash or cash equivalent

With credit you give away money and with debit you gain an asset instead.
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Non-current assets held for sale

A company may for whatever reason at any given point in time decide to give up on some of its assets. This may be due to discontinuing operations, replacement or something else, however, there are specific treatments for such assets on the balance sheet.

The first and foremost condition is that the asset must be available for immediate sale in its current condition. If it’s continued to be in use, it is questionable if the asset is in fact subject to be sold immediately.

Second condition that must be met is the fact that the sale must be highly probable. This is defined by having a selected buyers who have shown interest, existing market for the asset, reasonable price etc. For any transaction to be probable, obviously an imminent intent and an action plan must be enforced. If any approvals are required, those should also be obtained to ensure the highest probability.
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Amortization of intangibles

When the management has determined a useful life to an asset, the depreciable amount (acquisition cost or carrying value less any residual value if applicable) is allocated on a systematic basis over its useful life. In other words the value is expensed over determined months using one of the two methods available.

First things first, the amortization starts when the asset is available for use and ceases when the asset is derecognized or reclassified as held for sale. The period between those two dates is the expected period of useful live. Continue reading →

Useful lives of intangible assets

Every intangible asset must have a deemed period of its useful life. According to IAS 38 this can either be finite or indefinite. The judgment between those two is something that is done by the management based on their industry-wide knowledge, experience in the company and any other future perspectives that need to be considered. This is a management estimate and usually there cannot be a right or wrong answer. However, every estimate must be reasonable and reasoned.

Obviously an asset with finite useful life is amortized. This is now where the second judgmental area kicks in – the period itself. Will it be 2 or 20 years or something in between? There are a few things that ought to be considered when determining the period: Continue reading →

The value of bonds on the balance sheet

Simply put a bond is a form of financing and as such is an agreement to repay borrowed money with deemed interest (called ‘coupon’) intervals. So in essence bond could be considered also as a loan. However, note here that when loan payables are fairly easy to be recognized, bonds have a few things that need to be kept in mind. What is the price of one bond and what does it consist of? With loan payable it is far easier, so we will try to give you a few pointers just for the basics of bonds.
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