Most business owners must have heard if the term “profitability”. As all the for-profit organisations have the same objective, that is to earn money, all of them would pay particular attention when it comes to profit. Hence, no matter how busy they are, business owners should never forget to assess the profit margin of their business throughout their business venture.

To determine the profitability of your business, the first thing you need to do is to calculate the revenue that it has earned. Depending on the size and the type of business you are running, you may receive your earnings via different methods (Also see How to Prepare a Cash Flow Statement by Using the Direct and Indirect Methods?). This includes the cash you receive by using the cash register machine, the monthly payments you obtain from your customers, and so on. Keep in mind that you should always keep records of the transactions whenever you receive or spend money. It is advisable to do the calculations monthly so that you get to know the sum of revenue you have earned every month.

Next, you need to work out the sum of money that your business has spent. You should consider all the costs incurred as your company’s expenses, which may include rentals, labour costs, money spent on the procurement and maintenance of equipment, taxes, and so on. Most people would call these costs as overhead costs. When you are calculating the expenses incurred, you should factor in all the money that you have spent every month carefully so that you know the total amount you have spent on all business operations. By ensuring the accuracy of these figures, you will be able to know the exact profitability of your company.

After getting the amount of profit (Also see The Relationship Between Net Profit and Operating Profit) and expenses, the last thing you need to do is to deduct all the costs from the total revenue generated. By doing so, the figure that you obtain will be the profit that your company has earned. If you are a sole proprietor, this amount will be your net profit. If you are running a partnership, you need to divide the sum of profits among other partners.

It is more advisable for business owners to calculate the profitability of your business on a monthly basis. If you do so, you will be able to know which months have higher sales when compared to others. This is for you to know the trends of the market better so that you can make adjustments or improvements according to the timing better. Besides, you should identify the profitability of your business before and after you make any changes. Hence, you will be able to know whether the changes that you have implemented are working.

As we can see from the explanation above, the calculation of profitability requires accurate records for all business transactions. Yet, most business owners will not have time to deal with bookkeeping as this task is very time consuming, and it requires some basic knowledge in accounting (Also see Basics of Cost Accounting). If you are one of them who do not know how to calculate their company’s profitability due to insufficient records, it is more advisable for you to hire an accounting firm in Singapore.

When you look at the financial statements that the accountants in an accounting firm in Singapore have prepared for you, you may see a long list of different items under the category of asset. These are the resources or items that your company owns, and they are predicted to bring monetary benefit to your company in the future. Two largest categories within the list would be the current assets and fixed assets.

In simple words, the key difference between the current assets and fixed assets is the level of liquidity they have. Current assets are the assets that the company can convert into cash within a year. Some examples of this type of asset are cash and cash equivalents, inventory, prepaid expenses, trade receivables and so on. On the contrary, the assets that the company would keep for one accounting year and above fall under the category of fixed assets. The latter is also known as non-current assets. This includes tangible and intangible fixed assets, furniture and fixtures, machinery, vehicles, software and others.

A company will trade the non-current assets that it owns and will not hold them for more than a year. Contrarily, it needs to use the fixed assets continuously so that it can generate income, and thus, the company will hold them for more than a year. Current assets are readily convertible into cash while fixed assets are not.

Besides, the method that the company should use when determining the value of these two classes of assets is different too. For the valuation of the current asset, the company should use the lower of cost or market value (LCM). On the other hand, the company should subtract the amount of accumulated depreciation from the assets’ cost to determine the value of fixed assets.

Most companies would choose to use long term funds to finance fixed assets. Contrarily, to finance current assets, they would use short term funds. In some occasions, the company may need to get financial assistance from the bank or other financial institution, and this may lead to the creation of charge on its assets (Also see How Do Assets and Equity Differ from Each Other?). For current assets, the type of charge that can be created on it is the floating charge, whereas fixed assets are subjected to a fixed charge.

If the company decides to sell its current assets, the sale will lead to revenue (Also see Introduction to Deferred Revenue) profit or loss. On the contrary, the sale of a fixed asset would bring to profit (Also see The Relationship Between Net Profit and Operating Profit) or loss, which is capital in nature. Also, the company will not create a revaluation reserve for current assets. It will only create a revaluation reserve when it appreciates the value of a fixed asset.

Most business owners might have heard of the term “depreciation”. It refers to an accounting method that allocates the cost of certain tangible assets over their useful life. Even though they have understood what depreciation is, they may still choose to employ an accounting firm in Singapore as they are not sure about the journal entries that they should make to record the depreciation expense. In this article, we will take a look at the correct procedures of recording depreciation in the books of accounts.

The accountants will pass the journal entries for depreciation to record the reduction of the fixed asset value as a result of normal usage, wear and tear and other factors. They will record such transactions by debiting the depreciation account and crediting the relevant fixed asset account in each accounting period. By doing so, the accountant can transfer part of the capitalised cost of the fixed asset the company owns from the fixed asset account in the balance sheet to the company’s depreciation account in its income statement.

The depreciation journal entries include a debit entry to the company’s depreciation expense (Also see What Are Non-cash Expenses? ) account as well as a credit entry to its accumulated depreciation account. The main purpose of passing the journal entries for depreciation is to comply with the matching principle as per the requirements of the applicable accounting framework.

The depreciation expense account shows up in the company’s income statement. It is a temporary account, which means that the accountant will move its balance to the accumulated depreciation account at the end of an accounting period. Thus, when a new accounting (Also see An Overview of Accounting Procedures) period begins, the depreciation expense account will have a zero balance.

On the other hand, one will see the accumulated depreciation account in the asset section under the heading “property, plant and equipment”. This account is a contra asset account as unlike the normal asset accounts that have a debit balance, such accounts have a credit balance. The accumulated depreciation account appears in the balance sheet, and the accountants will carry their outstanding balances to the next period. As the amount of cost of assets which were depreciated increases, the credit balance in the accumulated depreciation account will increase and will be the same as the amount of cost depreciated.

In accounting (Also see Basics of Cost Accounting) , accumulated depreciation is a crucial aspect as this is related to the assets that the company has capitalised. Business owners should understand that when his company recognises a depreciation expense journal entry, the company’s net income (Also see How Do Net Income and Gross Income Differ from Each Other) will reduce by that amount too. The assumptions made in the calculation of depreciation include the estimated useful life of the assets, the assets’ historical cost, as well as the estimated salvage value. Also, depreciation is very helpful in estimating the book value of the assets that the company owns. However, business owners should note that the market value of the assets of the same kind may not be the same as their book values due to various reasons.

For all for-profit organisations, they aim to earn profits from the business activities they have carried out. Profit is a financial gain an organisation earns, and it is the difference between the amount of money earned and the spending of a company. There are three types of profits, which are gross profit, net profit and operating profit. If you find differentiating them difficult when generating financial statements, do not hesitate to hire an accounting firm in Singapore.

In this article, we will focus on the relationship between the net profit and operating profit that a company has generated. Net profit is the sum of income remaining after the company has deducted all the expenses incurred, the interest expenses, as well as taxes. In simple words, this is the profit that the company has earned from various sources after the deduction of all expenses (Also see Understanding What Are Non-cash Expenses? ). As against, operating profit is the income remaining after deducting all the costs and expenses the company has paid to run its business operations.

Net profit can be positive or negative. People often use it as an indicator that reflects the company’s ability in earning profits from its sales. By looking at the net profit, we get to know the profitability of a business as well as the amount of profit the company has earned in an accounting period. To calculate the net profit, we should work out the difference between the sum of revenue (Also see Introduction to Deferred Revenue) earned and the sum of expenses incurred. We can also calculate this figure by deducting interest expenses and taxes from the operating profits.

Operating profit, on the other hand, is the profit that a business has generated from its operations and core business activities. It includes neither the profits the company has earned from any investments made nor the profits earned from interests on the cash deposited in the bank savings account. The calculation of operating profits involves the deduction of operating expenses from the company’s gross profits.

The main difference between the net profit and operating profit is that the former is the sum of income left after the company has paid for all the costs incurred, while the latter is the total income left after deducting operating profits from the gross profits. People often use the net profit to determine the sum of profits a company has made in an accounting (Also see An Overview of Accounting Procedures) period. If they want to know how the company manages its expenses and resources, studying the operating income will be more suitable.

Both net income and operating income will appear in the profit and loss statement of a company. The readers of the financial statement will be able to know the company’s profitability and the sum of profits earned by looking at these two amounts. Thus, both are handy tools, and they can provide a clear picture of the financial health of the business to the readers.

Non-cash expenses are the expenditures incurred without involving cash payments. However, business owners should still record these transactions in the company’s profit and loss statement in the accounting period those costs were incurred. If you are not familiar with the accounting treatments that are related to non-cash expenses, feel free to contact an accounting firm in Singapore, and the experts are always ready to help.

Although business owners do not need to pay cash (Also see Types of Cash Flow Activities – Cash Flow from Financing Activities) for those expenses, they should still record these transactions in their books of accounts. This is because according to the accrual basis of accounting (Also see Basics of Cost Accounting ) , one should record the transactions once they happen. Thus, even though the non-cash expenses do not involve the payment of cash, we still need to record them.

Depreciation is probably the most common type of non-cash expenses a company may incur. When business owners purchase assets for their companies, they need to reduce the value of those assets as they are subject to wear and tear, and they will become obsolete as time passes. They need to record the reduction in value as an expense in the profit and loss statement every year. This is a non-cash expense, and people would call it depreciation.

The concept of amortisation is the same as that of the depreciation. The only difference is that depreciation is for tangible assets, whereas amortisation is for intangible assets. When the company incurs an amortisation expense, it means that the company has written off an intangible asset over its expected useful life. This is also a non-cash expense as the company does not need to pay cash for it.

Apart from depreciation and amortisation, the unrealised gains and losses are also non-cash transactions. In the case of unrealised gains, the investors feel that the investment will bring them a profit. However, in fact, they did not earn any profit in cash, but this is just on the paper. Thus, this is a non-cash transaction. The same concept applies to unrealised losses, and in this case, the investors think that the possibility of suffering from future loss is higher. As this only happens on the paper and it does not involve cash payment, this is a non-cash expense.

Some companies may create provisions for losses that they think may happen in the future. This is because if the company chooses to sell some of its products or services on credit, there will be a possibility where they will not be able to collect the full amount in cash in the future. There may be cases where the customers do not pay at all. The amount of money that the company would not be able to collect is called bad debt. To protect their own interests, companies may create provisions for bad debt (also known as the allowance for doubtful accounts) before the bad debt happens. Such expenses also fall under the category of non-cash expenses as the company does not pay out cash too.

In a nutshell, keeping records of non-cash expenses in the profit and loss statement is necessary as this allows us to determine the net income (Also see How Do Net Income and Gross Income Differ from Each Other) of the business. One thing to note is that business owners should add back the non-cash expenses when they calculate the company’s free cash flow (Also see How to Prepare a Cash Flow Statement by Using the Direct and Indirect Methods?) to obtain the exact cash inflow and outflow.

Deferred revenue refers to the payment from the clients for the goods and services they will receive in the future. In this case, the seller has to record this as a liability since he has not earned the revenue (Also see How Should We Classify Unearned Revenue?). To insurance agents and software providers, deferred revenue is something common as they will require advanced payments as they are going to provide the service for a period, probably for many months.

Recognition of Deferred Revenue

Eventually, the recipient will earn the revenue, and this reduces the balances of the deferred revenue account, which has a debit balance. At the same time, it will increase the balances of the revenue account, which has a credit balance. According to the contract terms, there is a possibility where the selling entity can only recognise the revenue when it has delivered the goods or provided all the services. Hence, at the early stage, the business may show losses, but this will be followed by profits afterwards.

Typically, the deferred revenue account falls into the category of current liability in the company’s balance sheet. If the company does not expect to see its performance in the next 12 months, then it can classify it as a long-term liability.

Accounting (Also see An Overview of Accounting Procedures) for Deferred Revenue

As an instance, XYZ corporation employs Spring Garden to mow its lawns. XYZ corporation paid RM12,000 in advance to Spring Garden as they request them to give the priority of mowing their lawns first. When XYZ corporation pays the fees, Spring Garden has not earned the revenue (Also see The Concept of Revenue Recognition) yet. Therefore, Spring Garden will record the RM12,000 in the deferred revenue account by using the entry below:

– Debit RM12,000 to cash

– Credit RM12,000 to deferred revenue (liability)

Spring Garden has agreed to mow the lawns for XYZ corporation for a year. So, throughout the 12 months, Spring Garden will recognise RM1,000 of the deferred revenue monthly. The entry it records will be:

– Debit RM1,000 to deferred revenue (liability)

– Credit RM1,000 to moving revenue (revenue)

It may be difficult for you to understand the concept of deferred revenue, especially if accounting (Also see Comparing Computerised Accounting and Manual Accounting) is not your thing. Thus, as a business owner, you should consider hiring an accounting firm Singapore so that you can always keep a tight grip on your business’s finances.