Bookkeepers And Accountants Choose Double Entry Bookkeeping For Accuracy

Double entry bookkeeping stretches back centuries perhaps even as early as the 12th century and is now accepted worldwide as the accounting standard to be employed by all companies in recording the financial accounting records. The first written explanation of the accounting system was reportedly by a Venetian mathematician Luca Pacioli towards the end of the 15th century.

The accounting industry has grown somewhat since then and today contains many technical words known but largely ignored by non accountants. The understanding and desire to understand accounting terms is further confused by the banking industry while adopting double entry bookkeeping as standard use what appears to be diametrically opposed terms in the presentation of information to their customers.

In accounting terms an asset such as money in the bank is a debit balance while bank customers are told if they have money in the bank it is a credit balance. This arises because what the bank is really saying is when a customer has money in the bank that the balance represents a creditor to the bank as it owes the customer money and is a creditor in the banks books. Hence the bank describes the balance as a credit balance.

The simplest way to understand double entry bookkeeping is the understanding that every financial transaction has a double effect. One effect is to change the profit and loss of the business with sales income increasing the financial profit and purchases reducing the financial profit. While the double entry is that every profit and loss transactions also has a balance sheet effect in either increasing assets or increasing liabilities.

In more complex accounting areas such as journal entries or bank transactions both sides of a transaction may have no impact on the profit and loss account as both sides of the double entry effect the value of balances in the balance sheet. For example when a creditor is paid the bank balance reduces and the amount owed by the business reduces by the same amount.

The greatest value of double entry bookkeeping to a business is its ability to show in numerical terms the profitability of the business to generate improved financial performance and management while also producing a statement of assets and liabilities. These factors are important to accountants too although the greatest benefit to an accountant is that because every transaction has an equal and opposite entry a mathematical check can be produced to ensure all financial transactions have been recorded accurately.

This mathematical balance is when all the financial accounts into which the financial transactions have been entered are listed and added up and if all transactions have been entered correctly the total is zero. This is called the trial balance.

The function of accounts clerks and bookkeeper is to record the prime documents such as sales invoices and purchase invoices into the financial ledgers. Cash and bank records must also be entered. And for every entry made there must also be the opposite entry into the business financial ledgers such as sales ledger, purchase ledger and bank.

Accounting software is basically a database of these financial transactions that automates the double entry enabling a single transaction to be entered once by the user but create the second entry in the company financial accounts. Using accounting software which all but the smallest companies adopt as a standard business tool ensures greater accuracy and usually produces a self balancing trial balance since the accounting software always produces a second equal entry to the one being input to the financial system.

The task of an accountant is first of all to ensure the prime documents are entered accurately and then interpret the results produced by the trial balance into financial statements and reports in a format that aids the financial management of the business and ensure those financial figures also represent a true and fair view of the financial position.

Limited companies must produce a balance sheet under various financial acts and submit the balance sheet to both Companies House and the tax authority each year. Different rules apply to a limited company as opposed to self employed business because the accounts including the balance sheet are public records available to the members of that company and not necessarily the property of a single individual or partnership.

Self employed business in the UK are not compulsory required to produce a balance sheet and consequently may choose to operate a single entry bookkeeping system rather than double entry. By adopting a single entry system the self employed business has less financial control over the assets and liabilities although this is often not a problem as the self employed in smaller businesses often know exactly what the individual assets and liabilities of the business are.

In smaller businesses that may not have adopted accounting software it is a common practise for the bookkeeper to maintain day books.

A sales day book would be a simple list of sales invoices issued and by recording against those financial transactions the sales receipts as they are received the sales day book effectively becomes a sales ledger in that it shows the debtor balance owing to the company.

A purchase day book would be a list of purchase invoices received and by recording on the purchase day book the amounts paid to each creditor that day book effectively becomes the purchase ledger.

About The Author

Terry Cartwright, qualified accountant and CEO at DIY Accounting in the UK designs accounting software for limited companies at http://www.diyaccounting.co.uk/companyaccounts.htm on excel spreadsheets using a double entry bookkeeping system http://www.diyaccounting.co.uk/bookkeeping.htm

Source : http://www.articlecity.com/

Italy energy firms banned from passing on new tax

ROME, June 25 (Reuters) - The Italian government has banned energy firms from passing on a new tax to their customers, the text of the law showed on Wednesday.

Economy Minister Giulio Tremonti has dubbed his hiking of the main tax on company profits (IRES) to 33 percent from 27.5 percent as a "Robin Hood" tax as the extra revenues will be taken from wealthy companies and spent on the needy.

Energy companies initially protested but have since played down the impact of the tax. Fulvio Conti, chief executive of power utility Enel (ENEI.MI: Quote, Profile, Research) said the tax would be "easily absorbed" by his group.

Media had speculated that the tax on oil, gas and electricity companies, would mean an extra burden to consumers already facing higher costs due to rising oil prices.

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Bookkeeping and Accounting Basics

Bookkeeping and accounting share two basic goals:

• to keep track of your income and expenses, thereby improving your chances of making a profit
• to collect the necessary financial information about your business to file your various tax returns and local tax registration papers
  

Sounds pretty simple, doesn't it? And it can be, especially if you remind yourself of these two goals whenever you feel overwhelmed by the details of keeping your financial records. Hopefully you will also be reassured to know that there is no requirement that your records be kept in any particular way. (There is a requirement, however, that some businesses use a certain method of crediting their accounts. See " Cash vs. Accrual Accounting.") In other words, there's no official "right" way to organize your books. As long as your records accurately reflect your business's income and expenses, the IRS will find them acceptable.

The actual process of keeping your books is easy to understand when broken down into three steps.

1. Keep receipts or other acceptable records of every payment to and every expenditure from your business.
2. Summarize your income and expenditure records on some periodic basis (generally daily, weekly, or monthly).
3. Use your summaries to create financial reports that will tell you specific information about your business, such as how much monthly profit you're making or how much your business is worth at a specific point in time.
   

Whether you do your accounting by hand on ledger sheets or use accounting software, these principles are exactly the same.

Step 1: Keeping Your Receipts
Comprehensive summaries of your business's income and expenses are the heart of the accounting process. But they can't legally be created in a vacuum. Each of your business's sales and purchases must be backed by some type of record containing the amount, the date, and other relevant information about that sale. This is true whether your accounting is done by computer or on hand-posted ledgers.

From a legal point of view, your method of keeping receipts can range from slips kept in a cigar box to a sophisticated cash register hooked into a computer system. Practically, you'll want to choose a system that fits your business needs. For example, a small service business that handles only relatively few jobs may get by with a bare-bones approach. But the more sales and expenditures your business makes, the better your receipt filing system needs to be. The bottom line is to choose or adapt one to suit your needs.

Step 2: Setting Up and Posting Ledgers
A completed ledger is really nothing more than a summary of revenues, expenditures, and whatever else you're keeping track of (entered from your receipts according to category and date). Later, you'll use these summaries to answer specific financial questions about your business such as whether you're making a profit, and if so, how much.

You'll start with a blank ledger page (a sheet with lines) or, more often these days, a computer file of empty rows and columns. On some regular basis like every day, once a week, or at least once a month, you should transfer the amounts from your receipts for sales and purchases into your ledger. Called "posting," how often you do this depends on how many sales and expenditures your business makes and how detailed you want your books to be.

Generally speaking, the more sales you do, the more often you should post to your ledger. A retail store, for instance, that does hundreds of sales amounting to thousands or tens of thousands of dollars every day should probably post daily. With that volume of sales, it's important to see what's happening every day and not to fall behind with the paperwork. To do this, the busy retailer should use a cash register that totals and posts the day's sales to a computerized bookkeeping system at the push of a button. A slower business, however, or one with just a few large transactions per month, such as a small Web site design shop, dog-sitting service, or swimming pool repair company, would probably be fine if it posted weekly or even monthly.

To get started on a hand-entry system, get ledger pads from any office supply store. Alternatively, you can purchase an accounting software program that will generate its own ledgers as you enter your information. All but the tiniest new businesses are well advised to use an accounting software package to help keep their books (and micro-businesses can get by with personal finance software such as Quicken). That's because once you've entered your daily, weekly, or monthly numbers, accounting software makes preparing monthly and yearly financial reports incredibly easy.

Step 3: Creating Basic Financial Reports
Financial reports are important because they bring together several key pieces of financial information about your business. Think of it this way -- while your income ledger may tell you that your business brought in a lot of money during the year, you may have no way of knowing whether you turned a profit without measuring your income against your total expenses. And even comparing your monthly totals of income and expenses won't tell you whether your credit customers are paying fast enough to keep adequate cash flowing through your business to pay your bills on time. That's why you need financial reports: to combine data from your ledgers and sculpt it into a shape that shows you the big picture of your business.

Source : http://www.inc.com/

Regulators should conform to new global accounting standards

International Financial Reporting Standards (IFRS) is gathering storm and most countries barring the US and a few others have either adopted IFRS or their national generally accepted accounting principles (GAAP) are converging to IFRS.

Australia, New Zealand, China, Singapore, Japan, Middle East, Africa & European Union have either adopted or are converging to IFRS. The eminent status to IFRS came about after EU made it mandatory for all its listed companies starting 2005. Consequently, more than 8,000 EU-listed companies adopted IFRS in one go. US capital markets are losing their attractiveness as a result of what many view as excessive regulation. As a consequence, many believe that the predominance of US GAAP as a standard may be coming to an end. This could make large companies look at other capital markets, and in many of those capital markets IFRS are accepted.

More than 1,100 Chinese companies have recently switched over to new accounting standards bringing their books in line with international norms. India follows Indian GAAP, which is inspired by International Accounting Standards (IAS).

However, Indian GAAP has not kept pace with the changes that followed IAS’ metamorphosis to IFRS. The most important change in IFRS is the application of fair valuation principles. Key standards based on fair valuation principles that have not yet been rolled out under Indian GAAP relate to business combinations, financial instruments and investment properties. There are also several areas where there are critical differences between Indian GAAP and IFRS.

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Accountability or accounting?

When Nicolas Sarkozy’s government spokesperson announced that each minister’s performance would be assessed according to criteria set by a private auditing firm, he probably did not expect to elicit a fierce response. But he should have

When Nicolas Sarkozy’s government spokesperson announced that each minister’s performance would be assessed according to criteria set by a private auditing firm, he probably did not expect to elicit a fierce response. But he should have. The opposition quickly attacked the move as a “dangerous gimmick” and a “smokescreen.” One pundit asked, “Will the time soon come when ministers are hired by head-hunters?” And a young MP declared that “France cannot be managed like a bolt factory.”

But what is so absurd about establishing standards by which to assess the fulfilment of Sarkozy’s campaign promises? As soon as they were appointed in June 2007, Sarkozy’s ministers were given a clear set of objectives in the form of a letter of intent. Isn’t it normal to create some means of holding ministers accountable?

A culture of “results” has become central to economic modernisation in France, so shouldn’t the same be true of French governments, with their entrenched inclination toward passivity and aloofness? And the issue of setting measurable standards for government operations is not confined to France. British Prime Minister Gordon Brown has made such quantifiable goals a hallmark of his leadership ever since he was Chancellor of the Exchequer.

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India Inc's effective tax compliance rate rises to 26% in 2007-08

If increasing subsidy bill is giving headache to P Chidambaram, he has found succour in higher direct tax collections. Direct tax receipts from companies and personal income have reportedly, increased 71.3% (ET June 19) in the first two months of the current year compared to the same period last year.

This may be too early to predict the collections for the full year, but if one goes by past records the finance minister has every reason to be optimistic. After all, rationalisation of tax structure has been giving good dividends. Despite a fall in tax rate, collections of corporate tax have increased steadily.

An ET survey of 200 large companies finds that their aggregate tax provisions have increased 28.3% in 2007-08 over the previous year.

The bigger question, however, is: Does a rise in tax collections automatically imply success of the restructuring process of corporate taxation? After all, higher tax collections last year could be the result of higher profits. As demand picked up following improvement in macro fundamentals, India Inc witnessed an all-round prosperity.

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'India Inc not ready for global accounting'

NEW DELHI: Corporate India is not fully prepared to handle the new accounting regime that comes in force from April 2011 with the adoption of International Financial Reporting Standards (IFRS), an accounting process recognized by over 100 countries that would replace the Indian GAAP (Generally Accepted Accounting Standards), global consultancy major KPMG said.

Richard Rekhy, COO for KPMG in India, told TOI that Indian accounting professionals are yet to be exposed to the intricacies and methods that would come along with new standards, which recognize fair value accounting against the existing historic accounting model.

"It is an alarming situation that we still do not have enough trained people on IFRS. And with no previous experience with new standards, most of the current lot of accounting professionals will be redundant with important changes in IFRS," Rekhy said.

While corporate India currently follows the standards proposed by the Institute of Chartered Accountants of India (ICAI) and enforced by National Advisory Committee on Accounting Standards (NACAS), from April 2011 they need to switch over to IFRS, issued by the International Accounting Standard Board, a London-based independent body. Firms like KPMG and Ernst & Young have pitched for advisory and consultancy services as the transition means big business opportunity for them.

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Defining Key Financial Ratios

Corresponding to figures from your financial statements, ratios make relationships in your business more understandable. A ratio is only a shorthand note: It shows you what's going on according to your books. If your books are accurate portrayals of your business, here are 10 checkpoints to think about.

Acid Test = Cash and Near Cash ÷ Current Liabilities
Measures ability to meet current debt, a stringent test since it discounts the value of inventories. The rule of thumb is 1-to-1. A lower ratio indicates illiquidity. A higher ratio may imply unused funds.

Current Ratio = Current Assets ÷ Current Liabilities
Another measure of ability to meet current obligations. Less accurate than the acid test for very near term, but probably better a measure for six months to a year out, since it contains receivables and inventories as well as cash and near cash. The rule of thumb is 2-to-1, though this will be affected by seasonality.

Receivables Turnover = Sales ÷ Receivables
Measures the effectiveness of credit and collection policies. If your ratio is going down, collection efforts may be improving, sales may be rising, or receivables are being reduced. If your ratio is going up, sales credit policies may be changing, collection efforts may be flagging, or sales may have taken a nosedive.

Caution: This ratio depends on when receivables are measured and the seasonality of the business. Careful bookkeeping is also essential. The same applies to inventory turnover: Make sure that the measures are comparable from month to month. Use average receivables (inventories) if you can.

Days Receivables = 30 ÷ Receivables Turnover
Another way of looking at receivables. Particularly useful in explaining graphically what changes in credit and collection operations do to a business.

Read more Article...

Bookkeeping and Accounting Basics

Bookkeeping and accounting share two basic goals:

• to keep track of your income and expenses, thereby improving your chances of making a profit
• to collect the necessary financial information about your business to file your various tax returns and local tax registration papers

Sounds pretty simple, doesn't it? And it can be, especially if you remind yourself of these two goals whenever you feel overwhelmed by the details of keeping your financial records. Hopefully you will also be reassured to know that there is no requirement that your records be kept in any particular way. (There is a requirement, however, that some businesses use a certain method of crediting their accounts. See " Cash vs. Accrual Accounting.") In other words, there's no official "right" way to organize your books. As long as your records accurately reflect your business's income and expenses, the IRS will find them acceptable.

The actual process of keeping your books is easy to understand when broken down into three steps.

1. Keep receipts or other acceptable records of every payment to and every expenditure from your business.
2. Summarize your income and expenditure records on some periodic basis (generally daily, weekly, or monthly).
3. Use your summaries to create financial reports that will tell you specific information about your business, such as how much monthly profit you're making or how much your business is worth at a specific point in time.

Whether you do your accounting by hand on ledger sheets or use accounting software, these principles are exactly the same.

Read more Article...

India Inc to adopt global accounting standards

The judiciary may soon have a lesser role in dictating the way corporate houses show valuation of companies they acquire.

Come April 2011, the country is all set to adopt global accounting standards making it easier for India Inc to get large valuation M&A deals executed without the court breathing down their necks.

Even as the present rules put the courts at a higher pedestal over the prevalent accounting standards, the ministry of corporate affairs along with the apex accounting body ICAI are working on harmonising the legal and other regulatory requirements with the International Financial Reporting Standards (IFRS). IFRS does not recognise the judiciary prescribing accounting policies which are highly technical in nature.

Under the present regulatory mechanism, the companies which intend to enter into M&A agreements first apply before the concerned High Court seeking permission to hold a shareholder meeting and subsequently to execute the deal. The process could drag for several months before the courts approve such M&A agreements as it involves considering the interests of all stakeholders including lenders and minority shareholders.

Even as the courts have been given wide powers to examine the procedural formalities as well as for evaluating the financial position of the companies, on several occasions courts have taken a view divergent to the prevailing accounting standards.

The scenario wherein the existing accounting standards had to make way for judiciary prescribed accounting treatment is soon to change. IFRS has laid down extensive accounting regulations relating to business combinations including amalgamations and acquisitions.
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New accounting norms to hit dole-happy cos

Companies giving stock options to their employees to retain them are expected to see a drop in their profits as they adopt international accounting standards.

The International Financial Reporting Standards (IFRS) that companies have to adopt from April 2010 require them to value the cost of employee stock options as per their fair value and charge for it over the service period. That is, if the share price moves above the price at which the employee is given a right to purchase, then the option value, multiplied by the number of shares, has to be shown in the company’s profit-and-loss account as a cost, explained PricewaterhouseCoopers partner Sunder Iyer. This has the potential to reduce the company’s profitability and earnings per share significantly, accounting experts said.

Companies now have the option to value their Esops as per their fair value, but most of them do not do that since they have the option not to. But once the IFRS becomes mandatory, they lose this option.

Although the right to purchase the share was given at a price close to the market price on that date, they did appreciate over a period of time. This appreciation has made the employee stay with the company. Although the company has not given any discount on the date when the employee has exercised the option, he did benefit from its appreciation.
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ICAI for early adoption of new accounting norms

NEW DELHI: The country's accounting regulator, Institute of Chartered Accountants of India (ICAI), clarified on Monday that its announcement on derivative accounting was to ensure that companies report their estimated losses from foreign currency derivatives as per already existing norms. The regulator said it has not advanced the compliance date for the new accounting norms on financial instruments, although it would encourage early adoption. ICAI said that it has no problem if other regulators-SEBI or RBI-want an early implementation.

Adopting the new standard on financial instruments-AS 30-would allow companies to provide for future gains as well as losses on foreign currency derivatives as per their fair market value, while following the existing norm of accounting prudence-AS 1-will force them to provide for only losses and not gains. That is if they do not adopt the new standards, they will not have the flexibility to provide for future gains. Therefore, net profit may be lower. Corporate houses are expected to make their balance sheets this way even now, but many had doubts after ICAI recently brought in AS 30.

ICAI officials told reporters on Monday that it received queries from various quarters on whether corporate houses need to disclose their exposure to derivative instruments now since the accounting standard covering them need to be compulsorily followed only three years from now.
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