Accounting

Are you considering firing your current accountant in favor of a new one? If so, you’re probably not sure if you’re overreacting or if you have just cause. The following warning signs will help you decide if it is time for you to change accountants:

Your accountant does not return your phone calls in a timely manner, if at all.

The bottom line here is you have hired your accountant to work for you. If he/she is not returning your telephone calls, or waits until you’ve left several messages before calling you back, take this seriously. A few incidents here and there are not something to worry about, as your accountant likely has many other clients and may not be in the office for days at a time. However, if not returning phone calls are the normal state of affairs, you will want to set up an appointment to discuss your concerns.

Your accountant is never in the office.

This could mean he or she is very busy and out with other clients the majority of the time. It could also mean they do not take their business, or your business, very seriously. Regardless, if you have a difficult time connecting with your accountant, it may be time to look for someone who has more time in their schedule to see to your needs.

Your accountant never delivers your financials/taxes/ or other forms to you on time.

This is not a good scenario! You have hired your accountant to be on top of the financial aspects of your business. If they are not able to get your forms to you on time, you need to first ask yourself if it is your fault. If you are late getting them the material they need, then it probably has little to do with them, but if they have everything they require from you with ample time – and are still consistently late, you will probably want to consider changing accountants.

Your accountant does not take the time to discuss your financial reports with you.

This is your business. You have the right to understand your financial reports, and if your accountant is unwilling to schedule the time to go over them with you, this is a warning sign you shouldn’t ignore. Think of it this way – if you don’t understand your reports, then you can’t feel confident that the IRS is getting correct information. It is essential to your peace of mind, and to your business, that you understand all of your financial reports.

The staff member assigned to your account does not seem competent.

If staff is unable to answer your questions, or if you seem to know more about the accounting aspects of your business than they do, you should request a different person to handle your accounts. If this is unable to be done, you may want to consider switching accountants.

You begin to receive a lot of IRS notices in the mail.

This is a serious warning sign. If the IRS is sending you repeated notices, then your business’s financial affairs are not being taken care of correctly. Too many of these notices, and your business will be red-flagged by the IRS, which could lead to years of issues every time a form is filed. Speak with your accountant and demand to know what the problem is. If you are unsatisfied with the answers, it is time to search for a new accountant.

Trust your instincts!

Often overlooked, but it shouldn’t be. If your instincts are telling you something isn’t right, pay attention.

With any of the above warning signs, it is always best to speak with your accountant about the issues at hand first. Sometimes, you may gain a clearer understanding and then feel more comfortable, but if you don’t, you need to move on. Changing accountants isn’t easy, but if it is the right decision, then it is absolutely what you must do!

If you need to find a new http://www.accountingaisle.com Accounting Aisle

Every small business accounting system has following key components.

1.Chart of accounts
2.General ledger
3.Accounts receivable
4.Fixed assets
5.Accounts payable
6.Payroll

Even if you hire an outside accountant for all your book-keeping and payroll management, we should understand the basic elements of accounting system.

Chart of accounts:

This is the first step in setting the accounting system for your business. This will decide what accounts you have to track for your business. Account numbers are used as an easy account identification system. In general two or three number systems will suffice for most of the business.

General ledger

After chart of accounts we need to establish the general ledger of the system, which is the engine that actually runs your business on a daily basis. Every account that is in your chart of accounts will be included in the general ledger and also in the same order as specified in chart of accounts. General ledger does not include every single accounting entry for a given period, it reflects only the summary of the transactions made. Important component for any general ledger are source documents. Two examples of source documents are copies of invoices to customers and invoices from suppliers. Source documents are very critical and very important for auditrail. Source documents are also important required documents for IRS at tax time. Other examples of source documents are cancel checks, utility bills, payroll tax records and loan statements.

General ledger entries are double entries. For every financial transaction in your business money goes from one place to another. For example, when you write a payroll check money goes from payroll account into employees account as an expense. When u sell an item from your business, you record a sale income but must have a journal entry for accounts receivable. The system used in recording entries on general ledger is of debits and credits.

In general ledger debits always go on the left and credits go on the right.

Accounts receivable

If you plan to sell goods, or provide services on account in your business there should be a method of tracking who owes you how much and when it is due. If you are selling to different customers then the best way to track is through an automated system. This will endure the billing and collection are done in a timely manner.

Fixed assets

Fixed assets are items that are for the long term use of the company. Fixed assets include computers, vehicles, land, buildings and other machinery. In the accrual system of accounting, fixed assets are not fully expensed to the company. But, expensed over a period of time that coincides with the life of an item. This process is called as depreciation of the item. Most business will keep a fixed assets sub ledger with the depreciation schedule.

Accounts Payable

Accounts Payable sub ledger is similar to the one that used to track accounts receivables. The difference is the account payable occurs when you purchase inventory or other assets on credit from a sub layer. It is important to track the accounts payable in a timely manner. Many supplier relationship with your business may be damaged due to poor accounts payable system. Good automated tools will enable you to alert when to pay.

Payroll

This is one of the most challenging subject for a new business owner. There are many federal and state laws regulating what you have to track related to a payroll. Failure in doing so will result in heavy fines. Many business owners use outside payroll services to comply with the applicable laws. It saves lot of time for the business owner to keep out of trouble with the law and saves time that can be devoted to something else in the business.

Cost Accounting

Cost accounting is a process of allocating the costs associated with generating a sale, both direct or indirect. Direct costs include material and labor. Indirect costs include all other costs associated with generating the product. By knowing the total costs associated for generating a product you can determine the items which are profitable to make.

Financial Statements

One of the primary benefits of a good book-keeping system is to generate timely useful financial statements. Most software packages offer capability of producing balance sheet, income statement and cash flow statement.

This is the second article in the series of articles which explains the need for bookkeeping for any business to run effectively. This article explained the key component definitions.

Third Article describes in detail about creating financial statements [Income statement, Balance sheet, Cash-flow statement. Cashflow statement analysis] with samples.

More details on:

* General Ledger entries.
* Accounts payable and Sample
* Accounts receivable and sample.
* Requirements from IRS on bookkeeping.

Stay tuned for the 3rd Article in the coming weeks. (c) Copyright 2007. All rights reserved.

Satti Vijay Bharath Reddy , is one of the founders of The Cashflow Crunchers, a web site for Investors and Smallbusiness to share investing tips and other information. For more articles, tips, and free online calculators, please visit http://www.cashflowcrunchers.com

Being self employed and your own boss also give you the freedom of not bound to a withholding money for tax by a company employer, like you would if you worked for someone else. When you work for someone else you would have to have money taken off each payday check and sent to the government with payroll deductions. When you are self employed you can keep that money yourself until it comes time to pay. So what is great about that is you can then put that tax money in a savings account and make a tiny percentage of interest till then.

Now as far as home business tax deductions, there are many deductions you can take advantage of. Be sure to consult with your tax advisor or accountant to be sure about each one, as many businesses and states or provinces are different.

Here are a few home business tax deductions you can get:

Start up cost – The start up cost for going into business can usually be deducted. This includes distributor kits and membership entry fees etc.

Office supplies – When you go to the store and buy stuff like paper, pens, computers, desks, and other supplies that you need for your home office you are able to deduct these expenses.

Services used – These are services such as business telephone lines, fax lines, Internet connections if used for business. You can then consider these to be business expense are now home business tax deductions.

Advertising – When you spend money on advertising for your business it is an expense to create profit and is also a home business tax deduction. This is a very big one. I often hear people complain about advertising their home business online and stuff. Well that advertising is an expense and can be deducted.

Gas – If you are using your car to do business appointments then you are allowed to deduct your gas bill.

Rent or Mortgage. – If you are a renter you can deduct a percentage of your rent as an expense or if you are a home owner you can deduct part of your mortgage as a business expense as you are working from your home.

These are just a few deductions that you may be able to take advantage of as a home based business owner. Please be sure to consult your accountant for more details on how to really implement and take advantage of these deductions.

Colin Meunier is a Successful Home Business Coach and Mentor !To learn more on how to start or become more successful in your home business online Visit: http://www.WhoIsColinMeunier.com & http://www.colinmeunier.com/blog

Spending hours on drafting and redrafting the accounts books of your business can try out your patience. Moreover checking each of the transactions can also consume a lot of your time, resulting in exhaustion and irritation. Accounting is just no child’s play and requires tremendous amount of expertise and accuracy. Moreover maintaining accounts is indeed a tiresome process, wherein most of your time you will need calculate and recalculate your transactions. But then this entire tedious process can not even be overlooked as maintaining a daily and accurate hard copy of your financial transactions is something that helps in determining the financial standing of your business. This further helps you to determine the graph of the profit or the loss that your firm is experiencing. Despite knowing the fact that maintaining accounts is an important task, you might be short of people who have proficiency in this field and can handle the work efficiently. In this scenario the best solution you can opt for is accounting outsourcing. In fact accounting outsourcing could help you solve all your problems and queries related to the accountings of your firm.

Any business firm, whether a large scale one or a small scale one, should be crystal clear while stating their financial transactions. This can only be done if the regular accounting work and financial reports are made precisely. This precise accounting work does call in for the investment of apt professionals who have thorough connoisseur in their work. Considering this fact you can always have an upper hand by adopting accounting outsourcing services. Considering accounting outsourcing services for your business will not only guide you and your business towards the right path of accounting, but will also help you in delivering the best and the most accurate accountings. Accounting outsourcing vendors make sure that the accounting outsourcing services provided by them help your business earn the maximum amount of profits and revenue. Apart from being assured of good revenues, once you adopt accounting outsourcing services you can also be rest assured about accurate and precise financial data at your disposition.

While you plan to adopt the accounting outsourcing services offered by an accounting outsourcing vendor or firm, you will have to look in through some details of the accounting outsourcing firm. The things that you will need to consider when selecting an accounting outsourcing firm are the authenticity of their organization and their work, the work experience and the expertise that they have in the field. Moreover you will have to understand the requirement of your business and then accordingly look out for an accounting outsourcing firm that suits your business requirements. The accounting outsourcing professionals who are hired have expertise in various fields of accounting and can handle their responsibilities very competently.

As accounting is a very sensitive issue you must make sure that you keep a track on the work of the accounting outsourcing firm that you have hired for your business. This will not only help you to stay up to dated with the work but will also help you to understand the work of accounting with more accuracy and expertise. Accounting outsourcing helps to maintain the daily record of the transactions and the various other financial issues of your business helping you to have accurate and scrutinized business records.

Michelle Barkley is a CPA who advises people on tax preparation and tax calculation.She specializes in Back Office Outsourcing ,Tax return preparation and accounting outsourcing. To know more about Accounting outsourcing services and to use the services visit http://www.ifrworld.com

We are a firm of Chartered Accountants in Southampton offering key advice on business startup.

It is the ambition of many people to run their own business. Some may have been made redundant and find themselves with free time and financial resources. Others make the decision to start up in business to be more independent and obtain the full financial reward for their efforts.

Whatever the reason, a number of dangers exist. Probably the greatest concern is the possibility of business failure.

Read on for guidance on some of the factors which need to be considered before trading begins.

This fact-sheet cannot cater for every possibility and any decisions should be supported by professional advice.

Initial Considerations

In order to make your business a success there are a number of key factors which should be considered:

commitment- starting a business is demanding. Determination and enthusiasm are essential

skills- you will need managerial, financial, technical and marketing skills. If you do not have these skills personally, they can be found in a partner or employee, or acquired through training

your product or service should have a proven or tested market, but must not conflict with the patent or rights of an existing business.

In addition to these general considerations there are a number of more specific matters.

Taxation

When starting in business, taxation aspects must be considered. Power Accountax are Chartered Accountants in Southampton , offering key taxation advice.

Taxation on profits

The type and rate of taxation will depend on the form of business structure. However, the taxable profit will normally differ from the profit shown in the accounts due to certain expenses which are not allowed for tax purposes and the timing of some tax allowances.

National insurance (NI)
The rates of NI contributions are generally lower for a sole trader or partnership than for a director of a company but the entitlements can also differ. But in a company, it may be possible to avoid NI by paying dividends rather than salary.

Value added tax (VAT)

Correctly accounting for VAT is an essential part of any business and neglect may result in a significant loss.

When starting a business you should consider the need to register for VAT. As Chartered Accountants in Southampton we can help register you for VAT. If the value of your taxable sales or services exceeds the registration limit you will be obliged to register.

Expect a visit from HMRC within eighteen months of registration. This inspection of your records ensures VAT is being properly accounted for.

Employing others

For the business to get off the ground or to enable expansion, it may be necessary to employ staff.

It is the employer’s responsibility to deduct income tax and national insurance and to account for student loan deductions. The balance must then be paid over to HMRC. Payroll records should be carefully maintained.

You will also need to be familiar with employment law.

Premises

There are many pitfalls to be avoided in choosing a property. Consideration should be given to the following:

suitability for the purpose

compliance with legal regulations

local by laws

physical restrictions such as access.

Insurance

Comprehensive insurance for business motor vehicles and employer’s liability insurance are a legal requirement. Other types of insurance such as public liability, consequential loss, business assets, Keyman and bad debts should be considered.

Pensions

Putting money into a pension scheme can be a very attractive way of saving for retirement because of the favourable tax rules. Many companies have to provide access for their employees to a stakeholder pension.

How We Can Help

As Chartered Accountants in Southampton whilst some generalisation has been made by us about starting up a business by us, it is always necessary to tailor the strategy to fit your situation. Any plan must take account of your circumstances and aspirations.

Whilst business success can never be guaranteed, professional chartered accountants advice can help to avoid some of the problems which befall new businesses. We would welcome the opportunity to assist you in formulating a strategy suitable for your own requirements. We can also provide key services such as bookkeeping, management accounts, VAT return and payroll preparation at an early stage.

For information of users: This material is published for the information of clients. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by the authors or the firm

Choose Power Accountax as your Chartered Accountants in Southampton

Contact

Tel No: 08704 42 32 22

Rajesh Kohli : rajesh@poweraccountax.co.uk

http://www.poweraccountax.co.uk

HREF=”http://www.poweraccountax.co.uk”>Chartered Accountants Southampton

Rajesh Kohli is a Chartered Accountant working with Power Accountax Ltd as a Managing Principals for a firm of accountants in southampton. Rajesh Kohli qualified with PricewaterhouseCoopers, then went to setup his own practice in 2000. Since then he has a well established practice, providing invaluable advice to owner managed businesses including all aspects of accounting services.

http://www.poweraccountax.co.uk

Starting and running a small business is full of challenges, and one of the biggest challenges is dealing with the finances of the business. No doubt people have recommended to you a variety of different types of software to help you with your bookkeeping, but you want to be sure that you pick the software that will be the most beneficial to you. QuickBooks is one of the best bookkeeping software available today and using this software can help you keep your small business running as it should financially. If you are wondering why you should choose this particular kind of bookkeeping software, the following are just four great benefits you will experience.

Benefit #1 - Easy to Manage All Expenses - One of the first benefits that you will enjoy if you choose this type of bookkeeping software is that it will make it so much easier to manage all of your expenses. You can use this software to keep track of the checks you write and even your credit card bill so you always know where your money is going. With easy entry, you will be able to make sure that you never miss an expense while using this software.

Benefit #2 - Reports Let You Know How You’re Doing - Another great benefit of using QuickBooks is that this software comes with a variety of different reports that will help to let you know how you are doing. You can print graphs and charts that show how much money you are bringing in versus how much you are spending each month. You can even look at a report of the past year and see how your business has fluctuated from time to time. These reports can be very helpful to keeping your small business on track.

Benefit #3 - Easy Estimates and Billing - Not only does this bookkeeping software keep track of expenses and offer great reports, but it can help you create estimates and take care of billing tasks as well. The program allows you to quickly draw up estimates for your customers and then to later create invoices for the jobs as well.

Benefit #4 - Makes Tax Time Much Easier - One of the biggest benefits of using QuickBooks is that it actually makes tax time so much easier. You will already have your expenditures and your income nicely laid out within the program, which will make it easier. If you are using an accountant, no doubt they will be thrilled that you are using this software as well, since it will make their job much easier too, which in the long run will save you some money.

QuickBooks is an excellent bookkeeping program to use for your small business. As you can see, there are a variety of different benefits that you can enjoy when you use this bookkeeping software. Why not make dealing with your finances a bit easier and considering using this software for your small business.

If you are looking for a small business accounting solution, you owe it to yourself to take a close look at Quickbooks. To learn more about Quickbooks and how it can simplify your accounting needs, be sure to visit http://www.e-accounting-software.com

It’s surprising how many people have asked how to get their business statistics on a single page each month. They have also asked how to turn the information into charts and graphs for use during meetings. Software today makes this easy; anybody can do these things with word document and/or a spreadsheet program. Therefore, there must be another problem in addition to getting the numbers on one page.

Is the problem truly a lack of knowledge about word or spreadsheet programs? It is possible, but not likely. Most people are computer literate and with built-in software tutorials, learning a new program is quite simple and painless. It can be done in a few hours.

Could it be that the information is too detailed, redundant and confuses people instead of helps them? In dentistry, this has become a problem. Monthly tracking has been taken to the extreme. It now takes multiple people to do what one person used to do in the past. As a result there are way too many details, much of it redundant and subjective, and it manipulates the facts.

That is the crux of the problem; too much information and uncertainty with how to use it. Monthly reports are intended to identify where the business stands and what direction it is heading. The bottom line is measuring and monitoring for growth. The dental business can be very effectively managed by tracking the results of specific activities on a monthly basis.

The activities to track are production, collections and accounts receivable, expenses, case tracking for new and existing patients and patient retention. There is a standard process or system you have in place to produce a specific result in each area. That is what you are measuring here, the effectiveness of a system, not individual performance. Employee performance is measured elsewhere although is often reflected in the report.

The primary purpose of the monthly report is to see what systems are producing the desired results and which ones are not. It is a tool to identify problems that are hindering growth and profits. Problems are defined as less than anticipated or expected results. Once you identify the problem the particular system can be modified, refined, or changed to get the numbers you are looking for.

When the results are good, the report serves another purpose. Remember the objective; to grow the business. Now it functions as a motivational tool. Begin looking at the specific activities and find ways to improve upon them to get more and better results.

Every activity affects another. All the statistics should be on one page so you can easily see these affects. People have requested charts and graphs. If you use a spreadsheet program, they can be developed quite simply.

The purpose of knowledge is action! Constance Knieper, owner of Goal Achievements, L.L.C. is committed to helping you help yourself. To learn more about one page monthly reporting and using it to improve growth and profits and get successful strategies to achieve goals, visit: http://www.goalachievements.com/

To ensure that the final accounts disclose the true trading results, it is necessary to lake into account the whole of the expenses incurred, whether paid or not, and whole of the losses sustained. Likewise the incomes and gains earned, whether actually received or not, during the period covered by the trading and profit and loss account under consideration must also be recorded.

In mercantile system of accounting, it is essential to adjust different accounts before the preparation of final accounts. It is quite common to adjust expenses paid in advance, incomes received in advance, income accrued but not received, bad debts, provision for bad debts depreciation on assets and soon. Journal entries are passed to effect the required adjustments, these entries are known as adjusting entries.

Usual Adjustments

Outstanding Expenses

Certain expenses relating to a particular period may not have been paid in that accounting period. All such expenses which are due for payment in one accounting year but actually paid in future accounting years or payment of which is postponed are all outstanding or unpaid expenses. All such expenses must be accounted for in that accounting year in which they are incurred, irrespective of the fact whether they are paid or not. In other words, all paid and also unpaid expenses must be recorded in an accounting year if they relate to that accounting year only with a view to ascertain true trading results e.g. if salaries for the last month are not paid, no entry will appear in books of accounts unless these are paid. So profit and loss account in respect of salaries will thus be under charged than the actual expenditure, therefore the profit will be more.

Prepaid Expenses

The, benefit of some of the expenses already spent will be available in the next accounting year also, Such a portion of the expense is called pre-paid expense; since such expenses are already paid, they are also recorded in the books of accounts of that period to which they do not relate. The result shown by the final accounts of a particular period will not be correct because such expenses relate to future periods. Therefore, such prepaid expenses must be adjusted in the books of accounts to arrive at true profit. Generally insurance, taxes, telephone subscriptions, rent etc. are paid in advance, thus requiring adjustment e.g. Rent paid by x for one year on 1.7.79 when his accounting year is calendar year; thus rent for 6 months will remain unexhausted and will be c/f to the next year.

Accrued Income

There may be certain incomes which have been earned during the year but not yet received till the end of the year. Income like interest on investments, rent and commission etc. are normally earned by merchant during a particular accounting period but actually not received during that period. Such income items need adjustments before the preparation of final accounts. Such incomes should be credited to that particular income account. At the same time the income so -earned but not received is an asset because the amount is still to be received.

Income Received in Advance

Sometimes, traders receive certain amounts during a particular trading period which are to be earned by them in future periods. Such incomes though actually received and therefore, recorded i.e. not yet earned. Such incomes should be credited to the profit and loss account of the year in which these are earned. Therefore, such income though received is not the income but a liability of that period

Closing Stock

It represents the unsold stock at the end of the year. Closing stock is valued and following entry is passed at the end of the year: Closing Stock account To Trading Account Closing stock at the end appears in the balance sheet and is carried forward to the next year. At the end of the next year it appears in the trial balance as opening stock and from there it is taken to debit side of trading account and thus closed.

Depreciation

The value of fixed assets diminishes gradually with their use for business purposes. Although this decrease in the value happens every day but its accounting is done only at the end of accounting period with the help of following entry :Depreciation account To Particulars asset

Interest on Capital

The proprietor may wish to ascertain his profit after considering the interest which he losses by investing his money in the firm. Interest to be charged is an expense for the business on one hand and income to the proprietor on the other hand. Following adjusting entry is recorded at the end of accounting period: Interest on capital a/e To Capital a/c Interest on capital being an expense is debited to profit and loss account and same amount of interest on capital is added to capital.

Interest on Drawings

As business allows interest on capital it also charges interest on drawings made by the proprietor. Interest so charged is an income for the business on one hand and expense for the proprietor on the other hand. Following adjusting entry is passed at the end. of accounting period: Capital ale Dr. To Interest on drawings a/e The interest on drawings being an income is credited to profit and loss account is shown as a deduction from the capital.

Bad Debt to be written off

Bad debts are irrecoverable debts from customers, during the course of the financial year. These are recorded as follows: Bad debts a/c To Sundry Debtors a/c It results in the reduction of customers debit balance and addition to the loss i.e. Bad Debts. At the end of the year when the trial balance is drawn, these two accounts show debit balances. The balance on sundry debtors account, thus arrived, is the net balance, after deduction of any bad debts recorded during the year. But after the trial balance is prepared and before the final accounts are drawn trader may find that there are additional bad debts. Such bad debts must be recorded with the same adjusting entry and giving it following effect in ledger and final accounts.

Provision for Bad Debts

At the end of the year, after writing off the bad debts about whom we were sure of becoming irrecoverable, there may still be some customer balances from whom it is doubtful to collect the entire amount. However, it cant be written off as bad because non-recovery of such amount is not certain. But at the same time the balance in sundry debtors account should be brought down to its net realizable figure so that balance sheet may not exhibit the debtors at more than their actual realizable value. Therefore, to show the approximately correct value of the sundry debtors in the balance sheet a provision or reserve is created for possible bad debts. Such an adjustment entry is recorded at the end of accounting year.

Provision for bad debts is an attempt to anticipate possible losses due to bad debts and to keep aside an amount out of profit to meet the loss estimated in the following years. When the provision for bad debts is created, following entry is recorded:

Profit and Loss A/c Dr. To Provision for bad debts A/c

Some important considerations while creating provision for bad debts

(i) Sundry debtors account should not be credited with the amount of provision for doubtful debts because the loss has not actually been incurred.

(ii) Treatment of bad debts or provision for bad debts appearing inside the trial balance. If some balance (credit) is already appearing in provision for doubtful debts account inside the trial balance, it is the previous years unutilized balance of this account. If some bad debts are also appearing on the debit side of the trial balance, these should be transferred to provision for bad debts account, with the help of following entry: Provision for bad debts a/e To Bad debts a/e. It is important to note that, as these items appear inside the trial balance, so these are to appear only in profit and loss account as debtors have already been reduced during the year.

(iii) When bad debts and provision for bad debts appear in trial balance, new provision is to be created and further bad debts are to be written off. If already bad debts and provision for bad debts are appearing in trial balance, these should be adjusted and only difference should be taken to profit and loss account.

If bad debts written off plus bad debts to be written off plus new provision for bad debts is more than the credit balance of old provision appearing in the trial balance, the difference should be debited to profit and loss account.

Provision for discount on Debtors

It is normal practice in trade to allow discount to customers for prompt payment and it constitutes a substantial sum. Sometimes the goods are sold on credit to customers in one accounting period where as the payment of the same is made by them in the next accounting period and so discount is to be allowed. It is a prudent policy to charge this expenditure to the period in which sales have been made, so a provision is created in the same manner, as in case of provision for doubtful debts

An important point to note is that no discount win be allowed on debts that become bad. Therefore, the provision required for discount will be in respect of the other debts only. So the amount of provision for discount be calculated after deducting the provision for bad debts from sundry debtors.

Provision for discount on creditors

Prompt payment, if made, enables a businessman to receive discount. The question arises whether this discount should be treated as income of the period in which purchases were made or of the period when the payment is made, if both events are in different accounting years, it has been well decided by accountants that it should be treated as income of the period in which purchases are made. So on last date of accounting period if some amount is still payable to creditors, a provision should be created for such probable income and amount should be credited to the profit and loss account of that year in which purchases are made. Following adjusting entry is passed for it :Provision for discount on creditors a/c Dr. To Profit and loss account

Losses by Accidents

Sometimes a business suffers certain losses not because of trading but because of certain accidents. These may destroy some fixed assets of the merchant. In such a case the asset account is credited and the profit and loss account is debited.

If goods (stock-in-trade) are lost by accident the value of closing stock win be lower than otherwise. This will reduce the amount of gross profit. So the cost of goods lost by accident is credited to the trading account and debited to the profit and loss account. The increase -in gross profit will be neutralized by the debit to the profit and loss account and thus the net profit will not be effected. The entries to the passed are as follows: Loss by accident a/c To Goods lost by accident a/c

Commission to manager payable on profits

Sometimes the manager is entitled to a commission on profits.. Such commission may be :

(a) Fixed percentage on net profits before charging such commission.

(b) Fixed percentage on net profits- after charging such commission.

Such commission being an expense is debited to commission account. However, as it has not yet been paid, so commission payable account is given the credit and finally it is shown in the balance sheet as a liability. Calculation of Commission First of all trading account should be prepared in usual manner and after transferring the gross profit or loss all expenses and incomes should be debited or credited except the commission which is still to be calculated.

Goods used in business

Sometimes goods purchased for the purpose of resale are used in business as giving them away for charitable purpose or distributing them as free samples. In these conditions purchases account should be credited with an amount equal to the cost of goods used in business and same amount is debited to charity or advertisement expenses account, as the case may be.

The author is an engineering graduate, B.E.(Hons), and is managing his own software development firm, HiTech Computer Services, that mainly deals in accounting, billing and inventory control software for traders, industries, business houses, hotels, hospitals, medical stores, newspapers, magazines, petrol pumps, automobile dealers, commodity brokers and other business segments, website and web application deveopment for business. The software are available both for intranet and internet. These software are available for download from the website:

Evaluation version accounting software download is available at http://www.hitech-on-web.com/p10.asp

Copy of the article and full Financial Accounting Primer or Tutorial is available at:http://www.hitech-on-web.com/Adjustments_of_Final_Accounts.asp

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Accountants prepare trial balance to check the correctness of accounts. If total of debit balances does not agree with the total of credit balances, it is a clear-cut indication that certain errors have been committed while recording the transactions in the books of original entry or subsidiary books. It is our utmost duty to locate these errors and rectify them, only then we should proceed for preparing final accounts. We also know that all types of errors are not revealed by trial balance as some of the errors do not effect the total of trial balance. So these cannot be located with the help of trial balance. An accountant should invest his energy to locate both types of errors and rectify them before preparing trading, profit and loss account and balance sheet. Because if these are prepared before rectification these will not give us the correct result and profit and loss disclosed by them, shall not be the actual profit or loss.

All errors of accounting procedure can be classified as follows:

1. Errors of Principle

When a transaction is recorded against the fundamental principles of accounting, it is an error of principle. For example, if revenue expenditure is treated as capital expenditure or vice versa.

2. Clerical Errors

These errors can again be sub-divided as follows:

(i) Errors of omission

When a transaction is either wholly or partially not recorded in the books, it is an error of omission. It may be with regard to omission to enter a transaction in the books of original entry or with regard to omission to post a transaction from the books of original entry to the account concerned in the ledger.

(ii) Errors of commission

When an entry is incorrectly recorded either wholly or partially-incorrect posting, calculation, casting or balancing. Some of the errors of commission effect the trial balance whereas others do not. Errors effecting the trial balance can be revealed by preparing a trial balance.

(iii) Compensating errors

Sometimes an error is counter-balanced by another error in such a way that it is not disclosed by the trial balance. Such errors are called compensating errors.

From the point of view of rectification of the errors, these can be divided into two groups :

(a) Errors affecting one account only, and

(b) Errors affecting two or more accounts.

Errors affecting one account

Errors which affect can be :

(a) Casting errors;

(b) error of posting;

(c) carry forward;

(d) balancing; and

(e) omission from trial balance.

Such errors should, first of all, be located and rectified. These are rectified either with the help of journal entry or by giving an explanatory note in the account concerned.

Rectification

Stages of correction of accounting errors

All types of errors in accounts can be rectified at two stages:

(i) before the preparation of the final accounts; and

(ii) after the preparation of final accounts.

Errors rectified within the accounting period

The proper method of correction of an error is to pass journal entry in such a way that it corrects the mistake that has been committed and also gives effect to the entry that should have been passed. But while errors are being rectified before the preparation of final accounts, in certain cases the correction can’t be done with the help of journal entry because the errors have been such. Normally, the procedure of rectification, if being done, before the preparation of final accounts is as follows:

(a) Correction of errors affecting one side of one account Such errors do not let the trial balance agree as they effect only one side of one account so these can’t be corrected with the help of journal entry, if correction is required before the preparation of final accounts. So required amount is put on debit or credit side of the concerned account, as the case maybe. For example:

(i) Sales book under cast by Rs. 500 in the month of January. The error is only in sales account, in order to correct the sales account, we should record on the credit side of sales account ‘By under casting of. sales book for the month of January Rs. 500″.I’Explanation:As sales book was under cast by Rs. 500, it means all accounts other than sales account are correct, only credit balance of sales account is less by Rs. 500. So Rs. 500 have been credited in sales account.

(ii) Discount allowed to Marshall Rs. 50, not posted to discount account. It means that the amount of Rs. 50 which should have been debited in discount account has not been debited, so the debit side of discount account has been reduced by the same amount. We should debit Rs. 50 in discount account now, which was omitted previously and the discount account shall be corrected.

(iil) Goods sold to X wrongly debited in sales account. This error is effecting only sales account as the amount which should have been posted on the credit side has been wrongly placed on debit side of the same account. For rectifying it, we should put double the amount of transaction on the credit side of sales account by writing “By sales to X wrongly debited previously.”

(iv) Amount of Rs. 500 paid to Y, not debited to his personal account. This error of effecting the personal account of Y only and its debit side is less by Rs. 500 because of omission to post the amount paid. We shall now write on its debit side. “To cash (omitted to be posted) Rs. 500.

Correction of errors affecting two sides of two or more accounts

As these errors affect two or more accounts, rectification of such errors, if being done before the preparation of final accounts can often be done with the help of a journal entry. While correcting these errors the amount is debited in one account/accounts whereas similar amount is credited to some other account/ accounts.

Correction of errors in next accounting period

As stated earlier, that it is advisable to locate and rectify the errors before preparing the final accounts for the year. But in certain cases when after considerable search, the accountant fails to locate the errors and he is in a hurry to prepare the final accounts, of the business for filing the return for sales tax or income tax purposes, he transfers the amount of difference of trial balance to a newly opened ‘Suspense Account’. In the next accounting period, as and when the errors are located these are corrected with reference to suspense account. When all the errors are discovered and rectified the suspense account shall be closed automatically. We should not forget here that only those errors which effect the totals of trial balance can be corrected with the help of suspense account. Those errors which do not effect the trial balance can’t be corrected with the help of suspense account. For example, if it is found that debit total of trial balance was less by Rs. 500 for the reason that Wilson’s account was not debited with Rs. 500, the following rectifying entry is required to be passed.

Difference in trial balance

Trial balance is affected by only errors which are rectified with the help of the suspense account. Therefore, in order to calculate the difference in suspense account a table will be prepared. If the suspense account is debited in’ the rectification entry the amount will be put on the debit side of the table. On the other hand, if the suspense account is credited, the amount will be put on the credit side of the table. In the end, the balance is calculated and is reversed in the suspense account. If the credit side exceeds, the difference would be put on the debit side of the suspense account. Effect of Errors of Final Accounts

1. Errors effecting profit and loss account

It is important to note the effect that an en-or shall have on net profit of the firm. One point to remember here is that only those accounts which are transferred to trading and profit and loss account at the time of preparation of final accounts effect the net profit. It means that only mistakes in nominal accounts and goods account will effect the net profit. Error in the these accounts will either increase or decrease the net profit.

How the errors or their rectification effect the profit-following rules are helpful in understanding it :

(i) If because of an error a nominal account has been given some debit the profit will decrease or losses will increase, and when it is rectified the profits will increase and the losses will decrease. For example, machinery is overhauled for Rs. 10,000 but the amount debited to machinery repairs account -this error will reduce the profit. In rectifying entry the amount shall be transferred to machinery account from machinery repairs account, and it will increase the profits.

(il) If because of an error the amount is omitted from recording on the debit side of a nominal account-it results in increase of profits or decrease in losses. The rectification of this error shall have reverse effect, which means the profit will be reduced and losses will be increased. For example, rent paid to landlord but the amount has been debited to personal account of landlord-it will increase the profit as the expense on rent is reduced. When the error is rectified, we will post the necessary amount in rent account which will increase the expenditure on rent and so profits will be reduced.

(iil) Profit will increase or losses will decrease if a nominal account is wrongly credited. With the rectification of this error, the profits will decrease and losses will increase. For example, investments were sold and the amount was credited to sales account. This error will increase profits (or reduce losses) when the same error is rectified the amount shall be transferred from sales account to investments account due to which sales will be reduced which will result in decrease in profits (or increase in losses).

(iv) Profit will decrease or losses will increase if an account is omitted from posting in the credit side of a nominal or goods account. When the same will be rectified it will increase the profit or reduce the losses. For example, commission received is omitted to be posted to the credit of commission account. This error will decrease profits ( or increase losses) as an income is not credited to profit and loss account. When the error will be rectified, it will have reverse effect on profit and loss as an additional income will be credited to profit and loss account so the profit will increase ( or the losses will decrease). If due to any error the profit or losses are effected, it will have its effect on capital account also because profits are credited and losses are debited in the capital account and so the capital shall also increase or decrease. As capital is shown on the liabilities side of balance sheet so any error in nominal account will effect balance sheet as well. So we can say that an error in nominal account or goods account effects profit and loss account as well as balance sheet.

2. Errors effecting balance sheet only

If an error is committed in a real or personal account, it will effect assets, liabilities, debtors or creditors of the firm and as a result it will have its impact on balance sheet alone. because these items are shown in balance sheet only and balance sheet is prepared after the profit and loss account has been prepared. So if there is any error in cash account, bank account, asset or liability account it will effect only balance sheet.

The author is an engineering graduate, B.E.(Hons), and is managing his own software development firm, HiTech Computer Services, that mainly deals in accounting, billing and inventory control software for traders, industries, business houses, hotels, hospitals, medical stores, newspapers, magazines, petrol pumps, automobile dealers, commodity brokers and other business segments, website and web application development for business. The software are available both for intranet and internet. These software are available for download from the website:

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Copy of the article and full Financial Accounting Primer or Tutorial is available at:http://www.hitech-on-web.com/Rectification_Of_Accounting_Errors.asp

Visit HiTech Computer Services at http://www.hitech-on-web.com/

Many people often ask themselves the question “do I need an accountant, or, can I do my tax return myself and save the money?” Sometimes it might seem counter-intuitive, however, hiring an accountant can save you a lot of money as well as hassle and time.

It’s also a good question as it’s not about what you earn, rather, it’s all about what you get to keep!

There is a high degree of trust required between an accountant and their clients, so what are some of the areas you need to look at when you are researching an accounting firm?

A simple but not exhaustive list that will allow you to “interview” your prospective accountant includes;

· Look at the size of the firm, if it is a large tier firm, will you get personal service?

· Check feedback from other customers or testimonials on their website.

· See whether they specialise in a particular area, is this compatible with you?

· How long have they been practising, experience is invaluable.

· Check what qualifications the principals and staff has, including professional associations.

· Discuss your business or circumstances with them and see whether they believe they can assist.

· Are they technology savvy, do they use MYOB, Quickbooks etc to eliminate paperwork?

· Establish the fees you will pay. Is it per job or an hourly rate?

Accountancy is not really something you should do for yourself, it requires expert knowledge to ensure that you comply with all laws, and, that you receive your maximum allowable refund. Your accountant can do this by applying the tailoring a solution to your individual situation.

Best of all, the fees you are charged by an accountant are tax deductible, meaning the amount you actually pay will be less than the stated fee.

Tiffany Boys is a manager and she lives and works in Sydney, Australia
http://www.crestfinancial.com.au