Training on Accounts

7/31/2019 Training on Accounts

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TRAINING ON ACCOUNTSPAYABLE

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1. Accounting Concepts

...3 to 62. Accounting Conventions

....7 to 83. Account and Types

... 9 to12

4. Rules and Principles of Debit andCredit.. 13 to 165. Accounts Payable Concept.

.. 17 to 176. Types of

Expense..

...18 to 187. Budgets and Purchase

orders...19 to 208. Accounting entries from procurement to

pay21 to 259. VAT and offsetting of

VAT.26 to 2810. Withholding or Tax Deducted at source.

INDEX

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ACCOUNTING CONCEPTS :The main objective is to maintain uniformity and consistency in

accounting records. These concepts constitute the very basis ofaccounting. Following are the various accounting concepts that havebeen discussed in the following sections

v Business Entity Conceptv Money Measurement Conceptv Going Concern conceptv Accounting period conceptv Accounting cost conceptv Dual Aspect Conceptv Realisation Conceptv Accrual conceptv Matching concept

The above concepts are explained below in brief

TRAINING ON ACCOUNTS PAYABLE

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1. Business Entity Concept :

Entity means a unit. The business enterprise and its owners are two separateentities. Thus the business and the personal transactions are maintainedseparately

2. Money Measurement Concept :

This means all the transactions should be measured in terms of money only that

is in the currency of a country. In our country such transactions are in terms ofrupees.

3. Going Concern concept :

This concept states that a business firm will continue to carry on its activities foran indefinite period of time. In simple words, the business will have the

continuity life.

4. Accounting period concept :

All the transactions are recorded in the books of accounts on the assumption thatprofits on these transactions are to be ascertained for a specified period


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5. Accounting cost concept :

This concept states that all the assets purchased should be recorded in thebooks at the cost price which includes transportation, installation etc., and notat its market price. This cost is also known as historical cost

6. Dual Aspect Concept :

It provides the very basis of recording business transactions in the books ofaccounts. This concept assumes that every transaction has a dual effect, i.e. itaffects two accounts in their respective opposite sides. Therefore, thetransaction should be recorded at two places. It means, both the aspects of thetransaction must be recorded in the books of accounts. For example, goodspurchased for cash has two aspects which are (i) Giving of cash (ii) Receiving ofgoods. These two aspects are to be recorded.

7. Realisation Concept :

This concept states that revenue from any business transaction should beincluded in the accounting records only when it is realised. In short, therealisation occurs when the goods and services have been sold either for cashor on credit. It also refers to inflow of assets in the form of receivables.


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8. Accrual concept :

The meaning of accrual is something that becomes due especially anamount of money that is yet to be paid or received at the end of theaccounting period.9. Matching concept:

The matching concept implies that all revenues earned during an

accounting year, whether received/not received during that year and allcost incurred, whether paid / not paid during the year should be takeninto account while ascertaining profit or loss for that year.


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ACCOUNTING CONVENTIONS :

Conventions are the customs and traditions that act as a guide to the preparationof the financial statements. Following these conventions leads to clear andmeaningful financial statements. The conventions followed to prepare accountingstatements are the :

1. Convention of Full Disclosure2. Convention of Materiality

3. Convention of Consistency4. Convention of Conservatism

These are briefly explained below.


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1. Convention of Full Disclosure : The accounting convention of full disclosure impliesthat accounts should make a full disclosure of all monetary or financial information that

can impact decision making of different parties. This accounting information is of interestto the management, current and potential investors and current and potential creditors ofthe business.

1. Convention of materiality : The convention of materiality proposes that whileaccounting for various transactions, only those transactions should be considered whichhave material impact on the profitability or the financial status of the organization. Foreg., insignificant transactions or items, such as postage stamps lying unused, at the end

of the accounting period will be ignored. Material information is the information thatenables any prudent person to arrive at a decision.

1. Convention of Consistency :The convention specifies that the accounting practices andmethods used by an organization should remain consistent over the years. Consistencyshould be maintained within the inter-related financial statement for the same date. Theperformance of the company in one year with the performance in the next year or anotheryear should be such that it can be compared. This is referred to as Horizontal Consistency.

The comparison of the performance of one company with that of another company in thesame industry can also be done. This is often referred to as Third Dimensional.

1. Convention of Conservatism : This convention means a caution approach or policy of"play safe". This convention ensures that uncertainties and risks inherent in businesstransactions should be given a proper consideration. If there is a possibility of loss, itshould be taken into account at the earliest. On the other hand, a prospect of profit should

be ignored up to the time it does not materialize. On account of this reason, theaccountants follow the rule 'anticipate no profit but provide for all possible losses'. On

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WHAT IS AN ACCOUNT ?:

The systematic recording, reporting, and analysis of financial transactions of abusiness.

The person in charge of accounting is known as an accountant, and thisindividual is typically

required to follow a set of accepted rules and regulations

These transactions allows a company to analyze the financial performance of thebusiness, and

look at statistics such as net profit.


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KINDS OF ACCOUNTS

The object of the book keeping is to keep a complete record of all the

transactions that take place in business like dealing with the persons,organizations', firms; possessing of assets like furniture, cash, buildings etcand paying the expense like rent, salaries and receiving incomes like discount,commission, interest etc.,

Considering the above it is necessary to keep the following accountsin order to keep a complete record of all the transactions

1. Personal Accounts2. Impersonal Accounts

2a. Real or Property Accounts2b. Nominal Accounts

These are explained below


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I. Personal Accounts :

An account of each person, firm or company with whom the

trader/business deals. In simple, the accounts opened in the name ofpersons are called Personal accounts. Here the word person is used forindividuals, partnerships, companies, cooperatives, state enterprises andany other institutions.

II. Real or Property Accounts :

Accounts relating to properties or assets are known as Real Accounts.

Accounts of Cash, Building, furniture, machinery, goods etc., are examplesof real accounts. They are classified into Assets and Goods. Assets aremeant for use in business e.g. Land and building, P&M, furniture andfittings. Goods are meant for resale. The trader buys goods, sells goods,returns defective goods to his suppliers and received defective goods fromhis customers

III. Nominal Account:

Accounts relating to expense, losses, incomes and gains are known asNominal accounts. Every business units incurs certain expense such assalaries, wages, postage etc. It may also suffer losses, such as loss by fire,loss by theft etc.,. It may also earn certain incomes and gains such asreceipt of commission, receipt of interest etc.,


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ACCOUNTS

PERSONAL IMPERSONAL

PROPRIETOR DEBTORSCREDITOR

DRAWINGS

ACCOUNTS

CAPITALACCOUNT

S

REAL NOMINAL

ASSETS GOODS EXPENSE& LOSSES

INCOMES& GAINS

1. Land &Building

2. Plant &

Machinery

3. Furniture&

Fixtures4. Cash

Meant foruse

Meant forsale

1.Purchase

2. Sales3.

Purchase

Returns

1.Salaries

2. Wages3.

Postage

4.Telegrams

1.Interest

Received2.

Disco

untReceived


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RULES AND PRINCIPLES OF DEBIT AND CREDIT

1. RULE FOR PERSONAL ACCOUNT :-

Debit the benefit receiverCredit the benefit giver

Debit the benefit receiver : Ex. Paid cash to Mr.Ibrahim

The two elements effected by the transaction are

1. Cash a/c. (Real account)2. Mr.Ibrahim a/c. ( Personal account)

Since cash is being paid, we can say that Mr. Ibrahim is receiving (benefit) from theorganisation. Thus we say that Mr.Ibrahim account is to be debited based on the principle

Debit the benefit receiver

Credit the benefit giver : Ex. Bought goods on credit from M/s. XYZ Co. Ltd

The two elements effected by the transaction are1. Goods a/c. (Real account)2. M/s. XYZ Co. Ltd. (Personal account)

Since goods are being bought on credit, we can say that M/s. XYZ Co. Ltd is giving thegoods (benefit) to the organisation. Thus we say that M/s.XYZ Co. Ltd is to be credit based


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2. RULE FOR REAL ACCOUNT: -

Debit what comes inCredit what goes out

Debit what comes in::- Ex. Bought furniture for credit from M/s. ABC Co. Ltd

The two elements are effected by the transaction are1. Furniture a/c. (Real account)

2. M/s. ABC Co. Ltd (Personal account)

Since furniture is being bought, we can say that it is coming in. Thus we say thatFurniture a/c. is to be debited based on the principle Debit what comes in

Credit what goes out :- Ex. Sold goods to Mr.Ram lal on credit

The two elements are effected by the transaction are1. Goods a/c. (Real account)2. Mr. Ram lal (Personal account)

Since we are selling goods we can say that they are going out. Thus we say that Goodsa/c. is to be credit based on the principle Credit what goes out

[Please ignore the effect relating to the other effect]


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3. RULE FOR NOMINAL ACCOUNT: -

Debit all expenses and lossesCredit incomes and gains

Debit all expense and losses::- Ex. Paid wages to the workers

The two elements are effected by the transaction are1. Cash a/c.. (Real account)

2. Wages a/c (Nominal account)

Since wages are being paid, it amounts to the expenditure for the organisation.Thus we say that Wages a/c. is to be debited based on the principle Debit allexpenses and losses

Credit all incomes and gains :- Ex. Received commission from M/s. XYZ

Ltd by cheque

The two elements are effected by the transaction are1. Bank a/c. (Personal account)2. Commission a/c. (Nominal account)

Since commission is being received, it amounts to an income to the organisation.Thus we say that commission a/c. is to be credited based on the principle Credit

all incomes and gains


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Account-wise general thought application

I. Personal account : Is he/she/it giving or Is he/she/it taking

To decide whether a particular personal account (element) affected byan accounting transaction is to be debited or credited, we need to identifywhether the element is giving the benefit to the organisation or taking thebenefit from the organisation

II. Real Account : Is it coming in (Or) Is it Going out

To decide whether a particular Real account (element) affected by anaccounting transaction is to be debited or credited, we need to identifywhether the element is coming into the organisation or going out oforganisation.

III. Nominal Account : Is it an Expenditure/Loss (Or) is it an income/gain

To decide whether a particular Real account (element) affected by anaccounting transaction is to be debited or credited, we need to identifywhether the element is expenditure/loss or income/gain to the organisation.


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ACCOUNTS PAYABLE

In every business undertaking, the business has to foresee many day to daytransactions for running the business for earning the revenue, where it has toincur many expenses which may be of different nature. Some expense may be ofrevenue in nature and some may be in capital. In order to work out such expense,the company creates a department called procurement department where if anyemployee of the company requires any purchase of materials or services, he will

place an indent with this department and arranges to get the required materials orservices for running the production. After receipt of the materials, the requestorwill get the invoice from the vendor and submits to a section in the financedepartment along with the required documents for processing the payments tosuch vendors. The section in the finance department which manages to pay suchexpense is called as Accounts payable.

1. The Accounts Payable is the sub ledger of General Ledger2. This account will also shows the credit balance. If it is showing a debit balance

which we means we need to get from the supplier.3. All the vendors or creditors captured in AP are assigned to the trade creditor

control account in General Ledger.


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TYPES OF EXPENSE

In an every organisation there will be difference expense incurred in order torun the business. The various expense are categories into two. They are

1. Direct Expense2. Indirect Expense

Direct Expense : Direct expense are those expense which are specific to adepartment or a cost centre. These expense are mainly related to productionlike purchase of raw materials, fixed assets. These are non-recurringexpense.

In our organisation we incur such expense for purchasing the raw materialswhich are mainly required in production of finished goods in the form of

mobile games.

Indirect Expense : Indirect expense are those expense which cannot be assignto your not specific to a particular department or cost centre. These arerecurring expense which are incurred to meet day to day expense for runningthe business like Rent, Salaries, transport etc.


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HOW THE BUDGETS AND PURCHASE ORDERS AREPREPAREDIn this session, we will be knowing the about the preparation of forecasts, budgets

and purchase orders and there accounting.

HOW BUDGETS ARE PREPARED

Annual budgets are ideally based upon an agreed-upon businessstrategy. Group/head office management set subsequent targets aroundrevenue, profit, operating expenses and headcount, using a set ofassumptions. This leads to a business plan, from which the company budget

for the coming year will be created. Budgeting will play the function ofhelping you to estimate revenue and expenses expected to be achieved overa specified future period of time

At the beginning of the calendar year/ financial year, the respectivedepartment manager or project manager will forecast & prepare the list ofvarious expenditure going to incurred during the year that may include theadministrative expense, purchase of fixed assets relating to his department,salaries, travelling expense etc., These are called forecasted figure orBudgets. Sometime these are done for each month.

The project manager will submit these figures to the respective Regionalhead or to the designated head and get the approvals before hand.

During the year, upon any requirement for purchase of any material or

asset, the concern manager will raise the purchase requisition or Indent withthe requirement and forward it for the approvals to his line manager.


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The Procurement team upon receipt will check for the Budget approvals andalso his line manager approvals. In budget approvals they will check whetherthis particular item has been budgeted and the budgeted cost.

Once all the required documents are checked, they will get the quotations fromthe various vendors and negotiate for the price which will be less than thebudgeted cost.

Once the negotiations are done, they will forward these quotations to theconcern project manager with their reviews and comments .

The concern project manager will approve for the best according to hisrequirement and confirms to procurement team.

The procurement team will raise the purchase order on that particular vendorwhose quotation has been approved.

The purchase order will be sent to vendor for his acceptance. The acceptanceis necessary in order to ensure that the vendor has accepted the terms andconditions agreed in the purchase order.

The vendor upon receipt of Purchase order will supply the materials/services as

HOW THE BUDGETS AND PURCHASE ORDERS AREPREPARED..


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ACCOUNTING ENTRIES FROM (PROC TO PAY) PURCHASE TOPAY

There will not be any entries when the Purchase order is released inthe system. The Purchase order will only capture the rates, quantity, termsand conditions, the charge account.

(The charge account is a account where the expense will becharged/accounted/ booked to. In simple words, it is the Business unit(SCOPE), department (OMSGR), global account (ELOORA) and localaccount to which the expense are charged.)

When the material purchased is of fixed assets nature then theaccount will always be charged to the balance sheet account whichnormally has only the company code, global account.

Upon supply of the goods/services given in the purchase order, therequestor/buyer will receive, check the quantity and will prepare the GoodsReceipt note (GRN). He will then does the receipting in the Material Modulein Oracle to the extent the materials supplied. From here there will be theflow of journal entries. Upon receipting the system will pass the belowreferred journal entry. For ex. Qty recd. 10 nos, value is $10,000/-

PARTICULARS DEBIT CREDIT

Expense a/c.(510.2041.3010.000.540001.0000.000000.000000)

$10,000.00

Accruals a/c. $10,000.00


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EXPLANATION OF THE ENTRY :

Upon receipting is done, the system passes this entry. This is merely an entry inthe system and it will not have any impact on the profit and loss account until theinvoice is accounted or month end happens. If the invoice is not accounted forthis receipt, such receipts are called as Uninvoiced receipts.

The rationale behind this entry is if such invoices does not get accounted before

the month end, the user has to accrue or create the provision for such invoicesduring the month end.

The user, during the month end, in order to identify such cases, he will run theUninvoiced receipt report which will show all the Uninvoiced receipts for whichthe materials/service were received but invoice not accounted. Since provisionsor accruals need to be created for them, the user will run the request called

Receipt accruals Period end after AP period is closed, the system will take theabove entry into the records as a provision entry for that period. Only at this

juncture this will have the impact on profit & loss account till then as said it ismerely an entry in system.


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VARIOUS ENTRIES WHICH FLOWS WHILE ACCOUTING

After the invoice is received by finance team, the team will do the necessaryaudit checks and enters the invoice in the Oracle by matching to the PO if it isa PO based invoice or charging to the account given on the invoice if it is aNon-PO based invoice. The entry flow will be as below :

Situation 1 : The entry with VAT. Example : Invoice amount is $10,000/- and

VAT is %1000/-, Vendor name is XYZ Ltd


Expense a/c.(560.2049.4103.000.540003.0000.000000.000000)

$9,000

VAT a/c.(560.2049.0000.000.240003.0000.000000.000000)

$1,000

XYZ Ltd a/c.(560.2049.0000.000.201005.0000.000000.000000)

$10,000


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Explanation of the EntryThe above entry is the general entry which is passed while entering the invoice

in the system. If the accounting principles are applied,

1. The Expense Since these are the expense to the organisation, they aredebited following the rule of Nominal Account Debit all expenses andloss;

2. The VAT a/c. Since these may be a income source or the offset source, theyare being debited following the rule of Real account Debit what comes

in;3. XYZ Ltd a/c. Since the organisation is getting some benefit from this party,

they are credited following the rule of personal account Credit thebenefit giver

Situation 2 : Entry with Discount and Vat Base amount $1000, VAT $100,Discount $100, Net payable to vendor is $ 1050.


Expense a/c. $ 1000

VAT a/c. $100

Discount received a/c. $ 50

Vendor a/c. $ 1050


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Discount received a/c. Since this is the income to the organization, they are

credited following the rule of Nominal account Credit all incomes & gains.In this case the user has to bear in mind that, if the discount received GL doesnot exist, he need to charge them to the expense account to the extent ofdiscount value. While doing this, he should not reduced the actual expense, thiswill have an impact on the VAT a/c. Like if the actual expense value is reduced,the system will automatically calculated the VAT which will be less than theamount given in the invoice.


Vendor a/c. $ 1,050

Bank a/c. $ 1,050

After getting the above entry passed, the validator will check the entry andvalidates.

On the payment schedule date, the concern person will release the paymentwhere the below entry will be passed.

The effect of this entry will be increase of goods/service in the business,

decrease in the Sundry creditors a/c. and decrease in the Bank balance a/c.


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VAT : VALUE ADDED TAX

Every business whoever deals with the exchange of goods and servicesin monetary terms will have to remit some portion of their sales done duringthe period to the local government which is called as a tax. In this context,we are going to deal with VAT or GST which is in use globally.

VAT means Value added Tax. The VAT a/c. is a special type of indirecttax in which a sum of money is levied at a particular stage in the sale of aproduct or service. In some regions it is also called as GST. Depending uponthe situation it is either debited or credited. Lets see the situations where itis debited or credited.

From the buyer perspective, it is a tax on the purchases which is calledas input tax. At this point the VAT is debited (real a/c.-Debit what comes in)

From the Seller perspective, it is a tax on the sales which is called asoutput tax. At this point the VAT is credited (real a/c.-Debit what goes out)

The buyer remits to the government the difference between the abovetwo amounts i.e., input tax and output tax, and retains the rest forthemselves to offset the taxes he had previously paid on the inputs.

Lets see the VAT payable and non-payable at various situations.


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Situation 1 : Assume the Input tax (tax paid on purchases to vendor) is $ 5000/-and the output tax is $ 5000/-. (tax on sales received from customers).

In this case the amount of the input tax and output tax is equal, there is noneed to pay any sum to government on account of tax, they will get offset. Theadjustment entry will be as below. Both the accounts gets nullified.


VAT on purchases $ 5000

VAT on Sales $5,000

Situation 2 : Assume the Input tax (tax paid on purchases to vendor) is $ 5000/-and the output tax is $ 6000/-. (tax on sales received from customers).

In this case the amount of the output tax is more than the amount of the input tax,the buyer has to pay the difference amount of $ 1000/- to government. In this

case to the extent of equal amount, it should be offset and the balance amountneed to paid thru bank. The entry flow will be as belowPARTICULARS DEBIT CREDIT


VAT on Sales $6,000

Bank a/c. $1,000


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Situation 3 : Assume the Input tax (tax paid on purchases to vendor) is $ 5000/-and the output tax is $4000/-. (tax on sales received from customers).

In this case the amount of the Input tax is more than the amount of the outputtax, there is no need for the buyer to pay any tax to government as the Inputtax is more than the output tax. In this case the excess tax of $1000/- will berefunded back to company. The entry will be passed to offset the input andoutput tax for the period and take the refund from government.



VAT on Sales $4,000

Bank a/c. $1,000


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WITHHOLDING TAX

As per the tax rules and regulations of some countries, the company who takes

services from other company would be liable to deduct a certain percentage ofamount from there bills. Such company shall pay that amount to the respectivegovernment and issue a tax certificate which details about the deductionamount, invoice details and the remittance details. This process is called asWithholding tax or Tax deducted at source (TDS). The company using theservices mandatorily should deduct the amount failing to which the company willbe penalized by the respective government.

Lets us know now the entries should be passed. For example. Vendor Name XYZ Pvt Ltd. $ 10,000/-, Tax rate 5%PARTICULARS DEBIT CREDIT

Expense a/c. $10,000

XYZ Pvt. Ltd a/c. $10,000

(Charging full amt to exp)

XYZ Pvt. Ltd a/c. $500

TDS Payable a/c. $500


TDS Payable a/c. $500

Government (Tax dept)a/c.

$500

(Remitting entry to Govt.)


Government (Tax dept)a/c.

$500


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CREDIT MEMO :

A Credit Memo (short for "credit memorandum") is a commercial documentissued by a Seller to a Buyer, indicating the products, quantities and agreedprices for products or services that the Seller provided the Buyer with, but Buyerreturned or did not receive. It may also be issued in the case of errors. A CreditMemo can reduce or eliminate the amount that the Buyer has to pay the seller inrespect of the original Invoice issued earlier. Credit Memos are often called CreditNotes or just Credits.

The seller usually issues a Credit Memo for the same or lower amount than theinvoice, and then refunds the money to the buyer or sets it off against a balancedue from other transactions.

DEBIT MEMO :

A Debit Memo (short for debit memorandum") is a document issued by a Buyerto a Seller, indicating the products, quantities and agreed prices for products orservices the Buyer returned to seller for some reason like defect in the goods,error in the invoice etc. A Debit Memo can reduce or eliminate the amount thatthe Buyer has to pay the seller in respect of the original Invoice issued earlier.

Debit Memos are often called Debit Notes.

CREDIT MEMO AND DEBIT MEMO


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ACCOUNTING APPLICATION OF CREDIT MEMO & DEBITMEMOFrom accounting perspective both the credit memo and debit memo indicates a

negative balance. From seller perspective it will be refunding the excessive amountcharged in his invoice to buyer and from buyer perspective, it will be recovery ofexcessive amount paid by the buyer to seller from other transactions. Now we willdiscuss on how the flow of accounting entries appears in seller books and in buyerbooks.

Example, Seller XYZ Pvt Ltd., Customer ABC Pvt. Ltd. Sale Invoice : $2500, a

credit memo % 250.PARTICULARS DEBIT CREDIT

ABC Pvt. Ltd a/c. $2,500

Finished Goods a/c. $2,500

Finished Goods a/c. $250

ABC Pvt. Ltd a/c. $250

(Should use Credit memo intype)


Expense a/c. $2,500

XYZ Pvt. Ltd $2,500

XYZ Pvt. Ltd $250

Expense a/c. $250

(Should use debit memo intype)

XYZ Pvt. Ltd $2,500

SELLER

BOOKS

BUYER

BOOKS


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PREPAYMENT ACCOUNTING

The Prepayment is an advance. Normally the advance is paid if the terms andconditions in the purchase order dictates or as per the requestor/project manager.Prepayment need to be done only before for the goods are delivered or theservices are rendered. If any amounts need to be paid as an advance than thisprepayment should be used. Point to be noted that when the prepayment isaccounted, the amount is not charged to expense account but it is charged to

advance liability account. These amounts are shown in the Asset side undercurrent asset >> Loans and advances. Steps to be followed while working onprepayment.

Entries for Prepayment : Example to XYZ supplier, the company has to pay 50% ofPO (PO value is $10,000 ) which arrives at $5,000. Let see the flow of entries forprepayment


Prepayment a/c. $5,000



Bank a/c. $5,000

Dr. PREPAYMENT a/c.Cr.

XYZ Pvt. Ltd $5,000Balance c/f $5,000

Balance b/f $5,000

(This shows there is a balance in prepayment a/c. which isdebit balance)

Dr. XYZ Pvt. Ltd a/c.

Cr.


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After the goods or services received, the supplier will submit the invoice adjusting

the prepayment amount. Invoice Value $ 10,000 less prepayment $5,000. At thatinstance the flow of entries will be as below


Expense a/c. $10,000


(This is for accounting the whole expense)


Prepayment a/c. $5,000

(This is for applying the prepayment to the invoiceamt)



Dr. PREPAYMENT a/c.Cr.

XYZ Pvt. Ltd $5,000Balance c/f $5,000

Balance b/f $5,000

XYZ Pvt. Ltd $5,000

$5,000 $5,000

(This shows the application of prepayment to the Invoice)

Dr. XYZ Pvt. Ltd a/c.Cr.

Bank a/c. $5,000Prepaymenta/c.

$5,000

$5,000 $5,000By passing the above entries, the prepayment balance will come down and the payable balancealso will come down.

PREPAYMENTACCOUNTING


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PREPAID EXPENSE AND ITS ACCOUNTING

The prepaid expense are those expense for which the business makes the paymentsfor goods and services to be received in the near future. This balance will be shownon Asset side under Loans & Advances. While prepaid expenses are initially recordedas assets, their value is expensed over time as the benefit is received onto theincome statement

In simple terms initially the amount is charged to prepaid account and at the end ofeach accounting period, adjusting entries are passed to recognize the portion ofprepaid expenses that have become actual expenses through use or the passage oftime.WHY THE PREPAID EXPENSE ARE REQUIRED

Sometimes in order to run the business, the business has to incur certain

expense and pay them before they get actually utilized or consumed. Forexample insurance, maintenance etc., If we look at insurance, insurance is aprepaid expense, because the purpose of purchasing insurance is tobuy proactive protection in case something unfortunate happens. Clearly, noinsurance company would sell insurance that covers the occurrence of anunfortunate event, after the fact, so insurance expenses must be pre-paid.


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ACCOUNTING :

Usually the business pays for insurance for there employees, fixed assets etc.,usually the such payments will be done for 3/6/12 months, Assume the businesshad received a claim to be paid for 12 months, while processing the payment, theaccountant will pass the entry as debit the expense a/c. with the amount actuallyutilized, debit the prepaid account with the amount to be utilized and credit the

vendor with the invoice amount and pay. The accountant during the month endwill pass the necessary entry thus reducing the balances from Prepaid accountand charging to expense a/c.

Assume in this example the 12 months are from Jan to Dec and the invoice for$12,000 was submitted in the month of Feb. Since the services for 2 months arereceived, the accountant will debit the expense a/c. with $2,000 and debit

$10,000/- credit vendor a/c. (AP Control a/c.) with $12,000/-.

Now the balance is prepaid account is $10,000/-. During March month end, theaccountant will pass an entry where he will debit $1,000/- to expense and credit$1,000/- prepaid account. Till $10,000/- gets exhausted / fully utilized, he willkeep passing this entry till Dec month end.

PREPAID EXPENSE..


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Accounting Entries : Assuming the above example, Supplier : XYZ Pvt. Ltd, Invoiceamt : $12,000. Period 12 months (Jan to Dec) Invoice submitted in the month of Feb.(Note : Service received till Feb)


Expense a/c. $2,000

Prepaid a/c. $10,000


(For Jan & Feb, they are charged to expense a/c. andbalance to Prepaid a/c.)


Bank a/c. $12,000

(Payment to vendor)

MARCH MONTH END

Expense a/c. $1,000

Prepaid a/c. $1,000

Dr. PREPAID a/c.

Cr.

FEB PERIOD :

XYZ Pvt. Ltd $10,000

$10,000 $10,000

MAR PERIOD

Balance b/f $10,000Expense a/c. $1,000

Balance c/f $9,000

$10,000 $10,000

APR PERIOD

Balance b/f $9,000Expense a/c. $1,000

Balance c/f $8,000

$9,000 $9,000

This will continue till Dec for this transaction.


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DIFFERENCE BETWEEN PREPAYMENT AND PREPAID ACCOUNT

PREPAYMENT PREPAID

This account is charged when advancepayment is processed This account is charged when anyexpense of subsequent/future periodsare paid in advance

Merely accounting of this amount doesnot imply that they are charged toexpense. They will be parked in theprepayment account.

Upon accounting of this amount, itimplies that a certain amount is chargedto expense and certain amount ischarged to prepaid a/c which will in turngets charged to expense on the passageof time.

These gets converted into actualexpense when the full-fledgedservices/goods received

These gets converted into actualexpense on the passage of time

The balance in this account getsreduced when the goods /services

received and invoice submitted andupon application

The balance in this account getsreduced during month end where the

GL user will credit this account anddebit the expense a/c.

This amount is shown under Assets,Loans and advance a/c.

This amount is shown under Assets,Loans and advance a/c. with headingPrepaid Exp a/c.


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ACCRUALS (PROVISIONS) :

Accruals are adjustments entries for expenses that have been incurred but are not

yet recorded in the accounts. The accruals need to be added via adjusting entriesso that the financial statements report these amounts.

The example for accruals involving expense are Rent, salaries, fuel, electricityexpense for the month. Normally, the bill / invoice for such transactions from theconcern people will be received only during next month.

Since the service/goods were received by us and expense got incurred but theywere not yet recorded, we need to ensure that the expense are shown in thebooks in the period in which they are actually incurred. The process of showingsuch un recorded expense for that period is done by way of creating accruals orprovision. This has to be done even the company publishes its financial statementor not.WHY ACCRUALS ARE REQUIRED EVERY MONTH

Accruals or provisions are required every month in order to

1. Record those expense or liabilities which were actually got incurred by notrecorded as of the month end2. Record revenues and receivables which are earned during the month but not

recorded as of month end.

We create accruals, in order to ensure the consistency in the expense andto show the perfect financial statement of the company


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Accruals a/c.(510.2041.0000.000.245002.0000.000000.000000)

$10,000.00

Expense a/c.(510.2041.3010.000.540001.0000.000000.000000)

$10,000.00

6. The system will pass the below referred entry in the next accounting period by

reversing the previous month provision entry.

WHY THE EXPENSE ARE CREDITED IN NEXT ACCOUNTING PERIOD& HOW THEY WILL BE REVERSED :

The provision which was passed during the previous month gets reversed in thenext period with an assumption that the invoice for that transaction will beaccounted. If not the system will continue to create the provision in subsequent

periods. While accounting the invoice, there will be a debit to the expense andcredit to the vendor account, thus the debit of the invoice and credit of thereversed provision entry will get offset and the impact will be nil during thecurrent period. The entry will be as belowPARTICULARS DEBIT CREDIT

Expense a/c.(510.2041.3010.000.540001.0000.000000.000000)

$10,000.00

Vendor a/c..(510.2045.0000.000.201001.0000.000000.000000) $10,000.00

PROVISION ENTRY FOR PO BASED TRANSACTIONS..


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PROVISION FOR NON PURCHASE ORDER BASEDTRANSACTIONSApart from the purchase order based transactions there will be few othertransactions which are not routed thru the purchase order. During the month endperiod, the accountant has to check upon such transaction if the goods/servicesfor them were received during the period but the invoice not yet accounted. Theaccountant has to list down such entries, get confirmed there status of accountedin system and then start with the manual provision/accrual creating.

Such manual provisions are created in GL by passing a manual entry or by theway of uploading process. The accrual entry will be the same entry which we usefor purchase order based transactions. These accruals are shown in the liabilitiesside.

This GL entry will get reversed in the beginning of the next accounting period.They get knocked off by the invoice entry getting passed thru Accounts payablemodule. If the invoices are not got accounted till the completion of that new

period, again they will be carry forwarded to the next month. This process willkept going till the invoice is accounted in the period.


Expense a/c.(510.2041.3010.000.540001.0000.000000.000000)

$10,000.00

Accruals a/c. $10,000.00

(510.2041.0000.000.245002.0000.000000.000000)


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MONTHEND CLOSE ACTIVITIES


4242

The month end close activities involves executing the various reports/ programswhich will help us to close the current accounting period with any exceptions andopen the next accounting period. In this process the below referredreports/programs will be executed.

1. Create Accounting2. Mass addition create report

3. Payable Posted Invoice register4. Payable Posted payment register5. Accounts Payable trial balance6. Accounts Payable & General ledger reconciliation (Trade creditors liability

account)7. Opening and closing of accounting period & Unaccounted report8. Uninvoiced Receipt Report9. Receipt accruals10. Close PO period11. Create Accounting receiving12. URR liability account & General Ledger reconciliation13. Open PO Period

Let us know about the above in detail.



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1. Create accounting : This is a program, we have two important parameters -

Transfer to General Ledger and Post in General Ledger. When this program isexecuted, the former transfers all the transactions (invoices & payments) fromaccounts payable sub ledger to General Ledger and lets them be in the GLinterface which is like waiting at the door of GL. At this stage the transactionswill not be totally moved to GL. When the latter one is executed the system willpost all those transactions to General Ledger which is like opening the door ofGL. At this stage all the transactions will be posted to GL which is called as

mother of all books.

Some companies executes is program on daily / weekly / fortnight / monthlybasis depending on the number of transactions they do on the daily/monthlybasis.

2. Mass addition create report : This is the report which will show all thetransactions pertaining to the fixes assets flown through Accounts payable.Before running this report, there is another program called Mass addition create,upon execution this will internally move all the fixed assets based transaction tofixed assets module. The above referred remove will then generates all suchentries into a report which is called as Mass addition create report . The concernperson who is dealing with Fixed assets will do the necessary accounting in thefixed assets module for these transactions by applying the category under whichthe asset falls, life of assets, rate of depreciation etc.,



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3. Payable Posted invoice register : This report provides all the details of theinvoices which are accounted and posted in the particular period. These areposted thru the program Create accounting . The Posted Invoice Registerlists each Accounts Payable Liability account and the invoices posted to theaccount, along with the supplier and invoice details irrespective of whetherthey are paid or not paid. This report will display the invoice amount and theposted distribution amount in the invoice currency and also in the functionalcurrency. This report is used for preparing the Accounts payable reconciliation.

4. Payable Posted Payment register : This report provides all the details ofthe payments which are accounted and posted during the particular period.

These are posted through a program Create accounting. This report willdisplay the payment document number, payment date, amount paid in total ininvoice currency and also in functional currency. This report is required while

preparing the AP reconciliation statement.

5. Accounts Payable Trial Balance (APTB) : The Accounts Payable TrialBalance shows you a complete list of all unpaid invoices on the system thathas been transferred to the General Ledger, irrespective of whether they aredue for payment or not. This report will assist with the month endreconciliation process. This report is run at the end of the current month and

the prior period to know the closing and opening balances.

Microsoft Off ice

Word 97 - 2003 Document

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6. Accounts Payable & General Ledger Reconciliation: The reason we need toprepare the AP and AP/GL reconciliation is to check whether all the payableentries got accounted and posted to General ledger. During month end, the

accountant need to ensure that the closing balance of Trade creditor account inthis AP trial balance is agreeing with the corresponding account in the Generalledger trial balance. In order to do this, accountant as to first check whether thebalance within the Accounts payable sub ledger are reconciling and latter needto check with the General Ledger balance. Lets see how to prepare the APreconciliation within sub ledger.

Assume the APTB Opening balance as $25,000, Posted invoice registerbalance as $ 20,000/-, Posted Payment register as $ 35,000/- and Closing APTBbalance as $10,000.

From the above working, accountant is ensures that the balances within the

AP sub ledger are agreeing. Now the accountant has to check this closing APTB


PARTICULARS AMOUNT

Opening balance of Accounts payable Trial balance (a) $25,000.00

Add : Posted Invoice register amount (b) $20,000.00

Less : Posted Payment register amount (c) $35,000.00

Net Amount (a + b c ) $10,000.00

Closing balance of Accounts payable trial balance $10,000.00

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In order to check whether all the transactions of account payable sub ledgerare posted to general ledger, he has prepare a reconciliation to find whether theclosing balance of AP trade control account in AP sub ledger APTB is matching

with the corresponding account in General ledger trial balance. To find the APTrade control account balance in General ledger, the accountant has to run aseparate report in the general ledger which shows balance for all the accounts.Currently the report name we are using is EAGL : Custom Trial Balance Detailor he can get this information by running account analysis report for the specificsegment/flexifield.

From the previous example figures assume the balance of trade creditorcontrol account in GL is showing the balance of %10,000/-

Now the AP / GL are agreeing. This ensures that all the entries got posted to


PARTICULARS AMOUNTOpening balance of Accounts payable Trial balance (a) $25,000.00Add : Posted Invoice register amount (b) $20,000.00Less : Posted Payment register amount (c) $35,000.00

Net Amount (a + b c ) $10,000.00

Closing balance of Accounts payable Sub ledger(APTB)

$10,000.00

Closing balance of General ledger $10,000.00

Net Difference $0

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Australia\Monthend\MAR11\EAG

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9. Receipt accruals This is the program which is used for creating theprovision for all those entries which are extracted by Uninvoiced receipt report.

Upon running this program based request the system will create theaccruals/provisions for all Uninvoiced receipts. At this stage, the entry which ispassed when the receipt is done will get flown in to profit and loss account.

10. Close Purchase order Period : The purchase order current period should beclosed only after running the above requests otherwise the system will not bein the position to create the accruals for Uninvoiced receipts. After close, the

accountant has to run the URR report. This balance should be matched withthe GL balance after the create accounting receiving is done.

11. Create accounting receiving : This is the program which has two foldstransfer to general ledger and post to general ledger. This program is executedto transfer all the accruals / provisions to general ledger and post them togeneral ledger. This program should be executed only once during the monthend close. Running this program more than one time will have a major effectin the trial balance.

12. URR liability account & General Ledger reconciliation : The accountant has toensure that the balance of URR report, run after the PO close, is matching withthe URR liability account of General ledger which can be extract by running theEAGL:Custom Trial Balance Detail.



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CASH MANAGEMENT & BANK RECONCILATION STATEMENT

Cash Management : Cash management is a broad term that refers to the collectionand disbursement of cash. The ability to predict the future demand estimate ofcurrency within a reasonable accuracy iscalled cash forecasting. The primary objective of cash forecasting is to ensure thatcash is used efficiently and effectively throughout the business.

The responsible person should be able to estimate the source of cash to be received

and the payments to be made to the trade creditors by managing effectively andefficiently. The cash management or cash forecasting is prepared based on thehistorical data from AP/AR. Some firms usually prepares this statement on weeklybasis or fortnight basis or monthly basis.

The cash management should be submitted to the treasury department who will beorganizing the necessary funds/cash based on the forecasting for the given period

for disbursement to trade creditors for the various business expense incurred.



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How to prepare Cash forecasting

The responsible person should follow the following steps while preparing the cashmanagement statement or Cash forecasting for arranging the funds thru treasury

1. The accountant need to decide whether the cash forecasting to be prepared forweek or for a month

1. If prepared for month, then the accountant has to check the total of theinvoices accounted and ye to be paid, total of invoices which are yet to beaccounted in the system and various payments done in previous two or threemonths for which the average amount to be consider in the forecasting underthe various payment method heads.

1. The accountant should also include the recurring, utility, Rent direct debits

etc., Since the amounts for these payments will be same month on month, theaccountant has to take them as it is in the forecasting.

1. Include the expense report payments on the basis of last two or three monthaverage.

1. The accountant has to check with the various departments, from whom the

invoices will be received, whether they are going to receive any invoices whichare not included above and the value is hu e. Such transactions should also be



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Bank Reconciliation Statement :

A bank reconciliation statement is a statement prepared by organizations toreconcile the balance of cash at bank in a company's own records with the bankstatement on a particular date.

This statement is the most common tool used by organizations for reconciling thebalance as per books of company with the bank statement and is made at the end ofevery month. Depending upon the volume of the transactions, some companys willalso prepare this statement on fortnight basis. The main objective of reconciliation isto ascertain if the discrepancy is due to error rather than timing.

The difference between the two records on a given date may arise because of thefollowing:

Cheques issued but not presented in bank books. Cheques deposited but not credited in bank books. Credited by Bank but not debited in company books. (Ex. Interest, dividends,direct deposit by

customer etc.,)

Debited by Bank but not credited in company books (Ex. Bank charges, lockerrent, cheque books



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How to prepare the Bank reconciliation statement

We need the following data to prepare the BRS.1. Bank statement2. Payment register for the period.3. Details of the GL entries passed to bank account

The responsible person for has to do the following steps for preparing the BRS.Step 1 : Check the cash book receipts and payments against the bank statement.Step 2 : Mark separately those items which are not appearing in Cash book but

appearing in Bank bookStep 3 : Make a list of these items (Like bank charges, locker rents, direct deposits,

dividends etc.,)Step 4 : Pass the necessary entries in AP for such transactions.Step 5 : Mark separately those items which are not appearing in Bank book but

appearing in Cash bookStep 6 : Make a list of these items ( Like cheques deposited but not credited)Step 7 : Pass the necessary entries to reverse such entries from APStep 8 : Enter your corrected check register total after all adjustments from the bankstatement.



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PARTICULARS AMOUNT

Balance as per company books XXXXXX

Add : Cheques issued but not presented in bankbooks

XXXXXX

Add : Credited by bank but not debited in companybooks

XXXXXX

Less : Cheques deposited but not credited in bankbooks.

XXXXXX

Less : Debited by bank but not credited in companybooks

XXXXXX

Balance as per Bank books XXXXXX

FORMAT OF TYPICAL BANK RECONCILIATION STATEMENT

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