Tag: Cash Accounting

Provision

A provision is a decrease in asset value and should be recognized when a present obligation arises due to a past event. The timing as to when the said obligation arises and the amount is often uncertain. Commonly recorded provisions are, provision for bad debts (debts that cannot be recovered due to insolvency of the debtors) and provision for doubtful debts (debts that are unlikely to be collected due to possible disputes with debtors, issues with payments days etc.) where the organization makes an allowance for the inability to collect funds from their debtors due to nonpayment. Provisions are reviewed at the financial year end to recognize the movements from the last financial year’s provision amount and the over provision or under provision will be charged to the income statement. The usual provision amount for a provision will be decided based on company policy.

Basic accounting treatment for recognizing a provision is,

Expense A\C                              Dr

Provision A\C                            Cr

Contingent Liability

For a contingent liability to be recognized there should be a reasonable estimate of a probable future cash outflow based on a future event. For instance, if there is a pending lawsuit against the organization, a possible cash payment may have to be made in the future in case the organization loses the lawsuit. Either winning or losing the lawsuit is not known at present thus the occurrence of the payment is not guaranteed. The recording of the contingent liability depends on the probability of the occurrence of the event that gives rise to such liability. If a reasonable estimate cannot be made regarding the amount, the contingent liability may not be recorded in the financial statements. Basic accounting treatment for recognizing a contingent liability is,

Cash   A\C                                       Dr

Accrued Liability A\C                   Cr

In accounting, “Accounts” refer to the individual records that track financial transactions related to specific assets, liabilities, equity, income, or expenses. Each account is part of the general ledger, where debits and credits are recorded to monitor the financial status of a business. Accounts help in organizing financial data for reporting, analysis, and decision-making purposes.

Accounts Types

There are several types of accounting that range from auditing to the preparation of tax returns. Accountants tend to specialize in one of these fields, which leads to the different career tracks noted below:

• Public Accounting.

This field investigates the financial statements and supporting accounting systems of client companies, to provide assurance that the financial statements assembled by clients fairly present their financial results and financial position. This field requires excellent knowledge of the relevant accounting framework, as well as an inquiring personality that can delve into client systems as needed. The career track here is to progress through various audit staff positions to become an audit partner.

• Financial Accounting.

This field is concerned with the aggregation of financial information into external reports. Financial accounting requires detailed knowledge of the accounting framework used by the reader of a company’s financial statements, such as Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS). Or, if a company is publicly-held, it requires a knowledge of the standards issued by the government entity responsible for public company reporting in a specific country (such as the Securities and Exchange Commission in the United States). There are several career tracks involved in financial accounting. There is a specialty in external reporting, which usually involves a detailed knowledge of accounting standards. There is also the controller track, which requires a combined knowledge of financial and management accounting.

• Government Accounting.

This field uses a unique accounting framework to create and manage funds, from which cash is disbursed to pay for a number of expenditures related to the provision of services by a government entity. Government accounting requires such a different skill set that accountant tend to specialize within this area for their entire careers.

• Management Accounting.

This field is concerned with the process of accumulating accounting information for internal operational reporting. It includes such areas as cost accounting and target costing. A career track in this area can eventually lead to the controller position, or can diverge into a number of specialty positions, such as cost accountant, billing clerk, payables clerk, and payroll clerk.

• Forensic Accounting.

This field involves the reconstruction of financial information when a complete set of financial records is not available. This skill set can be used to reconstruct the records of a destroyed business, to reconstruct fraudulent records, to convert cash-basis accounting records to the accrual basis, and so forth. This career tends to attract auditors. It is usually a consulting position, since few businesses require the services of a full-time forensic accountant. Those in this field are more likely to be involved in the insurance industry, legal support, or within a specialty practice of an audit firm.

• Tax Accounting.

This field is concerned with the proper compliance with tax regulations, tax filings, and tax planning to reduce a company’s tax burden in the future. There are multiple tax specialties, tracking toward the tax manager position.

• Internal Auditing.

This field is concerned with the examination of a company’s systems and transactions to spot control weaknesses, fraud, waste, and mismanagement, and the reporting of these findings to management. The career track progresses from various internal auditor positions to the manager of internal audit. There are specialties available, such as the information systems auditor and the environmental auditor.

Accounting Rules

The system of debit and credit is right at the foundation of double entry system of book keeping. It is very useful, however at the same time it is very difficult to use in reality. Understanding the system of debits and credits may require a sophisticated employee. However, no company can afford such ruinous waste of cash for record keeping. It is generally done by clerical staff and people who work at the store. Therefore, golden rules of accounting were devised.

Golden rules convert complex bookkeeping rules into a set of principles which can be easily studied and applied.

• Debit The Receiver, Credit the Giver

This principle is used in the case of personal accounts. When a person gives something to the organization, it becomes an inflow and therefore the person must be credit in the books of accounts. The converse of this is also true, which is why the receiver needs to be debited.

• Debit What Comes In, Credit What Goes Out

This principle is applied in case of real accounts. Real accounts involve machinery, land and building etc. They have a debit balance by default. Thus, when you debit what comes in, you are adding to the existing account balance. This is exactly what needs to be done. Similarly, when you credit what goes out, you are reducing the account balance when a tangible asset goes out of the organization.

• Debit All Expenses and Losses, Credit All Incomes and Gains

This rule is applied when the account in question is a nominal account. The capital of the company is a liability. Therefore, it has a default credit balance. When you credit all incomes and gains, you increase the capital and by debiting expenses and losses, you decrease the capital. This is exactly what needs to be done for the system to stay in balance.

Transaction analysis is a fundamental process in accounting that involves examining financial transactions to determine their impact on the financial statements of a business. This analysis is crucial for maintaining accurate financial records, preparing financial statements, and ensuring compliance with accounting standards.

Significance of Transaction Analysis:

• Accurate Financial Reporting:

Transaction analysis helps ensure that all financial transactions are accurately recorded, providing a true representation of a company’s financial position. This accuracy is essential for internal management and external stakeholders.

• Informed Decision-Making:

Understanding the effects of transactions on financial statements allows management to make informed decisions. By analyzing past transactions, businesses can identify trends, assess performance, and strategize for the future.

• Compliance:

Transaction analysis ensures that organizations comply with accounting principles and regulations, such as Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS). Adherence to these standards is critical for maintaining transparency and credibility.

• Fraud Detection:

A thorough analysis of transactions can help identify irregularities and potential fraud. By scrutinizing transactions, accountants can detect discrepancies that may indicate fraudulent activities.

Components of Transaction Analysis:

Transaction analysis involves several key components that work together to assess the financial implications of a transaction. These components include:

• Accounts:

Accounts are the individual records in which financial transactions are recorded. Each account represents a specific category, such as assets, liabilities, equity, revenue, or expenses.

• Debits and Credits:

The double-entry accounting system relies on the concepts of debits and credits. Each transaction affects at least two accounts, with one account being debited and another being credited. This ensures that the accounting equation (Assets = Liabilities + Equity) remains balanced.

• Accounting Equation:

The accounting equation serves as the foundation for transaction analysis. It states that a company’s assets must equal the sum of its liabilities and equity. Understanding this equation is crucial for determining how transactions affect the financial position of a business.

Steps in Transaction Analysis:

Transaction analysis typically involves a systematic approach to assess the financial impact of a transaction.

Step 1: Identify the Transaction

The first step in transaction analysis is to identify the transaction that needs to be analyzed. This could be any financial activity, such as a sale, purchase, payment, or receipt. For instance, if a company sells goods to a customer for cash, this transaction must be recorded.

Step 2: Determine the Accounts Affected

Once the transaction is identified, the next step is to determine which accounts will be affected. In our example of a cash sale, the accounts involved would be “Cash” (an asset) and “Sales Revenue” (a revenue account). It’s essential to consider the nature of each account to understand how the transaction will impact the financial statements.

Step 3: Analyze the Impact on Each Account

After identifying the affected accounts, the next step is to analyze how the transaction impacts each account. This involves deciding whether the accounts will be debited or credited.

For the cash sale example:

• Cash Account: This account will be increased (debited) by the amount received from the customer.
• Sales Revenue Account: This account will be increased (credited) to reflect the revenue earned from the sale.

Step 4: Record the Transaction

Once the impact on each account is determined, the transaction can be recorded in the accounting system using journal entries. The journal entry for the cash sale would look like this:

This entry reflects that cash is increasing by $1,000 and sales revenue is also increasing by the same amount.

Step 5: Post to the Ledger

After recording the transaction in the journal, it must be posted to the general ledger. The ledger is a collection of all accounts, where the cumulative effect of transactions is maintained. In our example, the cash and sales revenue accounts in the ledger will now reflect the increase.

Step 6: Prepare Financial Statements

Transaction analysis culminates in the preparation of financial statements, which summarize the financial position and performance of the business. The recorded transactions will impact the balance sheet and income statement.

• Balance sheet will show an increase in cash under assets.
• Income statement will reflect the increase in sales revenue, contributing to the company’s net income.

Provision for Doubtful Debts refers to a fund or reserve that a business sets aside from its earnings to cover potential future bad debts. In many businesses, customers purchase goods or services on credit, leading to accounts receivable. However, not all customers may fulfill their obligation to pay, and some of these debts may turn into bad debts.

To prepare for such losses, companies create a provision based on historical data, the financial condition of debtors, or market trends. This provision does not directly write off any specific debt but sets aside an estimated amount that may become uncollectible. This approach ensures that the reported value of accounts receivable reflects a more accurate figure, reducing the risk of overstating a company’s assets.

Importance of Provision for Doubtful Debts:

• Accurate Financial Reporting:

By creating a provision for doubtful debts, businesses ensure that their financial statements show a realistic picture of their financial health. Without this provision, accounts receivable could be overstated, misleading stakeholders about the company’s actual liquidity and solvency.

• Risk Mitigation:

It helps businesses anticipate potential losses and prepare for them in advance, ensuring that they are not caught off-guard if debts become uncollectible. This aligns with the conservative approach in accounting, which encourages businesses to prepare for foreseeable risks.

• Compliance with Accounting Standards:

In accordance with accounting principles such as the prudence principle and matching principle, the creation of this provision allows businesses to match potential future bad debt expenses with the revenues generated during the same accounting period.

• Improved Decision-Making:

Business leaders can make more informed decisions about credit policies, risk management, and liquidity when they have a realistic estimate of potential bad debts.

• Investor Confidence:

Investors and creditors prefer to see financial statements that adhere to conservative accounting practices, as it reduces the likelihood of sudden financial surprises due to bad debts.

Methods for Estimating Provision for Doubtful Debts:

The provision for doubtful debts can be estimated using the following methods:

1. Percentage of Sales Method:

A certain percentage of total credit sales is set aside as a provision. The percentage is usually based on historical data or industry standards regarding bad debts.

2. Aging of Accounts Receivable Method:

This method involves classifying debts according to their age (how long they have been outstanding) and applying different percentages of uncollectibility to each age category. Older debts are usually more likely to be written off, so they are allocated a higher provision.

3. Historical Data:

Businesses often review their past experiences with bad debts to estimate the provision required for the future.

Accounting Treatment for Provision for Doubtful Debts:

The creation of the provision for doubtful debts involves recording an expense in the profit and loss account and creating a liability or reducing the receivables balance on the balance sheet. Here’s the accounting treatment:

1. At the Time of Creating Provision:

When a company determines the estimated amount for provision, the following journal entry is passed:

Bad Debts Expense A/c   Dr.

    To Provision for Doubtful Debts A/c

• Bad Debts Expense is debited, increasing the expenses in the profit and loss account.
• Provision for Doubtful Debts is credited, creating a liability on the balance sheet or reducing the value of accounts receivable.

2. At the Time of Writing Off Bad Debts:

If any debt is confirmed to be uncollectible, the following entry is made to write off the debt:

Provision for Doubtful Debts A/c   Dr.

    To Debtors A/c

This entry reduces the debtor’s balance and uses the provision previously created. The loss does not affect the current year’s profit and loss account because it was already accounted for when the provision was created.

3. Adjusting Provision in Subsequent Years:

At the end of every financial year, the provision for doubtful debts is re-evaluated. If the provision needs to be increased or decreased, the following journal entries are passed:

• Increase in Provision: If the provision is found to be inadequate, an additional provision is created:

Bad Debts Expense A/c   Dr.

    To Provision for Doubtful Debts A/c

• Decrease in Provision: If the provision is too high, the excess amount is written back:

Provision for Doubtful Debts A/c   Dr.

    To Bad Debts Expense A/c

Example of Provision for Doubtful Debts

Let’s say a company has the following data:

• Accounts receivable: $100,000
• Estimated 5% of the receivables will become bad debts based on past experiences.

The provision for doubtful debts would be calculated as:

Provision for Doubtful Debts = 5% of $100,000 = $5,000

The journal entry to record the provision would be:

Bad Debts Expense A/c   Dr.  $5,000

    To Provision for Doubtful Debts A/c   $5,000

If in the next year, an actual bad debt of $2,000 is identified, the following entry would be made to write off the debt:

Provision for Doubtful Debts A/c   Dr.  $2,000

    To Debtors A/c   $2,000

In this case, the bad debt is written off without affecting the current year’s profit and loss account because the expense was already recognized when the provision was created.

Cloud accounting software is similar to traditional, on-premises, or self-install accounting software, only the accounting software is hosted on remote servers, similar to the SaaS (Software as a Service) business model. Data is sent into “The cloud,” where it is processed and returned to the user.

All application functions are performed off-site, not on the user’s desktop. In cloud computing, users access software applications remotely through the Internet or other network via a cloud application service provider.

Using cloud accounting software frees the business from having to install and maintain software on individual desktop computers.

Cloud accounting software

Cloud accounting (or online accounting) has all the same functionality as desktop accounting, but moves the whole process to the cloud and expands upon it. There’s no desktop application you log in to an always-up-to-date online solution and all data is safely stored on a cloud server. Most cloud platforms will also have an open API, which basically means third party software can connect with your system to provide even further value to you as a business owner.

Cloud accounting solutions also allow employees in other departments, remote or branch offices to access the same data and the same version of the software.

Benefits of Cloud Accounting

Secure sharing of data

When you’re working with your accountant, bank or other advisers, you can easily grant access to your accounts with cloud accounting software. There’s no need for USB memory sticks or sending emails back and forth. Your advisers have safe and secure access to all your financial information, in real time. This is quicker, safer and gives your advisers the information needed to support and advise you, going forward.

Seamless backups and updates

Time consuming daily backups are a drain on your staff’s time and patience! On the cloud platform, manual backups are a thing of the past. The software does it for you in real-time.

Not only does this mean that your risk of data-loss is minimised, but it also means that you can rest assured that everyone’s working from the same file version. File updates made by Sarah in her Sydney home office are instantly applied, saved, and accessible to all stakeholders across the world.

Always working with the latest software version

When you log in to your accounting platform in the cloud, you’re always using the latest version of the software. There’s no need for time-consuming and costly updates you just sign in and start working. Plus, you don’t have to be responsible for applying security fixes your software provider will handle that for you automatically.

Live bank feeds

Many cloud accounting platforms offer live feeds to your bank accounts, giving you the ability to link your banking directly with your accounting. Instead of manually keying-in each bank statement line, or uploading a .CSV file that you’ve downloaded from your internet banking portal, a live feed pulls your bank data straight through into your accounts. These speeds up bank reconciliation and gives you a more accurate view of your bank balance.

Access your accounts anywhere

Cloud accounting gives you access to your key business numbers 24/7, from any location where you can access the internet, removing the need to work from one central office-based computer. Log in via a web browser from your laptop, or use your provider’s mobile app to access your accounts from your phone or tablet.

Access to the app ecosystem

Open APIs mean you can add a range of third-party apps and tools to expand your core business system. There are cash flow forecasting apps, online invoicing apps, industry-specific project management tools and a host of other practical solutions to choose from. These tools enable you to further save time, reduce resourcing costs, identify problems further in advance, and generally ease the pain of unnecessary admin that’s weighing you down.

Access to real-time information

By keeping your bookkeeping and bank reconciliation up to date, you can achieve real-time reporting. Instead of looking at historical reports that are days, weeks, or even months out of date, you have an instant overview of the company’s current financial position. This real-time overview is vital when looking at your cash position, planning future spending and when making big financial and strategic decisions as a management team.

Limitations/Disadvantages:

Data security. This is extremely important so you need to be confident that your provider adheres to high standards. In addition, you need strong discipline around things like controlling access so that when staff leave, for example, their logins to your system are removed.

Internet/Broadband speed. Cloud-based accounting requires a good Internet connection otherwise slow speeds could impact efficiency and/or you could be affected by outages.

GDPR. Again, this is very important especially if the solution provider that you choose could involve having to transfer data out of the EU.

Vendor lock in. Some clients worry about this in case they may need to switch to an alternative solution provider in future.

Brexit. We don’t yet know what future arrangements will be in place around data and digital services.

Lack of customisation. This is usually more of a concern for large organisations with legacy systems.

Cost control is the task of overseeing and managing project expenses and preparing for potential financial risks. This is typically the project manager’s responsibility. Cost control involves managing the budget, as well as planning, and preparing for potential risks. Risks can set projects back and sometimes even require unexpected expenses. Preparation for these setbacks can save your team time and potentially, money. Cost control is necessary to keep a record of monetary expenditure for purposes such as:

• Minimising cost where possible;
• Revealing areas of cost overspend.

Cost control information is fundamental to the lessons learned process, as it can provide a database of actual costs against activities and work packages that be used to inform future projects.

Cost Control Techniques

Following are some of the valuable and essential techniques used for efficient project cost control:

Planning the Project Budget

You would need to ideally make a budget at the beginning of the planning session with regard to the project at hand. It is this budget that you would have to help you for all payments that need to be made and costs that you will incur during the project life cycle. The making of this budget therefore entails a lot of research and critical thinking.

Like any other budget, you would always have to leave room for adjustments as the costs may not remain the same right through the period of the project. Adhering to the project budget at all times is key to the profit from project.

Keeping a Track of Costs

Keeping track of all actual costs is also equally important as any other technique. Here, it is best to prepare a budget that is time-based. This will help you keep track of the budget of a project in each of its phases. The actual costs will have to be tracked against the periodic targets that have been set out in the budget. These targets could be on a monthly or weekly basis or even yearly if the project will go on for long.

This is much easier to work with rather than having one complete budget for the entire period of the project. If any new work is required to be carried out, you would need to make estimations for this and see if it can be accommodated with the final amount in the budget. If not, you may have to work on necessary arrangements for ‘Change Requests’, where the client will pay for the new work or the changes.

Effective Time Management

Another effective technique would be effective time management. Although this technique does apply to various management areas, it is very important with regard to project cost control.

The reason for this is that the cost of your project could keep rising if you are unable to meet the project deadlines; the longer the project is dragged on for, the higher the costs incurred which effectively means that the budget will be exceeded.

The project manager would need to constantly remind his/her team of the important deadlines of the project in order to ensure that work is completed on time.

Project Change Control

Project change control is yet another vital technique. Change control systems are essential to take into account any potential changes that could occur during the course of the project.

This is due to the fact that each change to the scope of the project will have an impact on the deadlines of the deliverables, so the changes may increase project cost by increasing the effort needed for the project.

Use of Earned Value

Similarly, in order to identify the value of the work that has been carried out thus far, it is very helpful to use the accounting technique commonly known as ‘Earned Value’.

This is particularly helpful for large projects and will help you make any quick changes that are absolutely essential for the success of the project.

It is advisable to constantly review the budget as well as the trends and other financial information. Providing reports on project financials at regular intervals will also help keep track of the progress of the project.

This will ensure that overspending does not take place, as you would not want to find out when it is too late. The earlier the problem is found, the more easily and quickly it could be remedied.

All documents should also be provided at regular intervals to auditors, who would also be able to point out to you any potential cost risks.

Operating Cycle

An operating cycle refers to the time it takes a company to buy goods, sell them and receive cash from the sale of said goods. In other words, it’s how long it takes a company to turn its inventories into cash. The length of an operating cycle is dependent upon the industry. Understanding a company’s operating cycle can help determine its financial health by giving them an idea of whether or not they’ll be able to pay off any liabilities.

For example, if a business has a short operating cycle, this means they’ll be receiving payment at a steady rate. The faster the company generates cash, the more it’ll be able to pay off any outstanding debts or expand its business accordingly.

The flow of a cash operating cycle is as follows:

• Obtaining raw material
• Producing goods
• Having finished goods
• Having receivables from making a sale
• Obtaining cash (receiving payment from customers)

Factors Impacting the Operating Cycle:

• The payment terms extended to the company by its suppliers. Longer payment terms shorten the operating cycle, since the company can delay paying out cash.
• The order fulfillment policy, since a higher assumed initial fulfillment rate increases the amount of inventory on hand, which increases the operating cycle.
• The credit policy and related payment terms, since looser credit equates to a longer interval before customers pay, which extends the operating cycle.

Budgets

The budget for a project is the sum of costs of individual activities that the project must accomplish.

Budgeting is important in the development of any major business project. Without a well-planned budget, projects can scatter and be left incomplete. Budgeting is not an easy process. It provides a number of different advantages that a project manager should consider.

Establishing Guidelines: Project budget allows you to establish the main objectives of a project. Without proper budgeting, a project may not be completed on time. It allows the project manager to know how much he can spend on any given aspect of the project.

Cost Estimating: Once a budget is in place, the project manager can determine how much money can be spent on each component of the project. Hence it also determines what percentage of the available funds can be allocated to the remaining elements of the project. It gives the chance to decide whether or not the project can be completed in the available budget.

Prioritizing: Another advantage of having a project budget is that it helps you to prioritize the different tasks of the project. Sometimes it might seem to be completed at once, but it doesn’t happen due to some inefficiency. A budget will allow you to prioritize which parts of the project can be completed first.

Allocations

Cost allocation is the distribution of one cost across multiple entities, business units, or cost centers. An example is when health insurance premiums are paid by the main corporate office but allocated to different branches or departments.

When cost allocations are carried out, a basis for the allocation must be established, such as the headcount in each branch or department.

Cost Allocation Methods

The very term “allocation” implies that there is no overly precise method available for charging a cost to a cost object, so the allocating entity is using an approximate method for doing so. Thus, you may continue to refine the basis upon which you allocate costs, using such allocation bases as square footage, headcount, cost of assets employed, or (as in the example) electricity usage. The goal of whichever cost allocation method you use is to either spread the cost in the fairest way possible, or to do so in a way that impacts the behavior patterns of the cost objects. Thus, an allocation method based on headcount might drive department managers to reduce their headcount or to outsource functions to third parties.

Cost Allocation and Taxes

A company may allocate costs to its various divisions with the intent of charging extra expenses to those divisions located in high-tax areas, which minimizes the amount of reportable taxable income for those divisions. In such cases, an entity usually employs expert legal counsel to ensure that it is complying with local government regulations for cost allocation.

Reasons Not to Allocate Costs

An entirely justifiable reason for not allocating costs is that no cost should be charged that the recipient has no control over. Thus, in the African Bongo Corporation example above, the company could forbear from allocating the cost of its power station, on the grounds that none of the six operating departments have any control over the power station. In such a situation, the entity simply includes the unallocated cost in the company’s entire cost of doing business. Any profit generated by the departments contributes toward paying for the unallocated cost.

Process for Performing Cost Allocations

Using a basis for allocation, costs are spread to each business unit or cost center that incurred the cost based on their proportional share of the cost. For example, if headcount forms the basis of allocation for insurance costs, and there are 1000 total employees, then a department with 100 employees would be allocated 10% of the insurance costs.

While there are numerous ways cost allocations can be calculated, it is important to ensure the reasoning behind them is documented. This is often done by establishing allocation formulas or tables.

Once the calculation is established and cost distributions are calculated, journal entries are created to transfer costs from the providing or paying entity to the appropriate consuming entities. During each financial period, as periodic expenses are incurred, this calculation is repeated and allocating entries are made.

The objective of Ind AS 24 is to ensure that an entity’s financial statements contain the disclosures necessary to draw attention to the possibility that its financial position and profit or loss may have been affected by the existence of related parties and by transactions and outstanding balances, including commitments, with such parties.

A related party transaction is a transfer of resources, services or obligations between RE (reported entity) and related party regardless of whether a price is charged or not.

Entity is related to another entity if:

• Entity and RE are members of same group (i.e., Parent, Subsidiary, fellow subsidiary) A Group is a parent and all its subsidiaries.
• Associate or JV of the entity covered under (i) (i.e., associate or JV of member of group)
• Both entities are JV of same third party
• JV and Associate of the same third party
• Entity is post-employment benefit plan of either the RE or an entity related to RE. If RE is itself such a plan, the sponsoring employers are also related to RE.
• Entity is controlled / jointly controlled by Person identified under a)
• Person identified in a(i) has significant influence over the entity; or Person is a member of KMP of the entity or parent of the entity
• Entity (or any member of the group of entity is part) provides KMP services to RE or parent of RE.

Related party disclosure requirements as laid down in this Standard do not apply in circumstances where providing such disclosures would conflict with the reporting entity’s duties of confidentiality as specifically required in terms of a statute or by any regulator or similar competent authority.

In case a statute or a regulator or a similar competent authority governing an entity prohibits the entity to disclose certain information which is required to be disclosed as per this Standard, disclosure of such information is not warranted. For example, banks are obliged by law to  maintain confidentiality  in respect of their customers’ transactions and this Standard would not override the obligation to preserve the confidentiality of customers’ dealings.

This standard shall be applied to:

• Identifying outstanding balance and commitments between the reporting entity and related parties.
• Identifying related parties and transactions with them.
• Determine the disclosures to be made.
• Recognising the circumstances in which disclosures will be required in the above-stated situations.

Related Party Transactions: A transaction of transfer of resources, services or obligations between a reporting entity and a related party regardless of whether a price is charged Government: Government, government agencies and similar bodies whether local, national or international Government-related entity is controlled, jointly controlled or significantly influenced by a government 5. The following are not related parties two entities because they have director or other member of key management personnel in common two joint venturers simply because they share joint control providers of finance trade unions public utilities departments and agencies of government that does not control, jointly control or significantly influence the reportiing entity a customer supplier franchisor distributor general agent 6. Following disclosures are to be made Relationships between a parent and its subsidiaries should be disclosed irrespective of whether there have been transactions between them An entity shall disclose key management personnel compensation in total and for each of the following categories:

• Post-employment benefits
• Short-term employee benefits
• Other long-term benefits
• Termination benefits and
• Share based payment.
• If key management personnel services are obtained from another entity, the above requirements need not be disclosed.
• If an entity has had related party transactions during the periods covered by financial statements, it shall disclose the nature of the related party relationship as well as information about those transactions (i.e amount, terms and conditions, provisions, expense) and outstanding balances, including commitments.
• The disclosures required above shall be made separately for each of the parent, entities with joint control or significant influence over the entity, subsidiaries, associates, joint ventures, key management personnel, other related parties
• Amounts incurred by the entity for the provision of key management personnel services that are provided by a separate management entity.

Some of the examples of transactions to be disclosed if done with related party;

Purchases or sales of goods or assets, rendering or receiving services, leases, transfer of research and development and so on

Disclosures to be made

• An entity must report the compensation to the key management personnel in total and each of the categories such as short term employee benefits, post-employment benefits, termination benefits, share-based payment, and other long-term benefits.
• Relationships between parent and subsidiaries should be disclosed irrespective of whether there have been any transactions or not. If the entity’s parent or the ultimate controlling party does not produce consolidated financial statements, then the next senior parent must be named in the consolidated financial statements for public use.
• If key management services are obtained from another entity, then only the amounts incurred for the provision of such services shall be disclosed.
• The above disclosures will be made separately in respect of a parent, subsidiaries, associate, entities with joint control or significant influence over the other entity, joint ventures in which the entity is the venturer, and key management personnel of the entity or parent and other related parties.
• If the entity has transactions with the related party during the financial year, then it shall disclose the nature of such transactions, and also all the details such as amount, outstanding balances including commitments, provision for doubtful debts, and the expense recognised in respect of bad and doubtful debts.

Government related entities Reporting entity is exempt from the disclosures requirements in relation to related party transactions and outstanding balances including commitments with government who has control or joint control or significant influence over the reporting entity and another entity that is related party because the same government has control or joint control of or significant influence over both the reporting and other entity If the above exemption is applied by the reporting entity then it shall disclose the following about the transactions and related outstanding balances.

• Name of the government and nature of its relationship
• The nature and amount of each individually significant transaction and for other transactions that are collectively but not individually significant a qualitative or quantitative indication of their extent.

Accounting controls consists of the methods and procedures that are implemented by a firm to help ensure the validity and accuracy of its financial statements. The accounting controls do not ensure compliance with laws and regulations, but rather are designed to help a company operate in the best possible manner for all stakeholders.

Accounting Controls are the measures and controls adopted by an organization that leads to increased efficiency and compliance across the organization and ensures that financial statements are accurate when presented to auditors, bankers, investors, and other stakeholders.

The purpose of implementing accounting controls in a firm is to ensure that all areas in an organization avoid fraud and other issues, improve efficiency, accuracy, and compliance. Every firm will have different accounting controls in place, depending on their type of business, however, there are three traditional areas that are the most common when it comes to accounting controls: detective controls, preventive controls, and corrective controls.

Corrective Controls

As the name suggests, corrective controls are put in place to fix any issues found through detective controls. These can also include remedying any issues made on accounting books after the audit process has been completed by an accountant.

Preventive Controls

Preventive controls are simply the controls that have been put in place by an organization to avoid any inaccuracies or incorrect practices. These are the policies and procedures that all employees must follow.

An example of a preventive control would be limiting management’s involvement in the preparation of financial statements. Sometimes it’s helpful for management to be involved since they generally know the company better than anyone. But final say on numbers should be in the hands of an accountant, because management may have the incentive to distort numbers to inflate the company’s performance.

Detective Controls

The controls in this category are meant to seek out any current practices that don’t align with the policies and procedures in place. The goal here is to find any areas that are not functioning as they ought to, if employees are accidentally or purposefully practicing incorrect or illegal actions, or detecting any errors in systems or accounting practices. Examples of detective controls would include inventory checks and internal audits.

Advantages of Accounting Internal Controls

• Accuracy of financial statements and funds application.
• The action log identifies the person responsible for any error.
• Efficient use of the resources for the intended purpose.
• A strong foundation for a more significant growth.
• Helpful in audit facilitation.
• Saving of cost and resources.
• Identification and rectification of any discrepancy identified.

Disadvantages:

• The high cost of maintaining controls and standards.
• Sometimes irritating and time-consuming for employees.
• Duplication of work.
• Overdependent for financial statements and audit.

Procedures:

Approval Authority Requirements

Requiring specific managers to authorize certain types of transactions can add a layer of responsibility to accounting records by proving that transactions have been seen, analyzed and approved by appropriate authorities. Requiring approval for large payments and expenses can prevent unscrupulous employees from making large fraudulent transactions with company funds, for example.

Daily or Weekly Trial Balances

Using a double-entry accounting system adds reliability by ensuring that the books are always balanced. Even so, it is still possible for errors to bring a double-entry system out of balance at any given time. Calculating daily or weekly trial balances can provide regular insight into the state of the system, allowing you to discover and investigate discrepancies as early as possible.

Physical Audits of Assets

Physical audits include hand-counting cash and any physical assets tracked in the accounting system, such as inventory, materials and tools. Physical counting can reveal well-hidden discrepancies in account balances by bypassing electronic records altogether. Counting cash in sales outlets can be done daily or even several times per day. Larger projects, such as hand counting inventory, should be performed less frequently, perhaps on an annual or quarterly basis.

Separation of Duties

Separation of duties involves splitting responsibility for bookkeeping, deposits, reporting and auditing. The further duties are separated, the less chance any single employee has of committing fraudulent acts. For small businesses with only a few accounting employees, sharing responsibilities between two or more people or requiring critical tasks to be reviewed by co-workers can serve the same purpose.

Periodic Reconciliations in Accounting Systems

Occasional accounting reconciliations can ensure that balances in your accounting system match up with balances in accounts held by other entities, including banks, suppliers and credit customers. For example, a bank reconciliation involves comparing cash balances and records of deposits and receipts between your accounting system and bank statements. Differences between these types of complementary accounts can reveal errors or discrepancies in your own accounts, or the errors may originate with the other entities.

Standardized Financial Documentation

Standardizing documents used for financial transactions, such as invoices, internal materials requests, inventory receipts and travel expense reports, can help to maintain consistency in record keeping over time. Using standard document formats can make it easier to review past records when searching for the source of a discrepancy in the system. A lack of standardization can cause items to be overlooked or misinterpreted in such a review.

Accounting System Access Controls

Controlling access to different parts of an accounting system via passwords, lockouts and electronic access logs can keep unauthorized users out of the system while providing a way to audit the usage of the system to identify the source of errors or discrepancies. Robust access tracking can also serve to deter attempts at fraudulent access in the first place.