The current memo is the response to your request about carrying out a research on the accounting for pension gains and losses in a defined-benefit plan. The research allows concluding that there are strict accounting requirement for pension and other retirement benefit gains and losses that should be accounted for and displayed in the companys balance sheet.
Basics of accounting for pension gains and losses
The procedures according to which accounting for pension gains and losses I a defined-benefit plan is carried out are regulated by FASB ASC 715-30-60-1. To describe it briefly, an organization should present a comprehensive account of any gains and losses associated with pensions and any other types of retirement benefits. In addition, all prior service costs and other related credits should also be accounted for. Finally, transition assets and liabilities of an organization in relation to pension and other retirement benefits should also be accounted for in a comprehensive manner.
Rationale for the above accounting requirements
There is a considerable rational approach to the accounting requirements provided for the pension gains and losses in a defined-benefit plan. The standards set by FASB ASC 715-30-60-1 have three major groups of reasons behind them:
The comprehensive manner of accounting for gains and losses from pensions and other retirement benefits in a defined-benefit pension plan allows the company to be well aware of its financial operations and conditions of its funds in regard to the retirement plans and schemes it adopts or plans to develop.
The accounting requirements set by FASB ASC 715-30-60-1 allow the regulatory bodies of the country in which a company operates to properly audit and monitor the financial operations of this company. The point here is that retirement benefits other than pension payments might sometime become the sources of illegal schemes, and thus they require full and proper control.
The standard established to account for gains and losses from pensions and other retirement benefit help lenders and potential investors of the company to study its financial performance, see if its operations are transparent and perfectly clear, and if there is a potential for investing into this company.
Balance sheet presentation
According to FASB ASC 715-20-65-1, pension gains and losses are represented in the companys balance sheet as the comprehensive retirement income or comprehensive retirement liability. The former appears on the balance sheet if the company meets its retirement payment projections, while the latter shows up in the opposite case. Companies must reflect their retirement plans on balance sheets.
What I Have Learned from the from Writing the Memo
From writing the memo, I have learned at least for points useful in my further study and career development. First, I have learned how pension and other retirement benefits are accounted for according to the FASB ASC standards. Second, I have found out the rationale for the establishment of these specific accounting standards that concern pension schemes and retirement plans. Third, I have managed to understand that pension assets and liabilities should obligatory be reflected in the companies balance sheets, which is one of the conditions of a legal and transparent operation of every business company. Finally, I have gained considerable insights on accounting practices and codifications standards in general, which will hopefully be helpful to me in future.
I interviewed Ms. Brandi Kastler, who has been working in the banking sector for ten years. She was my private accounting tutor for about four years. Ms. Kastler graduated from Drexel University in Pennsylvania with a bachelors degree in accounting. She later pursued her masters degree in accounting at the University of Rochester in New York. Ms. Kastler has worked in the private and public sectors; however, currently, she works in the private sector.
The Interview
Factors That Influenced the Respondents Career Decision
According to Ms. Kastler, the decision to pursue accounting was personal; however, several environmental factors played a role in influencing her career decisions. She grew up surrounded by accountants and, therefore, enrolling for certifications in accounting was expected. The perception of her career was influenced by the social information acquired from her interaction with family members. She often overheard their discussions regarding the industrys pros and cons, which consequently shaped her viewpoint of the profession. She views accounting as a specialty with great professional opportunities that offer attractive salaries. Besides her natural skills with numbers, Ms. Kastler had access to the resources necessary to facilitate her studies. She reported having no specific life experiences or events that determined her decision to pursue accounting.
Specific Activities Concerning the Job That the Interviewee Enjoys
Ms. Kastler enjoys using formulas to solve financial problems. She identified this practice as the most gratifying aspect of her job. Every fiscal year, the accounting department within her organization provides its managers with recommendations on improving the businesss financial growth. To do this, Ms. Kastler conducts a financial analysis of the businesss net profits, revenue, margins, and losses and develops recommendations based on her uncovering. She finds it satisfying that she can use her hobby working out formulas to contribute to something as meaningful as growing a business.
The Most Challenging Activities as Identified by the Respondent
According to the interviewee, the monotonous and cyclical nature of the job can be extremely stressful. Ms. Kastler finds it demoralizing and dissatisfying to always work on the same things over and over. She compared this feeling to running on a treadmill the outcomes of her efforts are noticeable, although she is always on the same spot. Ms. Kastler further posited that since she is on a monthly salary basis and she rarely gets compensated for working overtime, which, in turn, increases the likelihood of demotivation, especially when she works hard to meet deadlines without any reward for her effort.
The Influence of the Interviewees Career Path on Their Ability to Serve Others and Promote the Common Good
Ms. Kastlers profession fosters her capacity to promote the common good and serve others by giving her a platform to educate people on finance-related aspects, which, in turn, boosts their financial literacy levels. Although financial literacy is perceived as a private good since people have to pay to obtain it, the respondents viewpoint and consequent actions counter this perspective. Ms. Kastler views it as a public good and, therefore, offers her expertise and financial knowledge to people for free. She views her free financial advice as a form of content marketing. This is because the people she advises always entrust her with their financial problems and are always willing to pay to get those issues resolved.
The Application and Importance of Ethics in the Profession
When asked about the relevance of ethics in the profession, Ms. Kastler identified personal values as a crucial aspect that guides an accountants behavior in the workplace. She reported the role played by ethical behaviors in enabling her to establish trusting relationships with managers, investors, clients, friends, and business owners. Ms. Kastler further argued that a companys finances are a sensitive matter and that every accountant must uphold the highest professional standards.
Ms. Kastler noted the prevalence of ethical dilemmas and issues in the accounting profession, as well as the effectiveness of adequate ethical knowledge in helping her resolve these problems. Since trust from involved stakeholders relies on her accuracy in generating financial reports, she views responsibilities such as minimizing the risks of misrepresentation and errors during the report generation as part of her ethical responsibility. According to the respondent, financial reports are used during a companys valuation, and having strong moral behaviors can benefit the firm in the long run.
Reasons for Recommending This Career
Ms. Kastler reserved the recommendation for a career in accounting for people with an interest in the profession. According to the respondent, anyone interested in the specialty and those who enjoy working with numbers and are capable of working in a structured system can handle every aspect of the profession. Ms. Kastler further revealed the significant demand for experts in the specialty, arguing that it offers various career opportunities, although one has to have the appropriate proficiencies. Furthermore, she identified social skills efficacy in influencing the rate at which one advances throughout their career. According to Ms. Kastler, accounting can be rewarding both career-wise and economically if one has the right skill set.
Reason for Recommending a CPA Certification
Ms. Kastler argued that a CPA certificate opens more opportunities and enhances flexibility in choosing ones career options. She further stated that with a CPA certificate, one could work in the public and private sectors. According to the respondent, this accreditation is mandatory, particularly for individuals considering a career in public accounting. To emphasize further the significance of this certification, Ms. Kastler asserted that employers in the public sector place much more value on CPA certification than those in the private sector. As per the interviewees viewpoint, CPA certification adds credibility to ones qualifications, and therefore, it is essential.
Importance of budgets and performance reports Guillermo decision making process
Budgets and performance reports are vital tools used in business to regulate the level of companies expenditure. Due to the financial challenges faced by large and small organizations during their operations, firms must emulate budget to effectively allocate the scarce resources. Guillermo can use the performance reports and budgets in various ways. First, he can use them to know the area that is not achieving its objective due to low budgetary allocation (Elliot & Elliot, 2004, p. 23). In this way, it will be possible either to increase or decrease the budgetary allocation for such departments. Secondly, Guillermo can use the performance reports during the diversification of product line. For example, products that are performing poorly in the market may be modified and reintroduced in the market. On the other hand, well performing products can be produced in large quantity to meet the customers demand. Guillermo can also use the budgets to decide whether to expand the business operations or close the loss making branches. It is good to note that loss-making branches should be closed to avoid unnecessary budgetary allocations that only increases the company expenditures and decrease revenue. The financial decisions such as the level of salaries, amount of profit to be ploughed back, savings and assets to be purchased can also be made based on the performance reports and budgets. Competitors financial information that is retrieved from magazines can also be used by Guillermo to make informed decision on how to face them in the market (Goodyear, 1996, p. 36).
How ethics might influence Guillermo accounting decisions
Ethics has a great role in the operations of any business. Guillermo Navallez could have faced the stiff competition by lowering his prices lower than those of the competitors. Even though the competitors were making high sales due to their low market entry prices, the decision of Guillermo to lower prices can be irrational. This is based on the fact that it can result to low profits for the business. In addition, by emulating ethics Guillermo will be able to maintain proper documentation that is necessary during auditing and tax computation. One way through which some companies evade tax is in keeping of poor financial records and downward manipulation of the sales figures. It is therefore essential that good ethics be adopted not only by Guillermo but also by also other businesses in the furniture industry.
Important accounting information for Guillermo to consider when making decisions
The cost of labour is one of the important aspects that Guillermo need to consider. This cost should be maintained at low level to widen his profit margin. To put the labour cost at low level, Guillermo should hire experienced workers and marketers who do not need much training (Horngren, 2008, p. 56). Production cost is another important accounting information that Guillermo need to consider. Even though he is focused to face off his competitors, he should not emulate very expensive production facilities that may worsen his financial position. Likewise, Guillermo should adopt effective strategies to reduce the cost of distributing his products. This can be achieved by minimizing the number of channel members who Guillermo uses as distributors. In conclusion, it is clear that the cutthroat competition currently been experienced in the business arena calls for strong marketing strategies for companies to thrive in the market.
References
Elliot, B. & Elliot, J. (2004). Financial accounting and reporting. London, Prentice Hall, London.
Goodyear, L. (1996). Principles of Accountancy. Lowa Goodyear-Marshall Publishing Company.
Horngren, T. (2008). Introduction to Management Accounting. London, Pearson Education Incorporation.
International Financial Reporting Standards (IFRS) differ from the US Generally Accepted Accounting Principles (US GAAP) on multiple levels, including the four main financial statements. According to Levy et al. (2018), most of the world uses the IFRS system while US businesses operate under GAAP standards. In terms of the income statement, the difference is portrayed by debts being placed in the expense category according to the US GAAP system. In IFRS, they are under revenue offset. Additionally, US GAAP requires extraordinary items to be included in net income while they are not included in the statement of income based on the IFRS system. A change within the US system would benefit corporate management since the system will be more straightforward and internationally recognized.
Another contrasting concept is highlighted in the statement of the owners equity. IFRS standards include three categories for owners account (reserves, accumulated losses and profit, and share capital). However, the GAAP system divides it into retained earnings and contributed capital. The changes in equity are to be separately presented for IFRS and included in financial statements based on GAAP protocols.
In terms of cash flow, IFRS allows for more flexibility since organizations can place the interest paid in the operating or financing section while interest received is under operating or investing. On the other hand, US GAAP requires the interest paid/received to be classified as operating activities (a category within the financing section). Dividends paid are financing activities according to GAAP standards and operating or investing activities under IFRS. US corporations would benefit from a more transparent and flexible model that can lead to an increase in international investments and a decrease in interest rates. Regarding the balance sheet, IFRS standards call for listing non-current assets first, opposite to the GAAP system. Moreover, assets are listed based on liquidity (US GAAP), while IFRS requires the opposite (reverse liquidity).
Reference
Levy, A., Bouheni, F. B., & Ammi, C. (2018). Financial management US GAAP and IFRS standards. John Wiley & Sons, Incorporated.
The professional field of accounting is evolving with all the other aspect of human life under the influence of continuous advancement. New requirements in the professional area and labour market necessitate relevant changes in the educational field so that the competencies, skills, and theoretical knowledge of graduates from accounting department provide the expected level of expertise adequate to the demand. Therefore, it is vital to assess the level capability of Saudi education in the sphere of accounting to meet the demands of the market. The current literature review is aimed at analysing the recent scholarly publications on the topic of accounting educational outputs suitability with the requirements of the labour market in Saudi Arabia. The scope of the review includes articles published between 2015 and 2020. The literature sources are reviewed from the perspective of their contribution to the topic and are discussed according to the common themes.
The academic literature sources pay much attention to the quality of accounting graduates skills and the level of expertise in relation to the needs of the labour market in the Kingdom of Saudi Arabia. Several studies identify that the skills students obtain during their studying at universities do not match the employers demands (Al Mallak, 2018; Ibeaheem, Elawady and Ragmoun, 2018; Zureigat, 2015). Moreover, some researchers argue that the inconsistencies between the supply and demand in the accounting labour market provoke an increased level of graduates unemployment (Ibeaheem, Elawady and Ragmoun, 2018; Senan, 2019). Indeed, employers attitudes and values continuously change, which leads to their prioritisation of particular generic skills.
The gap between the expected level of skills development in graduates and their actual level has been addressed by many researchers. Al Mallak (2018) found that accounting graduates competencies in intellectual, personal, business, communicational, and ethical domains are all equally important for employers but are not properly developed. The same findings were presented by Ibeaheem, Elawady and Ragmoun (2018), who claimed that such skills as decision-making, self-control, the importance of work and communication are most appreciated by organisations in accountants (p. 70). Similarly, Zureigat (2015) conducted a questionnaire, in which it was found that in accounting, employers most value critical thinking, problem- and decision-making, communication, and teamwork. These skills must be purposefully developed in students through training.
Apart from generic skills expected from accounting graduates, the analysed literature presents the discussion of profession-specific competencies that must be addressed in the educational setting. The contemporary accounting profession in Saudi Arabia undergoes qualitative changes toward the employment of international accounting standards within the framework of the overall state corporatism and accounting hybridisation in the Kingdom of Saudi Arabia (Alanzi, 2019; Albader, 2015; Herath and Alsulmi, 2017; Mihret, Alshareef and Bazhair, 2017). The study conducted by to Alanzi (2019) demonstrated that the application of international accounting standards in the work of Saudi enterprises provides opportunities for effective economic process measuring, improvement of the quality of accounting information, enterprise performance, and internal control procedures (Alanzi, 2019, p. 18). Importantly, Herath and Alsulmi (2017) identify Saudi accounting education as one of the key obstacles for the implementation of international standards to the Saudi economy. Indeed, the outputs of the contemporary educational institutions require systematic improvements because their current quality does not match the demand.
The researchers indicate that the overall current level of accounting education in the country is insufficient for the market requirements and introduce several reasons for such a tendency (Albader, 2015). Mihret, Alshareef and Bazhair (2017) approach this problem from a historical perspective, explaining that the professional accounting education incepted in Saudi Arabia in the late 1960-s. More specifically, the reasons for insufficient educational outputs are found in inadequate class sizes, curricula, time, and attention to skills development in universities (Al Mallak, 2018). Figure 1 retrieved from Al Mallak (2018) demonstrates the barriers to adequate accounting education in Saudi Arabia.
Figure 1. Constraints factors.
Therefore, the accountants who work in contemporary Saudi enterprises are expected to be capable of applying international accounting standards and international financial reporting standards in their work. Such evolving requirements of the market impose higher demands for students and universities. In the reviewed literature, the ways for solving the problem of the skills gap are introduced. For example, Shahid, Alexander and Abdalla (2018) have found that the launching of undergraduate programs for accountants according to the contemporary standards and matching the market demand are possible with the support of key stakeholders. Similarly, AlMotairy (2016) suggests that the development of adequate learning outcomes measuring system will induce students critical thinking and help prepare them to the realities of the professional environment.
In conclusion, as the conducted literature review demonstrates, the overall state of Saudi accounting education is at an insufficient level of development and is not suitable for the current market. The identified manifestations of the problem include inadequate training of generic skills and professional knowledge related to the implementation of international accounting and financial reporting standards. Researchers see the reasons for the situation in relatively young accounting education in the country, inadequate curricular, planning, and organisation of the educational process, and the lack of integration of market-informed educational programs. The solution is envisioned in the initiation of market-oriented curricular and accounting undergraduate programs for the development of specific skills. Overall, most of the literature sources provide data concerning the gap between the supply and demand in the accounting profession, but only a few suggest practical solutions. Therefore, further investigation of the research problem is required with the priority set on the search for a relevant solution that would be appropriate for the Saudi labour market environment.
References
Alanzi, I. D. F. (2019) The impact of employing international accounting standards on improving monitoring & performance levels at Saudi enterprises, Multi-Knowledge Electronic Comprehensive Journal For Education And Science Publications, 18, pp. 1-25
Albader, M. (2015) Transition to IFRS and its implications for accounting education in Saudi Arabia. PhD thesis. Victoria University.
Al Mallak, M.A. (2018) Generic skills in accounting education in Saudi Arabia. PhD thesis. Massey University.
AlMotairy, O.S. (2016) Measuring the learning outcomes and critical thinking: the case of Saudi accounting students, Journal of Accounting, 6(2), pp. 49-64.
Herath, S.K. and Alsulmi, F.H. (2017) International financial reporting standards (IFRS): the benefits, obstacles, and opportunities for implementation in Saudi Arabia, International Journal of Social Science and Business, 2(1), pp. 1-18.
Ibeaheem, H. A., Elawady, S. and Ragmoun, W. (2018) Saudi universities and higher education skills on Saudi Arabia, International Journal of Higher Education Management, 4(2), pp. 69-82.
Mihret, D.G., Alshareef, M.N. and Bazhair, A. (2017) Accounting professionalization and the state: the case of Saudi Arabia, Critical Perspectives on Accounting, 45, pp. 29-47.
Senan, N. (2019) Convenience of accounting education for the requirements of Saudi labour market: an empirical study, Management Science Letters, 9(11), pp.1919-1932.
Shahid, H., Alexander, A. and Abdalla, T. A. M. (2018) An exploratory study for opening accounting undergraduate program in Saudi Arabia: the stakeholders perception & need analysis, Advances in Social Sciences Research Journal, 5(4), pp. 212-227.
Zureigat, Q.M. (2015) Accounting graduates skills and employers needs: the Saudi case, Jordan Journal of Business Administration, 11(1), pp. 227-238.
International Financial Reporting Standards (IFRS) and the General Accepted Accounting Principles (US GAAP) differ in terms of measurements of assets in several domains. According to IFRS standards, investment properties (IAS 40) are pieces of land or real estate held by an entity to earn capital from renting them out or as a result of an increase in value (Maisuradze & Vardiashvili, 2017). However, US GAAP does not hold a specific definition for such assets since they are usually included in property, plant, and equipment.
There are also differences between the fair value model (FVM) and the cost model. The fair value model is a more complex system that measures investment property separately during each reporting period. The fair value changes based on the financial gains or losses that the asset has brought. On the other hand, the cost model is based on the overall depreciation of a property up to one particular period.
Another aspect that differs between IFRS and US GAAP is the borrowing costs. An example is how both systems determine specific inventory that requires a long production time and higher rates in terms of quantity. IFRS uses qualifying assets to categorize such products. However, US GAAPs standards have other definitions for such concepts. Unless the products are intended for personal use or are not produced in large quantities, they are not included in qualifying assets.
IFRS and US GAAP also have contrasting policies for intangible assets, specifically how they are qualified. Based on IFRS standards, intangible assets are the assets that are always beneficial in terms of future financial profit. If an asset does not have this quality, it will not be inserted into this category. Unlike IFRS, US GAAP considers intangible assets based on their fair market value in the present. No additional criteria are taken into consideration under US GAAP standards.
Reference
Maisuradze, M., & Vardiashvili, M. (2017). The issues of recognition and measurement of the investment property according to IAS 40. Journal of International Scientific Publications, 11, 416423.
Common Control Principles Adopted to Protect Assets of an Organization
Internal controls are systems and structures installed by a company to facilitate effective operations by enabling it to appropriately manage, diminish, and mitigate risks and occurrences of fraud. The framework encompasses numerous provisions targeting specific aspects of an organization, including protecting and safeguarding the assets of a business. According to Mahadeen et al. (2016), functional internal controls enhance accountability and minimize the risk of asset loss, waste, misuse, and misappropriation, which could negatively affect the operational effectiveness of a firm. Although the specific managerial oversight and administration techniques adopted are primarily determined by the nature and category of assets, the most common approaches include physical security, proper monitoring, adequate documentation and recording, and access control. Authorization of activities and transactions of the procurement, usage, and disposal of assets is also a critical and widely applied strategy in safeguarding the assets.
Physical Security
Physical security encompasses all the visible safeguards installed to enhance the managerial controls designed to prevent loss, wastage, damage, fraud, and misappropriation of a firms assets. These include the specific provisions limiting unauthorized peoples access, minimizing the risk of damage through such occurrences as fire incidents, theft, and misuse. Notably, many organizations install provisions such as perimeter fences with manned entrances, closed-circuit television cameras for round-the-clock surveillance, and manned security. Other security measures include fire sensing and extinguishing systems to prevent and minimize damage occasioned by the inferno, vehicle tracking and monitoring equipment, and vaults for storing keys and necessary documentation for assets.
Proper Authorization
Authorization entails specifying the privileges and rights by identified employees to the purchase, use, and disposal of particular assets. This internal control technique enhances the legitimacy of the activity or event relating to a given asset by ensuring that only the permitted employees undertake the defined transaction. For instance, an organization may require that a supervisor authorize all the departure of delivery vehicles from the premises by signing their work tickets that define destinations and duties. The strategy would limit the possible misuse and deployment of the companys automobiles in unrelated activities. Such authorization is also critical in the procurement and disposal processes of assets to authenticate the rightfulness and validity of the transactions. For example, the United States Postal Service would have a supervisor authorize the departure of vehicles going out for delivery, explicitly defining their destination and departure time.
Monitoring
Monitoring is a fundamental internal safeguard for assets implemented by organizations to ensure compliance with the outlined procedures in their acquisition, utilization, depreciation, and eventual disposal. Generally, this is a comprehensive approach that promotes the efficient and proper use of company assets by tracking and recording all the critical aspects. This minimizes the risk of embezzlement, misappropriation, or fraud. For instance, an asset management and monitoring system should be installed to tracks the years, values, and corresponding appreciation and depreciation of land, plants, equipment, and buildings to ensure they are in the firms name.
Documentation and Record-Keeping
Organizations have robust and comprehensive requirements for the accurate, correct, and complete documentation and recording of all assets. This encompasses such provisions as updating any activity, event, or occurrence relating to the companys possessions. Notably, the documentation and recording provide sufficient evidence, which captures all fundamental aspects and conditions of the assets, including location, encumbrances, charged on any financial obligation, and whether hired or wholly owned. For instance, the maintenance of detailed records of a company-owned motor vehicle, capturing the date of purchase, and applicable depreciation values would ensure that the automobile is not undervalued during disposal.
Segregation of Duties
Segregation of duties is a fundamental principle and building block of an effective asset internal control system. It serves the principals of oversight and an accompanying review of a transaction by another party to identify errors (Yakubu et al., 2017). Segregation of duties splits a particular task into various phases, with each stage assigned to a different person. For instance, the responsibilities surrounding the authorization, acquisition, custody, use, record-keeping, and disposal of assets should not be undertaken by one employee. It becomes difficult to defraud or misuse an asset by separating roles since at least two people must be involved to swindle successfully. For example, the United States Postal States would have the procurement manager preparing the acquisition of delivery vans, a senior staff verifying and authorizing the purchase, while the custody and eventual disposal would be done by different persons.
Bank Reconciliation as a Part of Internal Control Systems
Bank reconciliation is an integral part of an effective internal control mechanism in an organization. It is a comprehensive exercise encompassing reviewing an organizations financial records and bank balances to ensure harmony and detect any errors or frauds. According to Onwonga et al. (2017), proper bank reconciliation practices significantly eliminate employees incentive to perpetrate fraud. Since businesses register many transactions in their cash and bank accounts at any given time, it becomes imperative to harmonize and conciliate the records periodically. Due to the large volume of ongoing financial transactions in an organization, rarely do the figures reflected in the bank records match those in the firms cash registers. Bank reconciliations objective is to provide a complete and accurate explanation of the observed disparities and identify any unusual activity, which would necessitate an in-depth review. A deeper analytical exploration of all the relevant documents should be conducted upon discovering and identifying any suspicious activity to recognize the reasons underlying the variation.
Additionally, bank reconciliations enhance the firms ability to keep accurate records by providing an alternative copy for comparison. This implies that an organizations documents obtained from the internal accounting department are meticulously reviewed against the itemized details of the bank record. In this regard, reconciliation helps enhance the accuracy and completeness of financial transactions in a company by making visible the differences between the accounting system and bank balances. For instance, a bigger cash balance than the bank figures indicates possible revenues received in the system but were not banked. Therefore, this tool is an integral part of an organizations internal control system.
Generally, the preparation for bank reconciliation is an inherent need across all organizations due to a large number of financial transactions in cash, direct deposits by trading partners, and checks. The voluminous nature of activities incentivizes fraud since the unscrupulous conduct may be difficult to uncover under such circumstances. This implies that bank reconciliation is a perennial business need and should be undertaken periodically and regularly, and preferably before the transactions accumulate.
The bank reconciliation procedure entails matching the balances in an organizations accounting records for the cash account and the corresponding figures on the bank statement. For the preparation, an entity commences the process by obtaining bank records for the specific period under review and extracts the incomes and outgoing funds from the firms accounting system. This is followed by the simultaneous analysis of the documents to identify any disparities and their subsequent harmonization.
Tabular Presentation of the Bank Reconciliation Procedure.
Activity
Details
Obtaining bank records
This provides a list of the transactions and activities that have occurred during the period under review.
Retrieving business records
Involves the retrieval of all relevant information from the ledger or accounting system regarding incomes and expenditures.
Identifying the starting point
The starting point should be the last juncture on the books when the balances in the bank and business matched. The reconciliation should commence from that point.
Analyzing the incomes against the deposits
Each income should have a corresponding bank deposit entry, and variation should be noted for further analysis.
Reviewing the business expenditures against bank withdrawals.
All bank withdrawals should match a particular expenditure provision that necessitated the withdrawal. Any difference should be noted and investigated further.
In-depth analysis, harmonizing the statements, and closure of the process.
The previously discovered disparities in the books, bank balances, and entries should be subjected to deeper analysis and explanations provided. In the absence of fraudulent activities, the bank and business balances should match at the end of the process.
Different Fixed Asset Depreciation Methods and their Impact on Income Statement
Organizations adopt and utilize different asset depreciation methods, including the straight-line, double-declining balance, sum-of-the-years digits, reducing balance, and the unit of production methods. Notably, each of these approaches has a different effect on the income statements since they are a non-cash charge made on an entitys profits (Mert & Dil, 2016). Thus, depreciation decreases the value of an asset held by an organization and is deemed an allowable expenditure.
Straight-Line Method
Straight-line is the simplest and the most widely used method of depreciation. This strategy charges a uniform amount for the years of a fixed assets useful life. In this regard, the depreciation charge made on the asset is the same for all the years. The impact of this method on the income statement is that it reduces the business earnings stably and uniformly over the assets useful life.
Double Declining Balance Method
Under this method, an organization accelerates the depreciation costs to minimize its tax exposure, particularly in the early years of an asset. In this regard, this strategy results in a higher depreciation value at the beginning of an assets life. Therefore, the implication of this method is that it causes an organization to register lower profits during the initial years of an asset than in the later years.
Reducing Balance Method
The reducing balance method encompasses the depreciation of an asset at a set percentage. This implies that the expensed amount declines over the years corresponding to the value of an asset. The effect of this method is that equal burden is apportioned to each year, with the initial periods bearing the most significant values. In this regard, this method results in lower profits in the first years following an asset acquisition due to a higher depreciation charge.
Sum-of-the-years Digits Depreciation
This is an accelerated strategy in which depreciation is considered as a fractional constituent of a sum of the useful years. For instance, if an assets years are 5, the sums of years are 1+2+3+4+5 = 15. This implies that the asset depreciates faster in the first years, resulting in lower incomes in the corresponding period. Conversely, a lower charge is apportioned in the later years of an asset since its production capacity will have dwindled.
Units of Production Depreciation
This method apportions an equal expense rate to all the units produced. It is widely used where an assets value is tied to its production capacity rather than its useful years. This implies that a higher charge is made when the asset produces more units, resulting in lower incomes during periods of increased production. Conversely, an organization reports higher profits when the units produced are low, leading to reduced depreciation charges.
Every company provides its financial position to the public for auditing and tax payment purposes. In addition, this is usually done to strengthen their competitive edge and increase investor confidence as well as invite potential investors. An accounting report on the financial positions of businesses is therefore very important and necessary for the development of such businesses. It is through such initiatives that a conclusive evaluation along with a valuation of the company can be made. In this respect, accounting reporting forms an integral part of financial activities. Depending on each companys performance, that is whether they make profits or losses, these are important in the calculation of the tax as well as dividend for shareholders. High profits result in increased tax collection, while a loss means less or no tax collection. These reports are quite significant in the development of a countrys economy. For instance, the United States economy is built largely on strong corporate ethics and investments. This paper will consider recent news on Cummins, Inc. It will also endeavor to provide an accounting report of the same (Gibson, 2011, p. 45).
Current event in accounting
Recent news by Dow Jones Newswires on Cummins Inc. provided a strong financial report on its first-quarter performance. Cummins Company deals in the manufacture, distribution, and design of service engines, among other electrical and fuel appliances. The company made a huge step towards its 2011 sales objectives. This raised their overall sales for the year 2011, allowing them to double second-quarter profits. The company boasts of presence in over 190 countries with above 500 independent distributors globally. Its distribution centers are networked in over 5200 dealer locations throughout the world. In addition, Cummins net income for the year 2010 was a massive $1.04 Billion. This shows its large financial base, which is impeccable and tempting to potential investors whose motives are usually to make more profit (Cummins Inc., 2011, p. 1).
Summary of the news on Cummins
An accounting report on Cummins by Bob Tita brings to knowledge its second-quarter performance which was outstanding. This achievement is attributed to an exceptional rise in demand for truck engines. It is this category of sales that is said to have propelled its profits to more than double. It is also reported that Cummins heavy-duty engines also saw a 73% rise in sales. Moreover, the company said that its sales on engines utilized in off-road constructions also rose by 51%. In summary, the company reported a 53% rise in engine-segment sales, which translated into $ 2.9 billion. In addition, pretax profit from that segment also rose from $ 197 in the previous year to $377 million. This exposed the surging demand for trucks used in commercial industries in North America. Other areas of improvement included avoidance of problems such as shortages of parts, among others, that held back other truck industries. It also increased its annual sales outlook to $18 billion from a forecast of $17 billion. The profit that Cummins reported in the second quarter was $ 505 million which translates to $ 2.60 per share. This was a huge improvement from its previous years performance, which was $ 1.25 per share, reflecting a $ 246 billion profit. performance in the second quarter raised its stock by 4.8% to $111.87 per share (Tita, 2011, p. 1).
Conclusion
Cummins Inc. deals in the manufacture, distribution, and design of service engines, among other electrical and fuel appliances. The company made a huge step towards its 2011 sales objectives. This raised their overall sales for the year 2011, allowing them to double second-quarter profits. It boasts of presence in over 190 countries with above 500 independent distributors globally. In addition, Cummins performance in the second quarter raised its stock by 4.8% to $111.87 per share (Tita, 2011, p. 1).
Reference List
Cummins Inc. (2011). About Cummins. Cummins.com. Web.
Gibson, C. H. (2011). Financial reporting and analysis: Using financial accounting Information (12th ed.). Mason, OH: South-Western Cengage Learning. ISBN 13: 9781439080603.
Tita, B. (2011). UPDATE: Cummins 2Q Profit Soars On Strong Truck-Market Growth. DOW JONES NEWSWIRES. Web.
For many years, the GAAP (Generally Accepted Accounting Principles) set of accounting principles have been used by major accounting firms around the world, and have acted as a standard framework for universal accounting in recording and summarizing, and in the preparation of financial statements. However, due to the emergence of the International Financial Reporting Standards (IFRS) and its subsequent popularity, there has been an urgent need for all countries to adopt a single accounting standard (CFO, 2011). Although each of the two standards has known weaknesses, many accounting bodies prefer the IFRS, consequently, studies aimed at streamlining IFRS and doing away with GAAP has been ongoing. Although this could take many years, it will result into all accountants adopting a single accounting system, which will restructure the field of accounting.
Benefits
Even though several accounting bodies have streamlined their accounting principles to converge IFRS and GAAP, differences continue to persist between the two, and hence the IFRS needs to modified so that the two standards can converge into a newer IFRS, and do away with the GAAP (Porter & Norton, 2010). GAAP requirements for recognition, measurement, presentation and disclosure of transactions vary significantly from those in IFRS, the latter requiring more extensive disclosures. In addition, some issues are addressed only in one of the standards, for instance, GAAP does not cover accounting for agricultural activities while the IFRS has a particular entry for that issue. The GAAP has certain industry specific standards, such as for investments, while the IFRS lack such provisions (Walton, 2009).
Apart from the adopting a common principles, on of the reasons why a shift from GAAP to IFRS would be a positive move is that it will further promote globalization. IFRS is currently being used in more than 100 countries, and if the rest follow suit, it will be easier for companies and businesses in different countries to make deals with each other (Walton, 2009). The new system would also allow shareholders and stockholders in other nations to have a better economic indicator of how companies in other nations are doing. Multinational would also benefit as they would be able to streamline their operations, financial reporting standards, auditing, training, and general company financial principles. This would allow for accuracy and consistency in financial recording and reporting.
Due to the several provisions provided by the IFRS, such as clarity, extensive disclosures, and provisions for several forms of transactions, its adoption by all accounting bodies would ensure that financial makers would use their professional judgment to handle a particular transaction (Walton, 2009). This would lead to less time being spent in accounting processes and also eliminate the need to follow complicated accounting rules. It will also allow accountants to keep statements in a simplistic ad easily comprehensible manner for shareholders, potential investors and parties interested in the financial records (Porter & Norton, 2010).
Conclusion
One of the major drawbacks of adopting IFRS would be the mandatory requirement of training accountants on the newer methods. This would amount to more capital outlay to fund the program. Hence, companies are likely to experience losses during the formative of adopting IFRS, however, such losses would only be short-term and the gains of adopting a common and improved accounting standard would offset such losses. To reduce the challenges attributed to the impending changes, companies ought to start an early switch over and allow a transition period so that the switchover becomes as smooth as possible, with very minor interruptions. Besides, firms could be required to hire additional financial advisers and staff to help with the switchover. The switchover to IFRS will not be an easy one, but in the long-term, it will provide clarity in financial statements and enhance globalization.
References
CFO. (2011). IFRS vs. GAAP. Web.
Porter, G. A., Norton, C. L. (2010). Financial Accounting: The Impact on Decision Makers. Mason, OH: Cengage Learning.
Walton, P. (2009). An Executives Guide for Moving from US GAAP to IFRS. NY: Business Expert Press, LLC.
General journals and general ledgers are vital records in accounting. General journals comprise raw accounting entries, recording Gina transactions in sequential order using date. Ideally, the journal is the first place where Gina transactions are recorded, and bookkeepers or accountants divide columns for serial numbers and dates, besides debit and credit records. On the other hand, a general ledger is a more formalized financial document that tracks five vital accounting items, including liabilities, expenses, capital, assets, and revenues. General journals are used in accounting to serve a purpose and are interlinked with general ledgers.
Purpose of General Journals
Accountants use unique formscalled journals to keep track of Ginas transactions. Extensively, journals keep historical accounts of record-oriented Gina-based transactions (Franklin et al., 2019; Wells, 2018). Simply put, a journal is like a business diary detailing daily Gina transactions. When one enters information into a journal, they are typically journalizing entries, which is the second step of the accounting cycle involved in Gina transactions. General journals record purchases & sales of fixed assets on credit, opening notes, and miscellaneous that are not included in other journals, besides taking possession of the assets, correcting errors, and transferring records.
Relationship Between General Ledger and General Journal
Unlike general journals that contain initial entries of low-volume Gina-based transactions, the general ledger summarises every transaction recorded. In tracking business finances, the best method often used by accountants is a double entry accounting system, whereby the general journal and general ledger are used simultaneously. Arguably, a general journal and a general ledger record Gina-based transactions through the double entry accounting system, accustomed to debit and credit entries (Wells, 2018). Accountants begin to record business transactions in the general journal and eventually post the entries in the respective accounts of the general ledger. When general journal and general ledger are used concurrently, the resulting accounting technique accurately tracks overall financial data and keeps business operations running smoothly and profitably.
Conclusion
In conclusion, general journals record track transactions made and are intertwined with a general ledger since the latter summarizes the information from the former. General journals are books of entries recorded in chronological order based on dates and are later summarised by entries in the general ledgers. Modern Business organizations make entries in general journals and ledgers for streamlining fundamental accounting activities.
References
Franklin, M., Grayvbeal, P., & Cooper, D. (2019). Principles of Accounting, Volume 1: Financial Accounting. Rice University
Wells, P., K. (2018). How well do our introductory accounting text books reflect current accounting practice? Journal of Accounting Education, 42, 40-48.
