Month: July 2020

The word global literally means worldwide, or all over the world. So, you’d think a global company must do business all over the world. But realistically, few, if any, companies could be said to do business with every single country in the world. A global company is one that does business in at least one country outside of its country of origin. Even expanding to one other country is a huge undertaking. It’s not as if someone wants to order some of your products and you ship them out to France or Bolivia or wherever and BOOM! you’re instantly a global company.

Becoming a global company means introducing your products and your company to the people of that country. It takes a great deal of research to determine which country to begin with and how to do the introductions. It means sending employees to the country to see it firsthand, talk with some of the people there and then decide if there’s a good fit. Of course, once a company decides to go global and has success in one country, it naturally tries expanding to another country, so global companies often have a presence in several countries.

Global Company Examples

Although using the term global in reference to business began in recent years, doing business globally isn’t new. One example is that of Coca-Cola, which was a fledgling startup in 1886. By the time of World War II, the 50-year-old company had managed to keep its item price to 5 cents, believing that everyone should be able to enjoy the treat. The company decided to provide its popular drink to U.S. soldiers wherever they were stationed, still at just 5 cents.

Today, people in over 200 countries enjoy not only Coke and its other regular and diet soft drinks, like Sprite and Fanta, but over 3,800 products ranging from bottled water and iced teas to juices, vitamin-enriched and soy-based beverages. A major reason for Coca-Cola’s success has been its strategy of looking at each market individually and providing beverages that fit with the local culture and tastes. Sometimes that means creating new products for a market or tweaking a beverage to be more in line with what people in that country are known to enjoy.

Some other companies that are now global include hospitality corporations Hyatt and Hilton Hotels, information technology leaders Cisco and Adobe, manufacturers Monsanto and 3M and financial services company American Express. Oh, and an internet search company you may have heard of called Google. What unites these very different institutions is that all have made Fortune’s October 2016 list of the 25 Best Global Companies to Work For. Employees cited how their company makes them feel valued, cares about their personal and professional development, keeps open lines of communication all the way to the CEO and encourages them to keep a good balance of work and family time.

Clearly, not only is it possible to expand globally with a great deal of success, but it’s also possible to do so without sacrificing the well-being of the employees that help you get there in the first place. In the long run, making your company a great place to work – the word fun was even mentioned many times – is a way to keep good employees that help you expand and grow globally without the pain of internal friction and high staff turnover.

It’s important to remember that these companies, though huge today with a presence in numerous countries, all began as small startups. Coca-Cola had its humble beginning at one drugstore in downtown Atlanta, Georgia. Google started out as the research project of two Stanford grad students, Sergey Brin and Larry Page. The key to successfully becoming a global company is to take it slow, one country at a time.

Global Company Benefits

The U.S. Small Business Administration reports that 96 percent of the world’s consumers live outside of the U.S. The obvious benefit to expanding globally is to increase sales and profits by reaching out. There are a number of other benefits, however, to having a presence in countries outside of the U.S.:

1. Increase customer base

Selling in another country vastly increases your customer base. If the U.S. market is saturated with products like yours, and research shows that’s not the case in the country you’ve chosen to expand into, you have an untapped potential customer base available to you. While your product may have become familiar to U.S. customers, it’s brand new to those in a foreign country.

2. Lower operating costs

If labor and/or manufacturing costs are cheaper in the new country, you stand to save on operating costs. That can make a huge difference to your bottom line.

3. Take advantage of the difference in seasons

In situations where your product is seasonal or even somewhat seasonal, meaning sales are steady year-round and then surge during one season, expanding in countries where the seasons are opposite to the U.S. allows you to experience high sales levels throughout the year.

4. Control product introductions

Remember, too, that you don’t have to provide your entire product line in the new country. You can begin with just seasonal products, announcing your presence with a big advertising splash. After the season ends, introduce other products one by one, creating media buzz each time you bring another product to the market. Since this market doesn’t know the extent of your product line, you can sell only the products that make the most sense in that market.

5. Continue your company’s high growth rate

If your company had been growing rapidly, but growth has stalled in the U.S., you can get back on track by expanding to another country.

6. Create new jobs

When you enter the market in a foreign country, you need employees or agents who can represent your company. Whether you have offices or manufacturing facilities there or just representatives, you’re creating work opportunities in that country. This helps that country’s economy and makes your company attractive.

Global Company Downfalls

Expanding to another country won’t be all sunshine and roses. That’s why it’s vital to fully research any country you’re considering in order to minimize unwelcome surprises:

1. Different regulations and technologies

Just as states in the U.S. have different regulations for doing business, other countries have different employment and tax laws that you’ll need to understand in advance. Don’t risk being surprised by these after you’ve committed to the expansion.

2. Infrastructure issues

Many countries do not have the reliable internet and cellphone services that the U.S. has. Particularly in developing countries, such as some in Africa, communication services are spotty or nonexistent. Whether you’re planning to open offices or a manufacturing facility in a country, or have agents there who represent you, be sure to verify that anywhere you’re considering expanding into has internet and cellphone communication. You’ll need them to put up a website, post on social media and communicate with your representatives in that country. Even travel in other countries can be problematic due to poor roads, traffic or other factors. Think of some of the older areas in European countries that have only narrow, winding streets and few places to park. They look charming, but could be a nightmare for your employees or distributors to do business.

3. Parlez-vous Francais Don’t assume you’ll be doing business in English. Although you’ll find some English speakers, many people did not learn English in school and they conduct business fully in their native languages. Make sure the software you use to run your business, from sending emails to promoting on social media, support the country’s language. The moment you decide on the country, begin a rapid language learning program for you and others who will be working with you on the expansion.
4. You’re not in Kansas anymore

Like Dorothy in “The Wizard of Oz,” you can feel as if you’ve landed in a bizarre place indeed because you don’t understand the culture. For example, something as simple as leaving the chopsticks upright in your rice bowl can be seen as rude in China. Using humor in a business discussion in Germany could nix the whole deal. And never say “no” during discussions in India. Opt for “we’ll see” or “I will try” instead. Ask the SBA or people you know who have a presence in the country what the differences are between how U.S. companies do business compared with the country you’re considering.

How to Become a Global Company?

When Coca-Cola began its expansion into foreign markets, it undertook extensive research about the country and its people, including their likes and dislikes as a group. As a result, the company came away with a good understanding of which products would be likely to sell well in that country, and which would not, as well as how to interact with the locals according to their customs.

1. Research, research, research

You cannot do too much research before going global. Which country should you start with? What have others experienced when they started their global expansion? Contact the SBA and devour all information they have for you. The SBA has arrangements with many schools to provide help to businesses in their area. Contact area universities for help. Many times, interns will help with the research so you don’t have to do it all.

2. Establish a local team in the country

Once you’ve chosen the country you want to expand into, find locals to help you do this. They know their country and often make a business of helping foreigners get established. Then, be sure to listen to the information and feedback the local team gives you. This may seem obvious, but it’s one of the biggest mistakes companies make when going global – they hire the local team, but discount the suggestions the team gives.

“One of the most disappointing mistakes that I’ve seen companies make is that they hire highly competent, intelligent local people to serve their overseas markets, but then fail to consider their input when making strategic decisions,” wrote business consultant Nataly Kelly in the Harvard Business Review. Company executives would ask her opinion, she said, instead of listening to the local team.

Maybe the advice seems contrary to what you’ve learned about business. That’s why other countries are called foreign. Their practices can seem strange to someone who has only done business in the U.S. You hired the local team for a good reason, so take their ideas seriously.

3. Take it slow

It’s human nature to want to act on an idea once you have it in mind. Think about how long it took you to get your business to where it is today. Now you’re considering going into a foreign environment and putting your hard-earned profits on the line. Give it the time it takes to thoroughly research, seek advice from others who have expanded and from organizations that are designed to help businesses go global, and get the right local team in place.

Follow the 1-2-3 plan. The SBA makes it simple with its three-step plan:

1. Get counseling
2. Find buyers
3. Get funding

A contingent liability is a potential liability that may or may not become an actual liability. Whether the contingent liability becomes an actual liability depends on a future event occurring or not occurring.

In accounting, some contingent liabilities and their related contingent losses are:

• Recorded with a journal entry
• Are limited to a disclosure in the notes to the financial statements
• Not recorded or disclosed

We have another Q&A that discusses the recording of contingent liabilities.

Examples of Contingent Liability

A company’s supplier is unable to obtain a bank loan. The company agrees to guarantee that the supplier’s bank loan will be repaid. As a result of the company’s guarantee, the bank makes the loan to the supplier. The company has a contingent liability. If the supplier makes the loan payments needed to pay off the loan, the company will have no liability. If the supplier fails to repay the bank, the company will have an actual liability.

If a company is sued by a former employee for $500,000 for age discrimination, the company has a contingent liability. If the company is found guilty, it will have an actual liability. However, if the company is not found guilty, the company will not have any liability.

A product warranty is also a contingent liability.

Types of Contingent Liabilities

Contingent liabilities are of two types which are:

1. Explicit Contingent Liabilities
2. Implicit Contingent Liabilities

Let us know more in details about the types

1. Explicit Contingent Liabilities

These liabilities are specific types of obligations that are created by government or obligations which are legal in nature that are established by the law.

Some of the examples are:

• Government insurance schemes on pension funds, bank bonds or bank deposits.
• Student loan, mortgage loan
• Currency exchange rates
• Legal claims in which court orders to pay penalty for pending cases.

2. Implicit Contingent Liabilities

These types of liabilities are legal obligations that are identified after the occurrence of an event. Government sets the amount for the liability in such cases. They are not recorded in the books as these events may occur or may not occur.

Some examples are:

• Disaster relief fund for people affected by natural disaster.
• Failure of central bank on paying its obligations like balance of payment
• Social security

Let us discuss some of the contingent liabilities’ examples

1. Product Warranty

This is one of the most common types of contingent liability examples. It occurs when a company launches a product with a warranty period with the condition that if the product fails to work within the period, it has to be repaired or replaced which becomes a liability for the company.

2. Lawsuits

Lawsuits are legal proceedings by an individual, party or parties against another in civil court of law.

3. Pending Investigations

If an individual or company is found to be defaulting in any form of payment, then they have to pay fine or penalty as ordered by court.

Recording of Contingent Liabilities

Contingent liabilities do not get recorded in financial statements of a company. These are obligations that are yet to occur but there is a probability that it may occur in future. Therefore, no accounting treatment exists for contingent liabilities.

But as accounting follows a conservative approach, there must be disclosure and therefore contingent liability needs to be updated in final statements of the company in the form of footnotes. Such a disclosure is made only when there is an obligation from a past event and the amount of the liability can be measured reasonably.

Difference between Provision and Contingent Liability

Provisions are a sum of money that is set aside in order to cover a probable expense that will happen in future. In this case the obligation is already present but the amount for such an obligation cannot be determined exactly.

Contingent liabilities are liabilities that are uncertain expenses that may or may not happen in future, but companies maintain it in order to encounter future uncertainties.

Provisions are recorded in the accounts. They get debited in Profit and Loss accounts whereas contingent liabilities are recorded as footnotes in financial

At the time of retirement or death of a partner, there may be some assets and liabilities which are not recorded in books at their current values. Also, there may be some unrecorded assets and liabilities which need to be recorded in the books.

A Revaluation Account is prepared in order to ascertain net gain or loss on revaluation of assets and liabilities and bringing unrecorded items into books. The Revaluation profit or loss is transferred to the capital account of all partners including retiring or deceased partners in their old profit sharing ratio.

The following Journal entries are passed:

1. For the increase in the value of Assets

Assets A/c (Individually) Dr.

To Revaluation A/c

(Being increase in the value of assets on revaluation)

2. For a decrease in the value of Assets

Revaluation A/c Dr.

To Assets A/c (Individually)

(Being decrease in the value of assets on revaluation)

3. For an increase in the value of Liabilities

Revaluation A/c Dr.

To Liabilities A/c (Individually)

(Being increase in the value of liabilities on revaluation)

4. For a decrease in the value amount of Liabilities

Liabilities A/c (Individually) Dr.

To Revaluation A/c

(Being decrease in the value of liabilities on revaluation)

5. For an unrecorded Asset

Assets A/c Dr.

To Revaluation A/c

(Being unrecorded asset recorded in books)

6. For an unrecorded Liability

Revaluation A/c Dr.

To Liability A/c

(Being unrecorded liability recorded in books)

7. For transferring Profit on Revaluation

Revaluation A/c Dr.

To All Partners’ Capital A/c (Individually)

(Being Profit on revaluation transferred to all partner’s capital A/c in old ratio)

8. For transferring Loss on Revaluation

All Partners’ Capital A/c (Individually) Dr.

To Revaluation A/c

(Being Loss on revaluation transferred to partner’s capital A/c in old ratio)

The partners may decide that the revalued figures of assets and liabilities will not appear in the books of the firm. In this case, the share of retiring or deceased partner of profit or loss from revaluation of assets and liabilities are adjusted in the remaining partners capital A/cs in their gaining ratio.

The journal entries that will be passed are:

9. In case of Revaluation Profit

Remaining Partners Capital A/c (Individually)                   Dr.

To Retiring Partners Capital A/c

(Being the share of retiring partner in revaluation profit adjusted in remaining partners capital in gaining ratio)

10. In case of Revaluation Loss

Remaining Partners Capital A/c (Individually)                   Dr.

To Retiring Partners Capital A/c

(Being the share of retiring partner in revaluation profit adjusted in remaining partners capital in gaining ratio)

Dissolution of firm means complete breakdown of the relation of partnership among all the partners. When all the partners resolve to dissolve the partnership, the dissolution of firm occurs, i.e. the firm is wound up.

If the business comes to an end, it is said that the firm has been dissolved. Dissolution of firm means the closing down of the business. Firm’s dissolution implies partnership dissolution but not vice versa.

That is dissolution of partnership does not mean dissolution of firm, but the dissolution of firm will be dissolved on any one of the following ways:

1. Dissolution by Agreement (Sec. 40)

A firm may be dissolved at any time with the consent of all partners. For instance, when a firm does not expect good prospects in the future, a firm can be dissolved by mutual consent of all partners.

2. Compulsory Dissolution (Sec. 41)

A firm is compulsorily dissolved by operation of law when all the partners except one become insolvent or when all the partners become insolvent or when business becomes illegal or when the number of partners exceeds twenty in case of ordinary business or ten in case of banking.

3. Dissolution on the Happening of Certain Contingencies (Sec. 42)

A firm is dissolved, in the absence of contrary, in the event of any of the following circumstances:

(i) The expiry of the term for which it was formed.

(ii) The completion of the venture for which the partnership was constituted.

(iii) The death of a partner

(iv) The adjudication of a partner as an insolvent.

4. Dissolution by Notice of Partnership at Will (Sec. 43)

Where a partnership is at will, the firm may be dissolved by any partner giving notice in writing to all the other partners of his intention to dissolve the firm.

5. Dissolution by the Court (Sec. 44):

The court is empowered to order the dissolution of a firm consequent on a suit by a partner in the following cases:

(i) When a partner becomes insane or unsound of mind.

(ii) When a partner becomes permanently incapable of performing his duties, be it mental or physical.

(iii) When a partner is proved guilty of misconduct which is likely to affect adversely the busi­ness of the firm.

(iv) When a partner conduct himself in such a way that it is not possible for the other partners to carry on partnership with him.

(v) When a partner transfers his interest or share to third party.

(vi) When the business cannot be carried out except at a loss. (It must be remembered that the object of partnership is to earn profits and if that object is not fulfilled, the firm can be dissolved).

(vii) When it appears to be just and equitable. For instance, continued quarrelling, deadlock in the management, refusal to attend matters of business, absence of cooperation etc. among the partners. (The court has wide discretionary powers).

Liability for Acts Done After Dissolution (Sec. 45)

When a firm is dissolved a public notice must be given of the dissolution. If it is not done, the partners continue to be liable as such to third parties for any act done by any of them after the disso­lution, and in such a case, the act of a partner done after dissolution is deemed to be an act done before the dissolution.

Settlement of Accounts (Sec. 48)

As soon as a firm is dissolved, it ceases to transact normal business. The mode of settlement of accounts between partners after the dissolution of a firm is determined by the partnership agreement. In the absence of any specific agreement as to the mode of settlement of accounts after the dissolu­tion of the firm, the Partnership Act laid down the following provisions (Sec. 48) for settlement of accounts.

(a) Losses, including deficiencies of capital, shall be paid first out of profit, next out of capital, and lastly, if necessary, by the partners individually in their profit-sharing ratio.

(b) The assets of the firm including any sums contributed by the partners to make up deficien­cies of capital shall be applied in the following manner and order:

(i) In paying the debts of the firm to third parties.

(ii) In paying each partner rateably what is due to him from the firm for advances.

(iii) In paying to each partner rateably what is due to him on account of capital, and

(iv)The surplus, if any, will be divided among the partners in their profit sharing ratio.

Dissolution Accounts

When a business is discontinued, the firm is said to be dissolved. As a result, all the accounts be closed. It is, therefore, necessary to open Realisation Account, Cash or Bank Account and Partners Capital Accounts.

 (i) Realisation Accounts is opened for all transactions relating to realisation of assets and payment of liabilities. That is, on dissolution, it is essential to make sale of assets of the firm, realize cash and paying off the liabilities.

Realisation of assets and settlement of liabilities are centred round the Realisation Account. It is a nominal Account. The transactions realisation and settlement are over, the difference, being gain or loss will be transferred to Capital Accounts.

(ii) Cash/Bank Account is opened to record all cash transactions. When the purpose is over the Cash Account shows a balance, which is equal to the amounts due to partners.

(iii) Capital Accounts are opened to make all entries connected with the partners’ accounts. Current Accounts, if any, are transferred to Capital Accounts. Finally the Capital Accounts are closed by receiving or paying cash.

The following steps are taken to close the books of accounts:

To sum up, when all the assets are realized and the liabilities are paid off, the balance of cash or Bank must be equal to the amount due finally to the partners’ capital account, after transferring the current account, if any. Sometimes, the capital account shows a debit balance, representing the amount due to the firm by the concerned partner.

The principle of unlimited liability is applied, that is, the partner, whose capital account shows a debit balance, should bring the amount to clear off the debit balance in his capital account. Then the cash in hand plus the amount so received, is applied in paying off all the partners whose accounts show credit balances. Thus, all the accounts of assets, liabilities, partners’ capital, and cash are closed.

The above method of preparation of Realisation Account is called Total Method. Alternatively, there is another method, known as Balance Method to prepare the Realisation Account.

Under the Balance Method, the assets appearing in the Balance sheet are not transferred to Realisation Account at their book value. But, only the difference between the Book Value of Assets and the amount realized by their sale is transferred to Realisation.

The sales proceeds are not taken through Realisation Ac­count. The liabilities too are not transferred to Realisation Account but only the difference between the book value and payments paid is transferred to Realisation Accounts.

For instance, consider the following:

Note: Return of Premium on Premature Dissolution:

Where a partner has paid a premium on entering into partnership for a fixed term, and the firm is dissolved before the expiration on the term otherwise than by the death of a partner, he shall be entitled to repayment of the premium or of such part thereof as may be reasonable unless the dissolu­tion is mainly due to his own misconduct, or the dissolution is in pursuance of an agreement contain­ing no provision for the return of the premium or any part of it.