You probably have heard of the term “markup” before. However, have you ever met the phrase “markdown”? In accounting, people would use this term to describe a reduction in the value and price of a particular asset (Also see Guide to Deferred Tax Asset). Markdown is a way for business owners to increase their sales. Thus, it will typically happen when business owners are unable to sell certain products or services at their current prices.

Before knowing whether they should adjust the prices, business owners should first know the sales of the products and services they provide. They need to monitor the volume of sales constantly and know how much they have spent compared to the amount that they have earned. However, they will not be able to know these without the help of the profit and loss statement that requires accurate and up to date accounting (Also see Comparing Computerised Accounting and Manual Accounting) records to be generated. Yet, not every business owner know how to deal with these accounting-related reports and complicated figures. If you are facing the same problem, do not hesitate to hire an in-house accountant or an accounting firm in Singapore.

As we mentioned above, markdown is a reduction in value and price. By doing so, that product or service will be able to attract more customers. Although the markdown will make that item to have a lower profit margin, this will cause the overall sales revenues to be higher because the number of units sold increases.

Business owners should value the products and services they want to sell accurately before they set a price for them. If the price is too high, those products and services are less likely to attract customers, hence having a low sales volume. However, on the flip side, the company will not be able to earn a profit (Also see The Relationship Between Net Profit and Operating Profit) is the product or service are sold at a low price.

Some people may feel confused between markdown and sales discounts are both involve price reduction. However, keep in mind that a markdown reflects the value, but a sales discount does not. A markdown is an adjustment made to the price of a good or service to show a drop in the market value. On the other hand, sales discounts are not related to the valuation of that good or service. They are the reduced rates the businesses (Also see Identifying the Profitability of a Business) offer to their customers for specific reasons.

As a markdown serves to adjust the product price to a price that the consumers are willing to pay, it is a devaluation of that product. If business owners have made the first markdown, but the sales still do not increase, they may need to markdown the price again until they can sell the product at a profitable price and at the same time attract customer to purchase them. Note that they should not markdown the prices too aggressively in a short time. Business owners need to leave some gaps between the time of markdowns for them to observe the impact of new prices in the market.

When you are dealing with issues related to taxes, have you ever come across the term deferred tax liability? It refers to the sum of taxes that are due in the current accounting period, yet the business (Also see Identifying the Profitability of a Business) has not paid for it. The deferred tax arises from the difference between the timing the company accrues the taxes and the timing it pays for it. If you outsourced your accounting tasks to an accounting firm in Singapore, and the accountants have recorded a deferred tax liability in your balance sheet, it means that your company needs to pay more taxes in the future for transactions that have taken place in the current accounting period.

Deferred tax (Also see Guide to Deferred Tax Asset) arises from the difference in tax laws and the accounting rules that the companies apply. This has led to a situation where the earnings before taxes of a business exceed its taxable income. Such a condition causes deferred tax liability to appear on the balance sheet of the company. This means that the business needs to make a tax payment to the appropriate tax authority in future. To calculate the amount of deferred tax liability, business owners should work out the difference between their taxable income (Also see How Do Net Income and Gross Income Differ from Each Other?) and earnings before taxes, then multiply the resulting amount with the tax rate.

In simple words, the deferred tax liability is the sum of taxes the company paid less than is due for, and it will make the payment in the future. This does not mean that the company did not fulfil its tax obligations. This only indicates that the company is going to pay for the obligation at different timing. As an instance, XYZ Corporation knows that it has to pay income taxes. As the tax liability is for the current accounting period, it needs to recognise the expense in that period too. However, it will only pay for the taxes in the next year. Thus, it will record a deferred tax liability to rectify the difference in timing.

The difference in the treatments used to deal with depreciation expense is one of the common reasons that lead to deferred tax liability. For example, the accountants will normally use the straight-line depreciation method to calculate the depreciation expense of fixed assets. However, the tax authorities require business owners to use the method of accelerated depreciation to calculate the depreciation expense. As the sum of depreciation calculated by using the straight-line method will yield a lower amount when compared to that of the accelerated method, the company’s income calculated through financial accounting will be higher than its taxable income temporarily.

To recognise the differences between the earnings before taxes and its taxable income, the company will record a deferred tax liability. As the depreciation process continues, the differences between the amounts calculated through the straight-line method and the accelerated method will be less significant. Thus, the accountants will remove the deferred tax liability by using offsetting journal entries.

As a business owner, have you ever studied the financial statements of your business and looked at the accounting terms closely? Even though you are not familiar with accounting and have outsourced your accounting tasks to an accounting firm in Singapore, it does not mean that you do not need to deal with those reports anymore. You still need to understand what the financial statements are trying to tell about your business (Also see Identifying the Profitability of a Business). So, knowing certain accounting terms is crucial as this will help you to understand your company’s financials.

When you are studying the balance sheet of your company, you may see a section called the deferred tax asset under the asset section. This is an item that you can use to reduce your future taxable income. Deferred tax asset arises when a company has paid the taxes in advance or has overpaid the taxes. After that, the business will receive these amounts in the form of tax break or tax relief. Thus, one may consider the overpayment as the company’s asset (Also see Differences between Current Assets and Fixed Assets That You Should Know).

Typically, the accountants will create deferred tax assets for the taxes that the company has paid but has not recognised on the profit and loss statement. The deferred tax asset arises due to the difference in the timing of revenue and expenses recognition between the company and the tax authorities. These assets can help a company to reduce the company’s tax liability in the future. However, note that the accountants will only recognise the deferred tax assets when they expect that the difference in depreciation will offset the company’s profit in the future.

The dissimilarities between the accounting treatments and taxation rules is the main reason for the deferred tax assets to arise. For example, in some cases, some of the revenues earned are subjected to taxes from the taxation aspect, but it has not become taxable in the profit and loss statement. Generally, when the accounting treatments and the taxation rules on assets (and liabilities in some cases) differ from each other, deferred tax assets may occur.

To understand the concept of deferred tax assets better, you can compare them with rentals or insurance that you paid in advance. They work under the same concept, that is, you have made the payment beforehand, and the prepayment becomes your asset. This is because although the payment has caused the amount of cash you have on hand to reduce, the value of the payment still exists. Hence, you need to reflect them in your financial statement, where, in the case of taxes, it is the deferred tax asset.

What will happen if we “underpaid” the taxes then? The accountants will, in turn, record a deferred tax liability in the balance sheet. This is the opposite of deferred tax assets, and it will cause the amount of taxes the business owes to the tax authorities to increase.

Typically, impairment will happen to a company’s fixed assets or intangible assets. In accounting, the term “impairment” refers to a situation where the value of an asset has reduced permanently. People will usually use this term to describe that a fixed asset’s recoverable amount has reduced drastically.

If an accountant from an accounting firm in Singapore wants to conduct an impairment testing on an asset, he needs to periodically compare the cash flow, total profit or other benefits that he expects a particular asset would generate with its present book value. If he found out that the asset’s book value is higher than that of its benefit or future cash flow, he needs to write off the difference between these two amounts. As a result, the asset’s value will decrease on the balance sheet of the company.

When economical or legal situations that surround a company has changed, or when the company suffers from a loss due to any unexpected devastation, an impairment may happen. As an instance, the equipment of a manufacturing company may experience an impairment in the aftermath of a flood. When this happens, the fair value of an asset will experience a large and sudden decrease, and it will become lower than that of its carrying value. Also known as book value, the carrying value of an asset is the asset’s value after deducting its accumulated depreciation that one has recorded on the balance sheet of his company.

As we mentioned above, the accountants will test the assets for any potential impairment regularly. In the case where any impairment happens, they will write off the difference between the carrying value and the fair value of that asset. Normally, the accountants will derive fair value as the amount of the undiscounted future cash flow as well as the predicted salvage value of an asset. The salvage value is the amount of money the company expects to obtain when it disposes of or sells an asset when the useful life of that asset has come to an end.

Some other accounts may experience impairment too. Thus, the accountants need to review and write them down. Some of the examples include the company’s accounts receivable as well as goodwill (Also see What is Impairment Testing for Goodwill?). Compared to current assets, long-term assets have higher risks of impairment as they have a longer useful life. Thus, their carrying value has a longer period to become impaired.

Some may confuse between depreciation and impairment. As time passes, depreciation will happen on fixed assets like equipment and machinery. In each accounting period, the depreciation will happen according to a schedule that the accountants have made in advance. The methods that they can use to account for depreciation include the accelerated depreciation method or the straight-line depreciation method. Depreciation and impairment are different from each other in a way that people would use the former to deal with the normal wear and tear that the fixed assets would experience as time passes. On the other hand, the latter is related to the drastic and unexpected decrease in an asset’s fair value.

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.