Tag: Double Entry

Ledger is a principal book of accounts where all business transactions, after being recorded in journals, are classified and posted under individual account heads. It is often called the “book of final entry” because it summarizes all financial information related to a particular account, such as cash, sales, purchases, etc. Each ledger account has two sides: Debit (Dr.) and Credit (Cr.). The ledger helps in preparing the Trial balance and financial statements. It ensures that all similar transactions are grouped together, making it easier to track financial performance and balances. Examples of ledger accounts include Cash Account, Sales Account, and Capital Account. Maintaining a ledger is essential for accuracy and completeness in the accounting process.

Nature of a Ledger:

Ledger is a permanent record of all financial transactions in a business, organized by account. Unlike the journal, which records transactions chronologically, the ledger organizes transactions by account, providing a summary of all activity related to each account over a specific period. The ledger enables businesses to keep track of their financial position and performance over time, making it an essential tool for financial reporting and analysis.

Structure of a Ledger:

Structure of a Ledger typically includes the following key Components:

1. Account Title: The name of the account, such as Cash, Accounts Receivable, Inventory, Accounts Payable, Sales Revenue, etc.
2. Date: The date of each transaction recorded in the ledger.
3. Description: A brief explanation of the transaction.
4. Debit Column: The amount that is debited to the account for each transaction.
5. Credit Column: The amount that is credited to the account for each transaction.
6. Balance: The running balance of the account after each transaction is recorded, indicating whether the account has a debit or credit balance.

The format of a ledger entry is typically organized as follows:

Date	Description	Debit ($)	Credit ($)	Balance ($)
YYYY-MM-DD	Initial Balance	–	–	XXX.XX
YYYY-MM-DD	Transaction Description	X.XX	–	XXX.XX
YYYY-MM-DD	Transaction Description	–	Y.YY	XXX.XX

Example of a Ledger

Let’s consider a simple example of a Cash Ledger for a small retail business:

Date	Description	Debit ($)	Credit ($)	Balance ($)
2024-10-01	Initial Balance	–	–	10,000.00
2024-10-02	Cash Sale	5,000.00	–	15,000.00
2024-10-05	Inventory Purchase	–	1,500.00	13,500.00
2024-10-10	Utilities Payment	–	300.00	13,200.00
2024-10-12	Cash Sale	2,000.00	–	15,200.00

In this example, the Cash account shows the initial balance, cash inflows from sales, and outflows for purchases and expenses, with the running balance calculated after each transaction.

Types of Ledgers:

There are several types of ledgers, each serving different purposes in the accounting process:

1. General Ledger:

This is the main ledger that contains all the accounts for recording financial transactions. It serves as the basis for preparing financial statements and includes all assets, liabilities, equity, revenues, and expenses.

2. Sub-ledgers:

These are specialized ledgers that provide more detail for specific accounts within the general ledger. Common sub-ledgers:

• Accounts Receivable Ledger: Tracks amounts owed by customers.
• Accounts Payable Ledger: Tracks amounts owed to suppliers.
• Inventory Ledger: Provides detailed records of inventory transactions.
• Fixed Asset Ledger: Records details about a company’s fixed assets, such as property, equipment, and vehicles.

3. Sales Ledger:

Specialized ledger that records all sales transactions, both cash and credit, along with customer details.

4. Purchase Ledger:

Specialized ledger that records all purchase transactions, providing details about suppliers and amounts owed.

Importance of Ledgers:

1. Comprehensive Financial Tracking:

Ledgers provide a detailed and organized record of all financial transactions, enabling businesses to track their financial activities effectively. By maintaining ledgers, businesses can monitor income, expenses, assets, and liabilities systematically.

2. Financial Reporting:

The information in the ledger serves as the basis for preparing financial statements, including the income statement, balance sheet, and cash flow statement. Accurate ledgers ensure that financial reports reflect the true financial position and performance of the business.

3. Facilitating Audits:

Ledgers play a crucial role in internal and external audits. Auditors rely on ledgers to verify the accuracy and completeness of financial transactions, ensuring compliance with accounting standards and regulations.

4. Error Detection:

By providing a clear record of all transactions, ledgers help accountants identify discrepancies and errors in financial reporting. Any inconsistencies between the journal entries and the ledger can be investigated and corrected promptly.

5. Budgeting and Forecasting:

Businesses use ledgers to analyze past financial performance, which aids in budgeting and forecasting future financial needs. By examining historical data, businesses can make informed decisions regarding resource allocation and financial planning.

6. Performance Evaluation:

Ledgers enable management to assess the financial health of the business by providing insights into revenue generation, cost control, and overall profitability. This information is vital for strategic decision-making and operational improvements.

7. Legal Compliance:

Maintaining accurate and up-to-date ledgers is essential for compliance with legal and regulatory requirements. Businesses must keep thorough records to meet tax obligations and other legal standards.

Credit Notes

In the Goods and Services Tax (GST) system, a credit note plays a significant role in rectifying errors, revising transactions, and ensuring accurate financial reporting. It serves as a document to adjust the value of a supply, either by reducing the taxable value or correcting any mistakes made in the original tax invoice.

Credit notes in the GST framework play a vital role in rectifying errors, adjusting values, and ensuring accurate reporting of transactions. Understanding the purpose, components, and compliance aspects of credit notes is essential for businesses to navigate the GST landscape successfully. Issuing credit notes in a timely and accurate manner contributes to transparency, builds trust in business relationships, and ensures compliance with the dynamic regulations of the GST system.

Purpose of Credit Notes in GST:

A credit note serves various purposes within the GST system:

1. Correction of Errors:

Credit notes are used to rectify errors made in the original tax invoice, such as incorrect descriptions, quantities, or values.

2. Return of Goods or Services:

When goods or services are returned by the recipient due to reasons like defects or dissatisfaction, a credit note is issued to adjust the value of the original supply.

3. Change in Tax Liability:

If there is a change in the tax liability after the issuance of the original invoice, such as a reduction in the taxable value, a credit note is issued to reflect the revised amount.

4. Adjustment in Input Tax Credit (ITC):

Recipients use credit notes to adjust their Input Tax Credit (ITC) based on the corrections or returns made by the supplier.

Components of a Credit Note:

For a credit note to be valid and compliant with GST regulations, it must include specific details:

1. Supplier’s Details:

Full name, address, and GSTIN of the supplier must be clearly mentioned.

2. Recipient’s Details:

Full name, address, and GSTIN of the recipient should be provided.

3. Credit Note Number and Date:

Each credit note must have a unique serial number, and the date of issue must be mentioned.

4. Reference to Original Invoice:

The credit note should refer to the original tax invoice by mentioning its number and date.

5. Description of Goods or Services:

A clear and concise description of the goods or services for which the credit note is issued, including the quantity, unit, and total value.

6. GSTIN, HSN, or SAC:

The GSTIN, HSN (for goods), or SAC (for services) should be mentioned to aid in classification.

7. Reason for Issuing Credit Note:

A brief statement indicating the reason for issuing the credit note, such as return of goods or services, price adjustment, etc.

8. Adjusted Taxable Value and Tax Amount:

The Credit note should clearly specify the adjusted taxable value and the corresponding reduction in the tax amount.

Compliance Aspects:

• Time Limit for Issuance:

A credit note should be issued within the prescribed time frame. For corrections or adjustments in taxable value, it should be issued before the filing of the annual return or September of the following financial year, whichever is earlier.

• Reversal of Input Tax Credit:

If ITC has been claimed on the original invoice, the supplier needs to reverse the corresponding credit in their return for the month in which the credit note is issued.

• Matching with GST Returns:

The details of credit notes should match the information provided in the GST returns filed by both the supplier and the recipient.

• Adjustment of Output Tax Liability:

The reduction in output tax liability, as reflected in the credit note, should be adjusted in the subsequent return filed by the supplier.

• Communication to Recipient:

The supplier should communicate the issuance of a credit note to the recipient to ensure transparency and avoid any confusion.

Types of Credit Notes:

1. Debit Note:

A debit note is issued by a supplier to the recipient to increase the value of the original supply. It is used in cases where there is an undercharge of tax or an increase in the taxable value.

2. Credit Note for Goods Return:

Issued when goods are returned by the recipient, leading to a reduction in the taxable value.

3. Credit Note for Services:

Issued when services are returned or there is an adjustment in the value of services provided.

Importance for Input Tax Credit (ITC):

• Adjustment of ITC:

Recipients use credit notes to adjust the ITC claimed on the original supply, ensuring accurate and fair utilization of credit.

• Compliance for ITC Reversal:

Suppliers need to reverse the corresponding ITC in their returns when issuing credit notes to maintain compliance.

Challenges and Considerations:

• Timely Issuance:

Timely issuance of credit notes is crucial to avoid any delays in the adjustment of ITC and compliance issues.

• Accurate Documentation:

Accurate documentation of the reasons for issuing credit notes is essential for transparency and compliance.

• Communication with Recipients:

Clear communication with recipients about the issuance of credit notes helps in maintaining trust and avoiding disputes.

Debit Notes

In the Goods and Services Tax (GST) framework, a debit note serves as a crucial document for businesses to adjust or rectify certain aspects of a transaction. It is typically issued by a supplier to the recipient to signify an increase in the value of the original supply, either due to an undercharge of tax or an increase in the taxable value.

Debit notes in the GST framework play a crucial role in correcting errors, adjusting values, and ensuring accurate reporting of transactions. Understanding the purpose, components, and compliance aspects of debit notes is essential for businesses to navigate the GST landscape successfully. Issuing debit notes in a timely and accurate manner contributes to transparency, builds trust in business relationships, and ensures compliance with the dynamic regulations of the GST system.

Purpose of Debit Notes in GST:

Debit notes serve various purposes within the GST system:

• Correction of Errors:

Debit notes are used to rectify errors made in the original tax invoice, such as undercharging of tax, incorrect descriptions, quantities, or values.

• Increase in Taxable Value:

If there is a subsequent increase in the taxable value of the original supply, a debit note is issued to reflect the revised amount.

• Additional Supply:

Debit notes can be issued to account for additional supplies or services not included in the original tax invoice.

• Adjustment of Input Tax Credit (ITC):

The recipient uses debit notes to adjust their Input Tax Credit (ITC) based on the corrections or additional amounts charged by the supplier.

Components of a Debit Note:

For a debit note to be valid and compliant with GST regulations, it must include specific details:

1. Supplier’s Details:

Full name, address, and GSTIN of the supplier must be clearly mentioned.

2. Recipient’s Details:

Full name, address, and GSTIN of the recipient should be provided.

3. Debit Note Number and Date:

Each debit note must have a unique serial number, and the date of issue must be mentioned.

4. Reference to Original Invoice:

The debit note should refer to the original tax invoice by mentioning its number and date.

5. Description of Goods or Services:

A clear and concise description of the goods or services for which the debit note is issued, including the quantity, unit, and total value.

6. GSTIN, HSN, or SAC:

The GSTIN, HSN (for goods), or SAC (for services) should be mentioned to aid in classification.

7. Reason for Issuing Debit Note:

A brief statement indicating the reason for issuing the debit note, such as correction of undercharged tax, additional supply, etc.

8. Adjusted Taxable Value and Tax Amount:

The debit note should clearly specify the adjusted taxable value and the corresponding increase in the tax amount.

Compliance Aspects:

1. Time Limit for Issuance:

A debit note should be issued within the prescribed time frame. For corrections or adjustments in taxable value, it should be issued before the filing of the annual return or September of the following financial year, whichever is earlier.

2. Reversal of Input Tax Credit:

If ITC has been claimed on the original invoice, the recipient needs to reverse the corresponding credit in their return for the month in which the debit note is issued.

3. Matching with GST Returns:

The details of debit notes should match the information provided in the GST returns filed by both the supplier and the recipient.

4. Adjustment of Output Tax Liability:

The increase in output tax liability, as reflected in the debit note, should be adjusted in the subsequent return filed by the supplier.

5. Communication to Recipient:

The supplier should communicate the issuance of a debit note to the recipient to ensure transparency and avoid any confusion.

Types of Debit Notes:

1. Debit Note for Tax Undercharged:

Issued when there is an undercharge of tax in the original tax invoice.

2. Debit Note for Additional Supply:

Issued when there are additional goods or services to be accounted for, not included in the original tax invoice.

3. Debit Note for Value Correction:

Used to correct the taxable value of the original supply, leading to an increase in the tax amount.

Importance for Input Tax Credit (ITC):

• Adjustment of ITC:

Recipients use debit notes to adjust the ITC claimed on the original supply, ensuring accurate and fair utilization of credit.

• Compliance for ITC Reversal:

Recipients need to reverse the corresponding ITC in their returns when the supplier issues a debit note to maintain compliance.

Challenges and Considerations:

1. Timely Issuance:

Timely issuance of debit notes is crucial to avoid any delays in the adjustment of ITC and compliance issues.

2. Accurate Documentation:

Accurate documentation of the reasons for issuing debit notes is essential for transparency and compliance.

3. Communication with Recipients:

Clear communication with recipients about the issuance of debit notes helps in maintaining trust and avoiding disputes.

Key Differences between Credit Notes and Debit Notes

Basis of Comparison	Credit Notes	Debit Notes
Purpose	Rectify overcharged amount	Rectify undercharged amount
Issued by	Supplier to recipient	Supplier to recipient
Decrease/Increase	Decreases taxable value	Increases taxable value
Original Invoice	Refers to the original invoice	Refers to the original invoice
Reason for Issuance	Return of goods or services	Additional goods or services
Adjusts Tax Liability	Reduces output tax liability	Increases output tax liability
ITC Adjustment	Adjusts Input Tax Credit (ITC)	Adjusts ITC claimed
Time Limit for Issuance	Before annual return filing	Before annual return filing
Communication to Recipient	Communication required	Communication required
Compliance with GST Returns	Details match GST returns	Details match GST returns
Components	Specific details as per GST	Specific details as per GST
Reference Number	Unique serial number	Unique serial number
GSTIN, HSN, or SAC	Mentioned for classification	Mentioned for classification
Description of Goods/Services	Describes return or adjustment	Describes additional supply or correction
Impact on ITC	Adjusts claimed ITC	Reverses claimed ITC

The implementation of a cost accounting system is an important step for a growing small business. Implementation begins with identification of the correct costing system for the business, moves on to deployment of the system and finishes with post-deployment support to train employees on how to use the system effectively. Best practices in cost-system implementation focus on all three parts of the implementation process.

(i) Management Apathy:

If management is not really convinced of the advantages of the costing system or if it has somehow been made to accept the system against its will, it will merely tolerate it and not encourage it properly. This will lead others also to withhold their cooperation and, therefore, the system may never operate effectively. The reports may all be correct and prompt but probably no one will look at them.

(ii) Hostility from Line Staff:

Line staff people often believe that firstly they know how to run their business and, therefore, they do not need anyone to tell them what information they need and, secondly, that they cannot waste their time in “form filling”. They may also be afraid that proper information will expose some of their mistakes or that the new system will make them less useful than before in the eyes of the management. There is a tendency to resent anything new unless it is patently to one’s advantage.

(iii) Structure of Authority:

The cost accounting system may be based on formal authority structure whereas in reality the structure may be quite different. If, for example, trade union leaders have a great deal of influence on the various decisions, the system may run into difficulties it is not likely that the organisation chart will show the authority of the union leaders.

(iv) Changed Circumstances:

Business often undergoes rapid changes the market may change and the production process may change; management ideas change also. If the costing system is not adapted to the changed circumstances, it will cease to be effective. For example, if a cotton textile mill is converted into a mill producing man-made fibres, the Cost Accounting system must also be suitably changed.

(v) Indifference:

Often a part of the system breaks down; if it is not quickly set right, it will affect the whole system. For example, if issues of material are not properly watched and kept under control, the whole materials control system may break down. Also there may be delay in the flow of information and report may be delayed. If this is not corrected the whole decision-making and control system may be vitiated. The same will be the result if there are serious errors in report. It is, therefore, necessary that someone should watch the actual operation of the system continuously and carefully.

(vi) Low Status of Cost Accountant:

The cost accountant will often have to collect and furnish information which may not be liked by someone. If the cost accountant occupies a very junior position, he may not be able to do his work without fear or favour and, therefore, the information supplied by him may not lead to the correct decision. It is essential that the cost accountant should be a high ranking official, having direct access to the top management. He must also be assisted by a properly trained and adequate staff.

(vii) Lack of Clarity about Priorities and Objectives:

If the Cost Accounting staff is not clear about the end uses to which costing information will be put, they may not go about their task in the correct manner; they may even send the wrong sort of or inadequate information. Because of all these difficulties, it is necessary to proceed slowly, taking everyone along. An educative process for all concerned is essential to see that the costing system is accepted and operated sincerely.

Direct Cost

Direct costs can be easily identified as per the expenditure on cost objects. So, for example, if we pick how much expenditure a business has had on purchasing the raw materials inventory, we will be able to directly point out.

Indirect Cost

In the case of indirect costs, the challenge is that we can’t identify the costs as per the cost object. So, for example, if we try to understand how much rent is given for sitting the machinery in a place, we won’t be able to do it because the rent is paid for the entire space, not for a particular place.

The essential difference between direct costs and indirect costs is that only direct costs can be traced to specific cost objects. A cost object is something for which a cost is compiled, such as a product, service, customer, project, or activity. These costs are usually only classified as direct or indirect costs if they are for production activities, not for administrative activities (which are considered period costs).

Prime Cost

Prime costs are a firm’s expenses directly related to the materials and labor used in production. It refers to a manufactured product’s costs, which are calculated to ensure the best profit margin for a company. The prime cost calculates the direct costs of raw materials and labor that are involved in the production of a good. Direct costs do not include indirect expenses, such as advertising and administrative costs.

Prime cost = Direct raw materials + Direct labour

Production Cost

Production costs refer to all of the direct and indirect costs businesses face from manufacturing a product or providing a service. Production costs can include a variety of expenses, such as labor, raw materials, consumable manufacturing supplies, and general overhead.

Direct Labor Costs

Direct labor consists of the fully burdened cost of all labor directly involved in the production of goods. This usually means those people working on production lines or in work cells. Other types of production labor are recorded within the category of factory overhead costs.

Direct Material Costs

Direct materials consists of those materials consumed as part of the production process, including the cost of normal scrap that occurs as part of the process.

Factory Overhead Costs

Factory overhead consists of those costs required to maintain the production function, but which are not directly consumed on individual units. Examples are utilities, insurance, materials management salaries, production salaries, maintenance wages, and quality assurance wages.

Administration Cost

Administrative expenses refer to the costs incurred by a company or organization that include, but are not limited to, the salaries and benefits of the administrative workers within the company or organization, as well as rent and managerial compensation. Also known as General and Administrative expenses, the costs are categorized separately from Sales & Marketing and Research costs.

1. Administrative Expenses

• Managerial team
• IT team
• Executive compensation
• Rent of equipment and buildings

2. Non-Administrative Expenses

• Manufacturers
• Developers
• Engineers
• Sales Team

Selling and Distribution Cost

The term ‘distribution‘ is widely used in relation to the whole operation of getting goods into the hands of the consumer, and thus covers the two functions of sales promotion and delivery. The expression ‘distribution costs’, however, may be considered as relating only to delivery.

Selling Costs: The cost incurred in promoting sales and retaining customers. Selling expenses are those expenses which are incurred to promote sales and service to customers. Thus, selling overhead includes Salesmen’s Salaries, Commission, Travelling expenses, Cost of advertisement, Posters, Cost of price list and catalogue, Debt collection charges, Bad debts, Free gift, Showrooms expenses, After-sale service, Legal expenses for recovering debt, etc.

Distribution Costs: The cost of the process which begins with making the packed product available for dispatch and ends with making the reconditioned returned empty package available for re-uses. Distribution expenses, on the other hand, are those which are incurred for warehousing and storage, packing for goods sent and making the goods available for delivery to customers. So, in broader sense of the item, distributions expenses include- Cost of storing, Cost of warehousing, Cost of packing, Cost of delivery, and Cost of preparation of challan.

Fixed Cost

In accounting and economics, fixed costs, also known as indirect costs or overhead costs, are business expenses that are not dependent on the level of goods or services produced by the business. They tend to be recurring, such as interest or rents being paid per month. These costs also tend to be capital costs. This is in contrast to variable costs, which are volume-related (and are paid per quantity produced) and unknown at the beginning of the accounting year. Fixed costs have an effect on the nature of certain variable costs.

For example, a retailer must pay rent and utility bills irrespective of sales. As another example, for a bakery the monthly rent and phone line are fixed costs, irrespective of how much bread is produced and sold; on the other hand, the wages are variable costs, as more workers would need to be hired for the production to increase. For any factory, the fix cost should be all the money paid on capitals and land. Such fixed costs as buying machines and land cannot be not changed no matter how much they produce or even not produce. Raw materials are one of the variable costs, depending on the quantity produced.

Fixed cost is considered an entry barrier for new entrepreneurs. In marketing, it is necessary to know how costs divide between variable and fixed costs. This distinction is crucial in forecasting the earnings generated by various changes in unit sales and thus the financial impact of proposed marketing campaigns. In a survey of nearly 200 senior marketing managers, 60 percent responded that they found the “variable and fixed costs” metric very useful. These costs affect each other and are both extremely important to entrepreneurs.

Variable Cost

A variable cost is a cost that varies in relation to either production volume or the amount of services provided. If no production or services are provided, then there should be no variable costs. If production or services are increasing, then variable costs should also increase.

Types of Variable Costs

Direct materials are considered a variable cost. Direct labor may not be a variable cost if labor is not added to or subtracted from the production process as production volumes change. Most types of overhead are not considered a variable cost.

Semi-variable Cost

In such mixed cost, the fixed part will occur irrespective of the production level; even in the case of zero production activities, a fixed cost will still occur. However, the variable part of such costs is dependent on the level of production work carried by the entity and increases in proportion to the production levels. That means that semi-variable costs can be calculated by adding the fixed costs and the variable costs (based on the level of production).

Period Cost

Period costs are costs that cannot be capitalized on a company’s balance sheet. In other words, they are expensed in the period incurred and appear on the income statement. Period costs are also called period expenses.

Product Cost

Product cost refers to the costs incurred to create a product. These costs include direct labor, direct materials, consumable production supplies, and factory overhead. Product cost can also be considered the cost of the labor required to deliver a service to a customer. In the latter case, product cost should include all costs related to a service, such as compensation, payroll taxes, and employee benefits.

Product cost appears in the financial statements, since it includes the manufacturing overhead that is required by both GAAP and IFRS. However, managers may modify product cost to strip out the overhead component when making short-term production and sale-price decisions. Managers may also prefer to focus on the impact of a product on a bottleneck operation, which means that their main focus is on the direct materials cost of a product and the time it spends in the bottleneck operation.

Product Cost Calculation

The cost of a product on a unit basis is typically derived by compiling the costs associated with a batch of units that were produced as a group, and dividing by the number of units manufactured. The calculation is:

Product unit cost = (Total direct labor + Total direct materials + Consumable supplies + Total allocated overhead) ÷ Total number of units

Explicit Cost

Explicit cost is valuable if you’re trying to create long-term strategic goals for a company or simply assessing its profitability. Learning how this metric varies from implicit costs can help you understand, determine and establish the total economic cost. Explicit costs can be easily determined and invaluable for decision-making in a business or department.

Important

Calculating profit: Once a company pays all its explicit costs, the profit is the remaining monetary value on the general ledger.

Performing long-term strategic planning: Explicit cost helps calculate a company’s profitability. It’s a key metric for long-term strategic planning because it allows a business to predict its profits for a specific period.

Implicit Cost

In economics, an implicit cost, also called an imputed cost, implied cost, or notional cost, is the opportunity cost equal to what a firm must give up in order to use a factor of production for which it already owns and thus does not pay rent. It is the opposite of an explicit cost, which is borne directly. In other words, an implicit cost is any cost that results from using an asset instead of renting it out, selling it, or using it differently. The term also applies to foregone income from choosing not to work.

Implicit costs also represent the divergence between economic profit (total revenues minus total costs, where total costs are the sum of implicit and explicit costs) and accounting profit (total revenues minus only explicit costs). Since economic profit includes these extra opportunity costs, it will always be less than or equal to accounting profit.

Although implicit costs are non-monetary costs that usually do not appear in a company’s accounting records or financial statements, they are nonetheless an important factor that must be considered in bottom-line profitability. Implicit costs distinguish between two measures of business profits accounting profits versus economic profits.

• Accounting profits are a company’s profits as shown in its accounting records and financial statements (such as its income statement). However, accounting profits, which are calculated as total revenues minus total expenses, only reflect actual cash expenses that a company pays out – its explicit costs.
• Economic profits take into consideration both explicit and implicit costs. Therefore, while a company may show a positive net accounting profit, it may actually be a losing economic enterprise when its implicit costs are factored into the profitability equation

Historical Cost

Historical cost is the price paid for an asset when it was purchased. Historical cost is a fundamental basis in accounting, as it is often used in the reporting for fixed assets. It is also used to determine the basis of potential gains and losses on the disposal of fixed assets.

Historical Cost Adjustments

According to the accounting standards, historical costs require some adjustment as time passes. Depreciation expense is recorded for longer-term assets, thereby reducing their recorded value over their estimated useful lives. Also, if the value of an asset declines below its depreciation-adjusted cost, one must take an impairment charge to bring the recorded cost of the asset down to its net realizable value. Both concepts are intended to give a conservative view of the recorded cost of an asset.

Other Types of Costs

Historical cost differs from a variety of other costs that can be assigned to an asset, such as its replacement cost (what you would pay to purchase the same asset now) or its inflation-adjusted cost (the original purchase price with cumulative upward adjustments for inflation since the purchase date).

Historical cost is still a central concept for recording assets, though fair value is replacing it for some types of assets, such as marketable investments. The ongoing replacement of historical cost by a measure of fair value is based on the argument that historical cost presents an excessively conservative picture of an organization.

Current Cost

Current cost is the cost that would be required to replace an asset in the current period. This derivation would include the cost of manufacturing a product with the work methods, materials, and specifications currently in use. The concept is used to generate financial statements that are comparable across multiple reporting periods.

Future or Predetermined Cost

A futures contract is a legal agreement to buy or sell a particular commodity asset, or security at a predetermined price at a specified time in the future. Futures contracts are standardized for quality and quantity to facilitate trading on a futures exchange.

The buyer of a futures contract is taking on the obligation to buy and receive the underlying asset when the futures contract expires. The seller of the futures contract is taking on the obligation to provide and deliver the underlying asset at the expiration date.

These costs are computed in advance of the actual spending. And it usually includes all specifications with regards to the cost in question. In manufacturing firms, they are estimated for raw materials, labor and Overheads. When the actual costs are included during the period, the actual is compared with the predetermined to get the variance. A favorable variance means the actual cost is lower while an unfavorable variance implies that the actual cost was higher.

The term is also used in standard costing. In this situation, the standard cost is said to be the predetermined cost which is then compared with the actual cost. Variance is used to understand the cost item. So that adjustments can be made.

Using predetermined cost improves management efficiency. It also reduces the cost of production. Furthermore, it serves as a key performance indicator. A manager spending above the predetermined cost may imply that he or she is not performing well in terms of managing the entity’s finance.

Opportunity Cost

The opportunity cost of a particular activity is the value or benefit given up by engaging in that activity, relative to engaging in an alternative activity. More simply, it means if you chose one activity (for example, an investment) you are giving up the opportunity to do a different option. The optimal activity is the one that, net of its opportunity cost, provides the greater return compared to any other activities, net of their opportunity costs. For example, if you buy a car and use it exclusively to transport yourself, you cannot rent it out, whereas if you rent it out you cannot use it to transport yourself. If your cost of transporting yourself without the car is more than what you get for renting out the car, the optimal choice is to use the car yourself.

Formula and Calculation of Opportunity Cost

Opportunity Cost = FO−CO

Where:

FO=Return on best forgone option

CO=Return on chosen option

Automated accounting involves the use of software to automate important finance operations. Accounting operations like accounts reconciliation, updating financial data, and preparing financial statements can be completed without human interaction using accounting software.

Although computerized accounting is not new, emerging technologies such as artificial intelligence (AI) and robotic process automation (RPA) have vastly expanded the capability of these systems in recent years. Accounting software may accomplish everything from tracking and recording data by using AI. AI helps you eliminate repetitive tasks like data entry and calculations so that analysts can focus on more important things.

Automation solutions help reimagine the entire accounting operations. Modern solutions require minimal human intervention and complete tasks without errors. It lets your team members spend time on more strategic tasks such as budgeting or investment planning.

Benefits:

Data accuracy

Even the most cautious and thorough professionals may miss minor details or enter wrong data occasionally. The error might be as unobvious as misplacing a number or forgetting a decimal.

Data accuracy is critical to financing operations and maintaining a good reputation with clients. Automated accounting helps reduce the possibility of errors and ensures better accuracy.

Faster turnaround

Automated accounting solutions help save your accountant’s time and efforts. Your accounting team can now give results quicker and with more accuracy. This opens up the possibility of taking on more clients and expanding your market presence.

Cost reduction

Accounting automation software helps automate mundane clerical tasks, thus helping you save on costs. Automation can process more records in less time and at a lower cost. You do not require to invest in a large accounting team to complete transactions when using accounting software.

Better security

Traditional accounting systems involve a lot of paperwork–large ledger books, journal entry records, and other accounts management papers. The chances of losing some of these papers are high. And since they are not backed up or duplicated, there’s a very slim chance of recovering your work, leading to inefficiencies. Automated accounting systems can help keep your accountants’ desks clean while ensuring that data is organized and stored securely on the cloud or on on-premises data centers.

Comprehensive analysis

Accountants and AR analysts need relevant and accurate data to track trends, identify fraud, and calculate various metrics that indicate a business’s financial strength.

Data collection and compilation can be made easier with automation. Self-service analytics features in automated accounting solutions allow even non-IT staff to create reports and visualize data easily.

Faster data retrieval

Some of you may recall the pre-digital days when rows of cabinets stored hundreds of paper-based files and books. To get a document or review a file, you had to scout through bundles of records. This is a tedious way to search for information.

With automation solutions, locating and retrieving data is easy. You can search with the file name, owner name, or other meta tags to locate the document. Archiving data is also easier and less expensive with automated accounting systems.

Challenges of Manual Accounting

People operating a business that follows conventional and manual accounting techniques know how difficult this situation is for everyone involved. The cost and possibility of mistakes can lead to numerous problems for businesses.

Undoubtedly, manual accounting has its own disadvantages that new business owners may not be even aware of.

Slow training period

When you transition to automated accounting, you’ll probably need to train everyone on how to use the software. Unfortunately, training time may differ from person to person, causing the solution to be implemented slowly.

Complex software interface

Certain accounting software can be too sophisticated or expensive for some firms. These bulky apps might be tricky to understand and navigate. However, automated accounting solutions allow you to choose from various tiered plans based on your demands.

Technical issues

IT Support: Your operating systems, internet connection, or glitch in software can result in technical troubles. Although the software is made in such ways that the system itself can address any such technical issues there is still some need for IT support required to resolve the issues.

System Downtime: Sometimes software servers may go down due to some technical issues, hindering database accessibility. System downtime causes hindrance in operations and makes work more hectic in such situations.

Data migration and integration complexities

The accounting software sometimes may not be able to read your database correctly or may skip out on some parts causing discrepancies in the newly migrated database. It also is possible that it doesn’t integrate with your ERP or CRM to share data.

Regulatory compliance issues

If in case of an error in your accounting software, it may produce a less accurate regulatory report which may lead to legal violations, risking fines, and sanctions

Employee wellness programs are programs undertaken by an employer in order to improve employee health and also to help individual employees overcome particular health-related problems. The employer can offer compulsory employee training, staff seminars, or even work with a third-party provider offering a variety of wellness programs.

Benefits of Employee Wellness Programs

Even though the advantages of an employee wellness program may be hard to see at first glance, employees who are healthy usually bring a range of benefits to other employees and to the companies they work for. Here are some of the benefits of an employee wellness program.

High employee morale

Wellness programs make employees feel appreciated and valued. Employees are happier when they feel appreciated and valued by their employers. The offer of wellness programs usually leads to more enthusiastic employees at work.

More productivity

Employees who eat healthily and exercise regularly are likely to be more productive than those who don’t. Poor health behaviors are usually linked to high levels of unproductivity and ultimately lead to higher health risks and chronic diseases.

Improve recruitment and retention of employees

Good wellness programs will help companies to hire, as well as retain, the best employees. Many people are strongly influenced by the presence of health offerings and other benefits when they choose an employer. Wellness plans also play a vital role in employee retention, by helping to keep the employees loyal.

Reduced health risks

Helping employees to adopt healthy behaviors such as eating well, exercising, and avoiding tobacco lowers health risks. Low health risks lead to reduced health care costs.

Reduced absenteeism

Workplaces with comprehensive wellness programs experience less absenteeism, due to employees being healthier and suffering less stress, leading to cost savings.

Building camaraderie among workers

Some initiatives offer employees the chance to experience other activities unrelated to work, such as participating in a sports team, going to the gym, or eating lunch together. The interaction of co-workers facilitates bonding that helps teams work better together.

Model:

Assessment

Program success and employee engagement require information to be obtained about the workplace, either formally (i.e. needs assessment) or informally (i.e. conversations with employees), collecting data regarding individual lifestyle, work environment, and organizational details. Data should be collected for both employee interests and available aggregate data about health status, health issues or cultural survey data. Engaging employees, including the leadership team, from the beginning of program planning and development will help drive commitment, responsibility, and participation; as well as, creating a culture of health and great place to work. Additional information to assist with workplace assessment can be found using the CDC Assessment Module.

Program planning

Next is to develop a strategic plan that considers the pertinent assessment results from a vantage point of both the individual’s actions and environmental context in accordance with the direction from the governance structure. This should always be completed prior to implementation or evaluation; however, keeping the end in mind (how will I evaluate this program to know it was successful?) will help drive the overall plan. The recommended strategy for “direction leadership and organization” by the CDC includes: leadership support dedicated to championing wellness and modeling behaviors; workplace Wellness Committee, Coordinator or Council; development of a resource list of available assets; defined mission, vision, goals, objectives and strategies; comprehensive communication plan; evidence-based practices; and data collection and analysis. A thoughtful strategic plan will select and deliver interventions, policies, and programs that are most advantageous to the particulars of the employee population. Additional resources can be found by visiting the CDC’s Planning/Workplace Governance Module.

Implementation

The implementation stage is where the rubber meets the road. Employees often see this stage as the “Wellness Program”, and typically do not understand what goes into the process to provide a comprehensive strategic plan. Therefore, implementation occurs when the strategic plan executes the opportunities to support an employee’s health. The CDC recommends four main categories for interventions or strategies that successfully influence health: “health-related programs; health-related policies; health benefits; and environmental supports”.

Evaluation

To determine impact and success, evaluation is crucial to the longevity of a workplace wellness program. Everything from programs to policies to environment must be evaluated to determine return on investment (ROI), value on investment (VOI), health impact, employee satisfaction and sustainability. “According to the CDC (2016), evaluations can often be overwhelming, time-consuming and expensive; so, focusing on relevant, salient, and useful information is key to quality evaluation practices. An evaluation tool should be designed to support the program process, quality improvement, and identification of gaps for future strategic plans.”

Significance of financial instruments for financial position and performance

An entity shall disclose information that enables users of its financial statements to evaluate the significance of financial instruments for its financial position and performance.

Balance sheet

Categories of financial assets and financial liabilities

The carrying amounts of each of the following categories, as defined in Ind AS 39, shall be disclosed either in the balance sheet or in the notes:

(a) financial assets at fair value through profit or loss, showing separately (i) those designated as such upon initial recognition and (ii) those classified as held for trading in accordance with Ind AS 39;

(b) Held-to-maturity investments;

(c) Loans and receivables;

(d) available-for-sale financial assets;

(e) financial liabilities at fair value through profit or loss, showing separately (i) those designated as such upon initial recognition and (ii) those classified as held for trading in accordance with Ind AS 39; and

(f) Financial liabilities measured at amortised cost.

Financial assets or financial liabilities at fair value through profit or loss

If the entity has designated a loan or receivable (or group of loans or receivables) as at fair value through profit or loss, it shall disclose:

(a) The maximum exposure to credit risk (see paragraph 36(a)) of the loan or receivable (or group of loans or receivables) at the end of the reporting period.

(b) The amount by which any related credit derivatives or similar instruments mitigate that maximum exposure to credit risk.

(c) The amount of change, during the period and cumulatively, in the fair value of the loan or receivable (or group of loans or receivables) that is attributable to changes in the credit risk of the financial asset determined either:

(i) As the amount of change in its fair value that is not attributable to changes in market conditions that give rise to market risk; or

(ii) Using an alternative method the entity believes more faithfully represents the amount of change in its fair value that is attributable to changes in the credit risk of the asset.

Changes in market conditions that give rise to market risk include changes in an observed (benchmark) interest rate, commodity price, foreign exchange rate or index of prices or rates.

(d) The amount of the change in the fair value of any related credit derivatives or similar instruments that has occurred during the period and cumulatively since the loan or receivable was designated.

If the entity has designated a financial liability as at fair value through profit or loss in accordance with paragraph 9 of Ind AS 39, it shall disclose:

(a) The amount of change, during the period and cumulatively, in the fair value of the financial liability that is attributable to changes in the credit risk of that liability determined either:

(i) As the amount of change in its fair value that is not attributable to changes in market conditions that give rise to market risk (see Appendix B, paragraph B4); or

(ii) Using an alternative method the entity believes more faithfully represents the amount of change in its fair value that is attributable to changes in the credit risk of the liability.

Changes in market conditions that give rise to market risk include changes in a benchmark interest rate, the price of another entities financial instrument, a 5

Commodity price, a foreign exchange rate or an index of prices or rates. For contracts that include a unit-linking feature, changes in market conditions include changes in the performance of the related internal or external investment fund.

(b) The difference between the financial liabilities carrying amount and the amount the entity would be contractually required to pay at maturity to the holder of the obligation.

The entity shall disclose:

(a) The methods used to comply with the requirements in paragraphs 9(c) and 10(a).

(b) If the entity believes that the disclosure it has given to comply with the requirements in paragraph 9(c) or 10(a) does not faithfully represent the change in the fair value of the financial asset or financial liability attributable to changes in its credit risk, the reasons for reaching this conclusion and the factors it believes are relevant.

Reclassification

If the entity has reclassified a financial asset (in accordance with paragraphs 5154 of Ind AS 39) as one measured:

(a) At cost or amortised cost, rather than at fair value; or

(b) At fair value, rather than at cost or amortised cost,

It shall disclose the amount reclassified into and out of each category and the reason for that reclassification.

12A. if the entity has reclassified a financial asset out of the fair value through profit or loss category in accordance with paragraph 50B or 50D of Ind AS 39 or out of the available-for-sale category in accordance with paragraph 50E of Ind AS 39, it shall disclose:

(a) The amount reclassified into and out of each category;

(b) For each reporting period until derecognition, the carrying amounts and fair values of all financial assets that have been reclassified in the current and previous reporting periods;

(c) If a financial asset was reclassified in accordance with paragraph 50B, the rare situation, and the facts and circumstances indicating that the situation was rare;

(d) for the reporting period when the financial asset was reclassified, the fair value gain or loss on the financial asset recognised in profit or loss or other comprehensive income in that reporting period and in the previous reporting period;

Measurement

A financial asset or financial liability is measured initially at fair value. Subsequent measurement depends on the category of financial instrument. Some categories are measured at amortised cost, and some at fair value. In limited circumstances other measurement bases apply, for example, certain financial guarantee contracts.

The following are measured at amortised cost:

• Held to maturity investments—non-derivative financial assets that the entity has the positive intention and ability to hold to maturity;
• loans and receivables—non-derivative financial assets with fixed or determinable payments that are not quoted in an active market; and
• Financial liabilities that are not carried at fair value through profit or loss or otherwise required to be measured in accordance with another measurement basis.

The following are measured at fair value:

• Financial assets and financial liabilities held for trading—this category includes derivatives not designated as hedging instruments and financial assets and financial liabilities that the entity has designated for measurement at fair value. All changes in fair value are reported in profit or loss.
• Available for sale financial assets—all financial assets that do not fall within one of the other categories. These are measured at fair value. Unrealised changes in fair value are reported in other comprehensive income. Realised changes in fair value (from sale or impairment) are reported in profit or loss at the time of realisation.

Initial measurement

Initially, financial assets and liabilities should be measured at fair value (including transaction costs, for assets and liabilities not measured at fair value through profit or loss). [IAS 39.43]

Measurement subsequent to initial recognition

Subsequently, financial assets and liabilities (including derivatives) should be measured at fair value, with the following exceptions: [IAS 39.46-47]

• Loans and receivables, held-to-maturity investments, and non-derivative financial liabilities should be measured at amortised cost using the effective interest method.
• Investments in equity instruments with no reliable fair value measurement (and derivatives indexed to such equity instruments) should be measured at cost.
• Financial assets and liabilities that are designated as a hedged item or hedging instrument are subject to measurement under the hedge accounting requirements of the IAS 39.
• Financial liabilities that arise when a transfer of a financial asset does not qualify for derecognition, or that are accounted for using the continuing-involvement method, are subject to particular measurement requirements.

Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction. [IAS 39.9] IAS 39 provides a hierarchy to be used in determining the fair value for a financial instrument: [IAS 39 Appendix A, paragraphs AG69-82]

• Quoted market prices in an active market are the best evidence of fair value and should be used, where they exist, to measure the financial instrument.
• If a market for a financial instrument is not active, an entity establishes fair value by using a valuation technique that makes maximum use of market inputs and includes recent arm’s length market transactions, reference to the current fair value of another instrument that is substantially the same, discounted cash flow analysis, and option pricing models. An acceptable valuation technique incorporates all factors that market participants would consider in setting a price and is consistent with accepted economic methodologies for pricing financial instruments.
• If there is no active market for an equity instrument and the range of reasonable fair values is significant and these estimates cannot be made reliably, then an entity must measure the equity instrument at cost less impairment.

Amortised cost is calculated using the effective interest method. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument to the net carrying amount of the financial asset or liability. Financial assets that are not carried at fair value though profit and loss is subject to an impairment test. If expected life cannot be determined reliably, then the contractual life is used.

IAS 39 fair value option

IAS 39 permits entities to designate, at the time of acquisition or issuance, any financial asset or financial liability to be measured at fair value, with value changes recognised in profit or loss. This option is available even if the financial asset or financial liability would ordinarily, by its nature, be measured at amortised cost but only if fair value can be reliably measured.

In June 2005 the IASB issued its amendment to IAS 39 to restrict the use of the option to designate any financial asset or any financial liability to be measured at fair value through profit and loss (the fair value option). The revisions limit the use of the option to those financial instruments that meet certain conditions: [IAS 39.9]

• The fair value option designation eliminates or significantly reduces an accounting mismatch, or
• A group of financial assets, financial liabilities or both is managed and its performance is evaluated on a fair value basis by entity’s management.

IAS 39 available for sale option for loans and receivables

IAS 39 permits entities to designate, at the time of acquisition, any loan or receivable as available for sale, in which case it is measured at fair value with changes in fair value recognised in equity.

Impairment

A financial asset or group of assets is impaired, and impairment losses are recognised, only if there is objective evidence as a result of one or more events that occurred after the initial recognition of the asset. An entity is required to assess at each balance sheet date whether there is any objective evidence of impairment. If any such evidence exists, the entity is required to do a detailed impairment calculation to determine whether an impairment loss should be recognised. [IAS 39.58] The amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated cash flows discounted at the financial asset’s original effective interest rate. [IAS 39.63]

Assets that are individually assessed and for which no impairment exists are grouped with financial assets with similar credit risk statistics and collectively assessed for impairment. [IAS 39.64]

If, in a subsequent period, the amount of the impairment loss relating to a financial asset carried at amortised cost or a debt instrument carried as available-for-sale decreases due to an event occurring after the impairment was originally recognised, the previously recognised impairment loss is reversed through profit or loss. Impairments relating to investments in available-for-sale equity instruments are not reversed through profit or loss. [IAS 39.65]