Month: August 2021

A tangible asset is an asset that has a finite monetary value and usually a physical form. Tangible assets can typically always be transacted for some monetary value though the liquidity of different markets will vary. Tangible assets are the opposite of intangible assets which have a theorized value rather than a transactional exchange value.

Companies have two types of assets; tangible and intangible. Tangible assets are the most basic type of assets on the balance sheet. They are usually the main form of assets in most industries. They are also usually the easiest to understand and value. Tangible assets are assets with a finite or discrete value and usually a physical form. A quick review of a balance sheet will provide a layout of a company’s tangible assets listed by liquidity. The asset portion of the balance sheet is broken out into two parts, current assets and long-term assets. Current assets are assets that can be converted to cash in less than one year. Long-term assets are assets that will not be converted to cash within a year. All types of assets support the operations of a company and help it to achieve its main goal which is generating revenue.

Current and Long-Term Tangible Assets

Tangible assets can be either current assets or long-term assets. Current assets may or may not have a physical onsite presence but they will have a finite transaction value. A company’s most liquid, tangible current assets include cash, cash equivalents, marketable securities, and accounts receivable. All of these tangible assets are included in the calculation of a company’s quick ratio. Other current assets are included in the calculation of a company’s current ratio. The current ratio shows how well a company can cover its current liabilities with its current assets. Current ratio assets include inventory which is not as liquid as cash equivalents but has a finite market value and could be sold for cash if needed in a liquidation.

Long-term assets, sometimes called fixed assets, comprise the second portion of the asset section on the balance sheet. These assets include things like real estate properties, manufacturing plants, manufacturing equipment, vehicles, office furniture, computers, and office supplies. The costs of these assets may or may not be part of a company’s cost of goods sold but regardless they are assets that hold real transactional value for the company.

Tangible assets are recorded on the balance sheet at the cost incurred to acquire them. Long-term tangible assets are reduced in value over time through depreciation. Depreciation is a noncash balance sheet notation that reduces the value of assets by a scheduled amount over time. Current assets are converted to cash within one year and therefore do not need to be devalued over time. For example, inventory is a current asset that is usually sold within one year.

Acquisition of Fixed Assets

Fixed assets refer to long-term tangible assets that are used in the operations of a business. They provide long-term financial benefits, have a useful life of more than one year, and are classified as property, plant, and equipment (PP&E) on the balance sheet.

Fixed asset, in accounting, is defined as a long-term asset having lifespan > 1 financial year and value > capitalizing limit. They are typically bought to generate income. They are also known as Capital Assets and Property, Plant and Equipment (PP&E). These assets are normally not meant to sell or are not easily convertible into cash and therefore are categorized under non-current assets in the balance sheet.

Characteristics of a Fixed Asset

• They can be depreciated

With the exception of land, fixed assets are depreciated to reflect the wear and tear of using the fixed asset.

• They have a useful life of more than one year

Fixed assets are non-current assets that have a useful life of more than one year and appear on a company’s balance sheet as property, plant, and equipment (PP&E).

• They are illiquid

Fixed assets are non-current assets on a company’s balance sheet and cannot be easily converted into cash.

• They are used in business operations and provide a long-term financial benefit

Fixed assets are used by the company to produce goods and services and generate revenue. They are not sold to customers or held for investment purposes.

Asset Types

Current assets or liquid assets are those assets that can easily be converted into cash and are in the business for a short period of time, generally less than or equal to one year. The liquidity of current assets is significantly greater than that of fixed assets.

Fixed assets or hard assets are those held by a business for a long time and cannot be easily converted into cash. Fixed tangible assets are depreciated over a period of time.

Business Importance of Tangible Assets

Depreciation: Depreciation on tangible assets is a non-cash expenditure. It means that it is an expenditure that helps the company receive a tax benefit, but there is no cash outflow from the business.

Liquidity: As tangible current assets can easily be converted into cash, they provide liquidity to the business and, thus, reduce risk. As long as the value of the assets owned by a business is more than the money risked in acquiring them, a business typically remains safe and solvent.

Collateral Security: The assets can be used as collateral security to obtain loans.

Valuation of Tangible Assets

1. Liquidation Method

The assets can be converted into cash. Thus, it is important for a company to know the minimum value it would receive from a quick sale or liquidation. An assessor is hired and determines the value that an auction house, equipment seller, or other bulk asset buyers would be willing to pay for such categories of assets as those owned by the company.

2. Appraisal Method

Under the appraisal method, an appraiser is hired to determine the true fair market value of a company’s assets. The asset appraiser will assess the current condition of the assets, including the degree of obsolescence and level of wear and tear. Then, the appraiser will compare these values to the values such assets can fetch in the open market.

3. Replacement Cost Method

An insurer generally uses the replacement cost method to calculate the value of the asset for insurance purposes. It helps to determine how much it would cost to replace the asset.

Examples of Fixed Assets

• Machinery
• Land
• Buildings and facilities
• Furniture
• Vehicles (company cars, trucks, forklifts, etc.)
• Computer equipment
• Tools

Inventory valuation is the monetary amount associated with the goods in the inventory at the end of an accounting period. The valuation is based on the costs incurred to acquire the inventory and get it ready for sale. Inventories are the largest current business assets. Inventory valuation allows you to evaluate your Cost of Goods Sold (COGS) and, ultimately, your profitability. The most widely used methods for valuation are FIFO (first-in, first-out), LIFO (last-in, first-out) and WAC (weighted average cost).

Inventory refers to the goods meant for sale or unsold goods. In manufacturing, it includes raw materials, semi-finished and finished goods. Inventory valuation is done at the end of every financial year to calculate the cost of goods sold and the cost of the unsold inventory. This is crucial as the excess or shortage of inventory affects the production and profitability of a business.

Inventory is used to find the gross profit, which is the excess of sales over cost of goods sold. To determine the gross profit or the trading profit, the cost of goods sold is matched with the revenue of the accounting period.

Cost of goods sold = Opening stock + Purchases – Closing stock.

The above equation shows that the inventory value affects the cost and thereby the gross profit. For example, if the closing stock is overvalued, it will inflate the current year’s profit and reduce profits for subsequent years.

Specific Identification

Under this method, every item in your inventory is tracked from the time it is stocked to when it is sold. It is usually used for large items that can be easily identified and have widely different features and costs associated with these features. The primary requirement of this method is that you should be able to track every item individually with RFID tag, stamped receipt date or a serial number. While this method introduces a high degree of accuracy to the valuation of inventory, it is restricted to valuing rare, high-value items for which such differentiation is needed.

First-In, First-Out (FIFO)

This method is based on the premise that the first inventory purchased is the first to be sold. The remaining assets in inventory are matched to the assets that are most recently purchased or produced. It is one of the most common methods of inventory valuation used by businesses as it is simple and easy to understand. During inflation, the FIFO method yields a higher value of the ending inventory, lower cost of goods sold, and a higher gross profit. Unfortunately, the FIFO model fails to present an accurate depiction of the costs when there is a rapid hike in prices. Also, unlike the LIFO method, it does not offer any tax advantages.

Last-In, First-Out (LIFO)

Under this inventory valuation method, the assumption is that the newer inventory is sold first while the older inventory remains in stock. This method is hardly used by businesses since the older inventories are rarely sold and gradually lose their value. This results in significant loss to the business. The only reason to use LIFO is when businesses expect the inventory cost to increase over time and lead to a price inflation. By moving high-cost inventories to cost of goods sold, the reported profit levels businesses can be lowered. This allows businesses to pay less tax.

Weighted Average Cost

Under the weighted average cost method, the weighted average is used to determine the amount that goes into the cost of goods sold and inventory. Weighted average cost per unit is calculated as follows:

Weighted Average Cost Per Unit = Total Cost of Goods in Inventory / Total Units in Inventory.

This method is commonly used to determine a cost for units that are indistinguishable from one another and it is difficult to track the individual costs.

The costs that can be included in an inventory valuation are:

• Direct labor
• Direct materials
• Factory overhead
• Freight in
• Handling
• Import duties

Inventory valuation is important for the following reasons:

Impact on multiple periods. An incorrect inventory valuation will cause the reported profits in two consecutive periods to be incorrect, because the incorrect ending balance in the first period will be wrong, and it then carries over into the beginning inventory balance in the next reporting period.

Impact on cost of goods sold. When a higher valuation is recorded for ending inventory, this leaves less expense to be charged to the cost of goods sold, and vice versa. Thus, inventory valuation has a major impact on reported profit levels.

Income taxes. The choice of cost-flow method used can alter the amount of income taxes paid. The LIFO method is commonly used in periods of rising prices to reduce income taxes paid.

Loan ratios. If an entity has been issued a loan by a lender, the agreement may include a restriction on the allowable proportions of current assets to current liabilities. If the entity cannot meet the target ratio, the lender can call the loan. Since inventory is frequently the largest component of this current ratio, the inventory valuation can be critical.

Cost of Goods Sold (COGS) measures the “direct cost” incurred in the production of any goods or services. It includes material cost, direct labor cost, and direct factory overheads, and is directly proportional to revenue.

Cost of goods sold is the accumulated total of all costs used to create a product or service, which has been sold. These costs fall into the general sub-categories of direct labor, materials, and overhead. In a service business, the cost of goods sold is considered to be the labor, payroll taxes, and benefits of those people who generate billable hours (though the term may be changed to “cost of services”). In a retail or wholesale business, the cost of goods sold is likely to be merchandise that was bought from a manufacturer. It does not include any general, selling, or administrative costs of running a business.

As revenue increases, more resources are required to produce the goods or service. COGS is often the second line item appearing on the income statement, coming right after sales revenue. COGS is deducted from revenue to find gross profit.

Accounting for Cost of Goods Sold

IFRS and US GAAP allow different policies for accounting for inventory and cost of goods sold. Very briefly, there are four main valuation methods for inventory and cost of goods sold.

• First-in-first-out (FIFO): Assumes that the items purchased or produced first are sold first. Costs of inventory per unit or item are determined at the time produces or purchased. The oldest cost (i.e., the first in) is then matched against revenue and assigned to cost of goods sold.
• Last-in-first-out (LIFO): The reverse of FIFO. Some systems permit determining the costs of goods at the time acquired or made, but assigning costs to goods sold under the assumption that the goods made or acquired last are sold first. Costs of specific goods acquired or made are added to a pool of costs for the type of goods. Under this system, the business may maintain costs under FIFO but track an offset in the form of a LIFO reserve. Such reserve (an asset or contra-asset) represents the difference in cost of inventory under the FIFO and LIFO assumptions.
• Weighted average:
• Specific identification: Under this method, particular items are identified, and costs are tracked with respect to each item. This may require considerable recordkeeping. This method cannot be used where the goods or items are indistinguishable or fungible.

Calculate the Cost of Goods Sold

The cost of goods sold is derived by adding together beginning inventory and all inventory purchases made during the reporting period, and then subtracting out the ending inventory balance. Beginning inventory is the value of the raw materials and finished goods in stock at the beginning of the reporting period. Purchases made during the reporting period include all raw materials, components, and merchandise acquired from other parties during the period. Ending inventory is the amount counted as being on hand at the end of the reporting period. The formula is:

Cost of goods sold = Beginning inventory + Purchases – Ending inventory

Items Included in Cost of Goods Sold

The items that make up costs of goods sold include:

• Cost of raw materials
• Cost of items intended for resale
• Cost of parts used to make a product
• Supplies used in either making or selling the product
• Direct labor costs
• Overhead costs, like utilities for the manufacturing site
• Shipping or freight in costs
• Indirect costs, like distribution or sales force costs
• Container costs

Inventory is a current asset account found on the balance sheet, consisting of all raw materials, work-in-progress, and finished goods that a company has accumulated. It is often deemed the most illiquid of all current assets and, thus, it is excluded from the numerator in the quick ratio calculation.

The ending balance of inventory for a period depends on the volume of sales a company makes in each period.

You can calculate this amount with the following information:

• Total valuation of beginning inventory. This information appears on the balance sheet of the immediately preceding accounting period.
• Cost of goods sold. This information appears on the income statement of the accounting period for which purchases are being measured.
• Total valuation of ending inventory. This information appears on the balance sheet of the accounting period for which purchases are being measured.

The formula for this is as follows:

Ending Inventory = Beginning Balance + Purchases – Cost of Goods Sold

Inventory and COGS

Ending inventory is also determined by the accounting method for Cost of Goods Sold. There are four main methods of inventory calculation: namely FIFO (“First in, First out”), LIFO (“Last in, First out”), Weighted-Average, and the Specific Identification method. These all have certain criteria to be applied and some methods may be prohibited in certain countries, under certain accounting standards.

In an inflationary period, LIFO will generate higher Cost of Goods Sold than the FIFO method. As such, using the LIFO method would generate a lower inventory balance than the FIFO method. This must be kept in mind when an analyst is analyzing the inventory account.

Turnover and Accounts Payable

The average inventory balance between two periods is needed to find the turnover ratio, as well as for determining the average number of days required for inventory turnover. In these calculations, either net sales or cost of goods sold can be used as the numerator, although the latter is generally preferred, as it is a more direct representation of the value of the raw materials, work-in-progress, and goods ready for sale.

Accounts payable turnover requires the value for purchases as the numerator. This is indirectly linked to the inventory account, as purchases of raw materials and work-in-progress may be made on credit thus, the accounts payable account is impacted.

Inventory Best Practices

Inventory best practices include careful inventory management. The business saying “If you can’t measure it, you can’t manage it” applies here. The first best practice is to track inventory. Others include:

Invest in a Cloud-based Inventory Management Program:

Cloud-based inventory management systems let companies know in real time where every product and SKU are globally. This data helps an organization be more responsive, up-to-date, and flexible.

Carry Safety Stock:

Also known as buffer stock, these products help keep companies from running out of materials or high-demand items. Once companies deplete their calculated supply, safety stock serves as a backup should the level of demand increase unexpectedly.

Use Batch/Lot Tracking:

Record information associated with each batch or lot of a product. Some businesses log precise details, such as expiration dates that provide information about their products’ sellable dates. Companies that do not have perishable goods use batch/lot tracking to understand their products’ landing costs or shelf lives.

Start a Cycle Count Program:

Save time, money and customers. Cycle counting benefits extend well past the warehouse by keeping stock reconciled and customers happy.

Inventory Turnover

Inventory turnover is the number of times a company sells or uses an item in a specific timeframe. The number can reveal whether a company has too much inventory on-hand. To determine inventory turnover, use the following equations:

Average inventory = (Beginning Inventory + Ending Inventory) / 2

Inventory turnover = Sales + Average Inventory

Accounts payable (AP) is money owed by a business to its suppliers shown as a liability on a company’s balance sheet. It is distinct from notes payable liabilities, which are debts created by formal legal instrument documents. An accounts payable department’s main responsibility is to process and review transactions between the company and its suppliers and to make sure that all outstanding invoices from their suppliers are approved, processed, and paid. Processing an invoice includes recording important data from the invoice and inputting it into the company’s financial, or bookkeeping, system. After this is accomplished, the invoices must go through the company’s respective business process in order to be paid.

Accounts receivable and accounts payable are essentially opposites. Accounts payable is the money a company owes its vendors, while accounts receivable is the money that is owed to the company, typically by customers. When one company transacts with another on credit, one will record an entry to accounts payable on their books while the other records an entry to accounts receivable.

An accounts payable is recorded in the Account Payable sub-ledger at the time an invoice is vouched for payment. Vouchered, or vouched, means that an invoice is approved for payment and has been recorded in the General Ledger or AP subledger as an outstanding, or open, liability because it has not been paid. Payables are often categorized as Trade Payables, payables for the purchase of physical goods that are recorded in Inventory, and Expense Payables, payables for the purchase of goods or services that are expensed. Common examples of Expense Payables are advertising, travel, entertainment, office supplies and utilities. AP is a form of credit that suppliers offer to their customers by allowing them to pay for a product or service after it has already been received. Suppliers offer various payment terms for an invoice. Payment terms may include the offer of a cash discount for paying an invoice within a defined number of days. For example, 2%, Net 30 terms mean that the payer will deduct 2% from the invoice if payment is made within 30 days. If the payment is made on Day 31 then the full amount is paid. This is also referred to as 2/10 Net 30.

The accounts payable departments are responsible for more than just paying incoming bills and invoices. Accounts Payable are usually their own department in larger companies but in smaller businesses accounts payable and receivable tasks are usually combined.

While the size of the business ultimately determines the role accounts payable plays, AP fulfills at least three basic functions in addition to paying bills.

Internal Payments

Accounts Payable is responsible for distributing internal reimbursement payments, controlling and administering petty cash and controlling the distribution of sales tax exemption certificates.

Employees must turn in a manual log report, receipts or both substantiate reimbursement requests. Small expenses such as miscellaneous postage, out-of-pocket office supplies or company meeting lunch are handled as petty cash. AP often handles a supply of sales tax exemption certificates issued to managers to ensure qualifying business purchases don’t include sales tax expense.

Business Travel Expenses

Larger businesses or business that require staff to travel may have their AP department manage their travel expenses. The travel management by the AP department might include making advance airline, car rental and hotel reservations. Depending on the controls of a company, account payable might processes requests and distributes funds to cover travel expenses. After a business travel has occurred, AP would then be responsible for settling funds distributed versus funds actually spent or for processing travel reimbursement requests.

Vendor Payments

Accounts Payable organizes and maintains vendor contact information, payment terms and Internal Revenue Service W-9 information either manually or using a computer database. Depending on the internal controls of a company, an AP department either handle pre-approved purchase orders or accounts payable verifies purchases after a purchase is made. The AP department also handles end-of-month aging analysis reports that lets management how much the business currently owes.

Other Functions

The accounts payable department also work to reduce costs by recognizing details and developing strategies to save a business money. An example is if an invoice gets paid within a discount period that many vendors provide. AP is also a direct line contact between a business and its vendor representatives. Strong business relationships between the two could benefit the company and a vendor might offer relaxed credit terms.

Process involves:

Receiving the bill: If goods were purchased, the bill helps trace the quantity of what was received. The validity of the bill can be known during this time too.

Review bill details: Ensure that the bill includes vendor name, authorization, date and verified and matching requirements to the purchase order.

Updating records once the bill is received: Ledger accounts need to be updated based on the received bills and an expense entry is usually required. Managerial approval might be required at this stage with the approval hierarchy attached to the bill value.

Making timely payment: All payments should be processed before or at their due date on a bill, as agreed upon between a vendor and a purchasing company. Required documents need to be prepared and verified. Details entered on the cheque, vendor bank account details, payment vouchers, the original bill and purchase order need to be scrutinized. A managerial authorization might be required at this point too.

Notes receivable represents claims for which formal instruments of credit are issued as evidence of debt, such as a promissory note. The credit instrument normally requires the debtor to pay interest and extends for time periods of 30 days or longer. Notes receivable are considered current assets if they are to be paid within one year, and non-current if they are expected to be paid after one year.

Notes receivable is an asset of a company, bank or other organization that holds a written promissory note from another party.

If the note receivable is due within a year, then it is treated as a current asset on the balance sheet. If it is not due until a date that is more than one year in the future, then it is treated as a non-current asset on the balance sheet.

Often, a business will allow customers to convert their overdue accounts (the business’ accounts receivable) into notes receivable. By doing so, the debtor typically benefits by having more time to pay.

Key Components of Notes Receivable

Maker: The person who makes the note and therefore promises to pay the note’s holder. To a maker, the note is classified as a note payable.

Principal value: The face value of the note.

Payee: The person who holds the note and therefore is due to receive payment from the maker. To a payee, the note is classified as a note receivable.

Timeframe: The length of time during which the note is to be repaid. Notes receivable are not usually subject to prepayment penalties, so the maker of the note is free to pay off the note on or before the note’s stated due, or maturity, date.

Stated interest: A note receivable generally includes a predetermined interest rate; the maker of the note is obligated to pay the interest amount due, in addition to the principal amount, at the same time that they pay the principal amount.

Notes Receivable Terms

The payee is the party who receives payment under the terms of the note, and the maker is the party obligated to send funds to the payee. The amount of payment to be made, as listed in the terms of the note, is the principal. The principal is to be paid on the maturity date of the note.

A note receivable usually includes a specific interest rate, or a rate which is tied to another interest rate, such as a bank’s prime rate. The calculation of the interest earned on a note receivable is:

Interest earned = Principal x Interest rate x Time period

If an entity has a large number of notes receivable outstanding, it should consider setting up an allowance for doubtful notes receivable, in which it can accrue a bad debt balance that it can use to write off any notes receivable that later become uncollectible. An uncollectible note receivable is said to be a dishonored note.

Transfers of financial assets take many forms, including sales, assignments, factoring arrangements and securitizations. Often transfers involve the seller (transferor) having some continuing involvement either with the transferred assets or with the buyer (transferee). Continuing involvement can exist in different forms such as seller recourse provisions, servicing arrangements and call options.

Accounting for transfers in which the transferor has no continuing involvement with the transferred financial assets or with the transferee is not a controversial topic. However, transfers of financial assets with continuing involvement often raise questions about the circumstances under which the transfers should be accounted for as sales (i.e., assets are removed from the balance sheet and a resulting gain or loss is recognized) or secured borrowings (i.e., assets remain on the balance sheet with no change in measurement).

Transfers and Servicing, establishes principles and a control-based accounting framework for evaluating transfers of financial assets, which can be summarized as follows:

• The economic benefits provided by a financial asset (generally, the right to future cash flows) are derived from the contractual provisions of that asset, and the entity that controls those benefits should recognize them as its asset.
• An entire financial asset cannot be divided into components prior to a transfer unless all of the components meet the definition of a participating interest.
• A transferred financial asset should be considered sold and therefore should be derecognized if “control” is surrendered.
• A transferred financial asset should be considered pledged as collateral to secure an obligation of the transferor (and therefore should not be derecognized) if the transferor has not surrendered control.
• The recognition or derecognition of financial assets and liabilities should not be affected by the sequence of transactions that led to their existence unless the effect of those transactions is to maintain effective control over a transferred financial asset.
• To the extent that a transfer of financial assets does not qualify for sale accounting, the transferor’s contractual rights or obligations related to the transferred assets are not accounted for separately if doing so would result in recognizing the same rights or obligations twice. For example, a call option retained by the transferor may prevent a transfer from being accounted for as a sale. In that case, the call option is not separately recognized as a derivative asset.
• Transferors and transferees generally should account symmetrically for transfers of financial assets.
• When determining whether control has been surrendered over transferred financial assets, the transferor (and its consolidated affiliates included in the financial statements being presented) should consider its continuing involvement in the transferred financial assets and all arrangements or agreements made contemporaneously with, or in contemplation of, the transfer, even if they were not entered into at the time of the transfer. Certain exceptions apply (e.g., accounting for repurchase financings, as defined).

A transfer of a financial assets can take many forms; from the sale of a widely-held equity security for cash to sales of trade receivables to a securitization entity in exchange for cash, a subordinated economic interest in the receivables, and servicing rights. A transfer may involve the conveyance of all rights and title in a financial asset to its purchaser or, alternatively, a transferor may sell an ownership interest in only certain of an underlying financial asset’s cash flows. In other instances, the transferor may grant only a security interest in a financial asset pledged with the transferee.

ASC 860, Transfers and Servicing, provides comprehensive guidance to assist a transferor of financial assets to account for transactions that involve a transfer of a recognized financial asset or an interest therein. Perhaps most importantly, ASC 860 prescribes the conditions that a transfer must satisfy to allow the transferor to derecognize the financial asset from its balance sheet. The guidance in ASC 860 addresses not only the transferor’s accounting, but also informs the corresponding accounting by the transferee.

ASC 860’s derecognition model incorporates the so-called financial components approach. The fundamental tenets of that approach include:

• The economic benefits provided by a financial asset (generally, the right to future cash flows) stem from the asset’s underlying contractual provisions, and the entity that controls those benefits should recognize them as its asset.
• A financial asset should be considered sold–and therefore derecognized–if it is transferred and control is surrendered.
• If a transferor has not surrendered control of a financial asset, derecognition is inappropriate; the asset should be considered pledged as collateral to secure an obligation of the transferor.
• The recognition of financial assets (and liabilities) should not be affected by the sequence of transactions that led to their existence; the controlling principle instead is whether a transferor maintains effective control over a transferred asset.
• Transferors and transferees should account for transfers of financial assets similarly (symmetrical reporting).

ASC 860’s derecognition model does not incorporate consideration of an asset’s “risks and rewards” and how a transfer impacts the transacting parties’ assumption or retention of those risks. Instead, it is a control-based framework.

To apply ASC 860’s derecognition template, companies must first identify which party to a transfer controls the financial assets after the exchange. This assessment should consider the transferor’s continuing involvement in the transferred financial asset, including all arrangements or agreements made contemporaneous with, or in contemplation of, the transfer, even if they were not entered into at the time of the transfer. Under the financial components approach, an entity that has surrendered control over a transferred financial asset should derecognize the asset. Conversely, an entity must recognize all financial assets acquired (controlled), and any liabilities incurred, stemming from a transfer.

Financial Asset: Cash, evidence of an ownership interest in an entity, or a contract that conveys to one entity a right to do either of the following:

• Receive cash or another financial instrument from a second entity
• Exchange other financial instruments on potentially favorable terms with the second entity.

There are some similarities between securities lending transactions and repurchase agreements, both of which represent securities financing transactions. For example, in both types of transactions:

• One party generally transfers legal title to a security or basket of securities to another party for a limited time in exchange for the receipt of a legal interest in the collateral pledged as part of the transaction. Therefore, in both types of transactions, there is a lender and a borrower of the security.
• Fees are involved.
• An entity generally accounts for the transaction as a secured borrowing, though this may not always be the case.

Salary payable is the amount of liability or payment of the company towards its employees against the services provided by them but not yet paid at the end of the month, year, or for a specific period of time. These amounts include the basic salary, overtime, bonus, and other allowance. These payables are required to recognize along with the salary’s expenses in the company’s financial statements at the end of the period. Salary payable is a current liability account containing all the balance or unpaid wages at the end of the accounting period.

The amount of salary payable is reported in the balance sheet at the end of the month or year, and it is not reported in the income statement.

Accounting treatment of salary payable:

Salary payable is classified as a current liability account under the head of current liabilities on the balance sheet. All the general rules of accounting are also applicable to this account.

Salary expenses are the income statement account. It is sometimes recording under the cost of goods sold, cost of services, or operating expenses depending on how the staff is involved in the operation.

Salary payable and accrued salaries expenses are the balance sheet account, and they are recording under the current liabilities sections. This account is decreasing when the company makes payable to its staff.

When the salaries expenses are recognized, but the company has not paid yet to its staff, the following journal entries should be recorded:

Dr Salary expenses XXXX

Cr Salary payable XXXX

And if the salaries are pay to its staff, then the following journal entries should be recorded:

Dr Salary payable XXXX

Cr Cash or bank XXXX

Salary expenses are the income statement account, and it records all of the salary expenses that occur during the period or year. However, the salary payable account is the balance sheet account that reports only the unpaid amount.

The same as other liabilities accounts, salary payable increase is recording on the credit side, and when it is decreasing is recording on the debit side. The recording is different from the recording of assets or expenses, and it is the same effect as revenues and equity.

Salary payable Vs Accrued salary expenses:

Accrued salary expenses are different from the salaries payable. The company knows the exact amount of payment to be paid and actually incurred in the salaries payable.

However, the company’s accrued salary expenses are the expenses that the company is expected to incur based on their best estimate. However, the company does not know yet the exact amount incurred. The company needs to accrue the expenses.

Payroll journal entries fall under the payroll account and are part of your general ledger. Record the following expenses in your payroll account:

• Payroll taxes: Federal income, Social Security, Medicare, and applicable state or local income taxes withheld from employee wages.
• Employee compensation: Salaries, wages, bonuses, commissions, and other taxable income reported on Form.
• Employer taxes: Employer match of Social Security and Medicare taxes, as well as federal and state unemployment taxes
• Employee deductions for benefits: Health insurance, retirement plan, etc.
• Employer portion of fringe benefits: Health insurance, life insurance, education assistance, etc.
• Other deductions: Child support, spousal support, outstanding tax liabilities, etc.