Category: Accounting

Choosing a suitable business entity for a new company is something that every business owner must have gone through. Before they can choose the form, which works the best for them, they must do some research about the pros and cons of each or get assistance from a company secretarial service in Singapore. Among the different types of business entities, let us now have a look at the advantages and disadvantages of setting up a partnership.

The owners of partnerships can enjoy some of the benefits that this business entity brings them. From a legal perspective, the business affairs of all the partners remain private, and they need to follow fewer external regulation. Besides, if the business continues to grow, and the structure of a partnership can no longer cater for the demand, it is easier for the owners to alter the business structure.

People can set up partnerships easily with low start-up cost. As partnerships have several owners, it increases the number of inputs, and thus, the business will have more capital for its operation. This makes partnerships to have larger borrowing capacity than sole proprietorships. Apart from that, the partners may get some advantages from income splitting, and this may bring significant tax (Also see Do You Need a Tax Accountant?) savings for them.

Establishing a business in the form of a partnership also means that the owners will be able to work with each other so that they can create ideas that help to boost the efficiency of their business. Also, they can make skilful employees be their partner. This will enable them to come up with more amazing ideas and hence increase the revenue (Also see How to Differentiate Revenue and Income?) of the business.

Everything has their downsides, and partnerships are no exception. One of the most notable disadvantages is that if the partnership is not established as a limited liability partnership (LLP), the partners will have unlimited liability on the debts and other liabilities (Also see Equity and Liabilities) of the business. All the partners are entirely liable for the partnership’s debts, which means that they have to be responsible for paying the debts of their share.

Besides, in most cases, partnerships are tenuous in terms of interpersonal relationships as there will be a high risk of friction and disagreement between the management and the partners.  The partnership (Also see How Can You End a Partnership?) will face some issues if the partners cannot collaborate well. Also, as every partner serves as one of the essential elements in a partnership, every one of them is liable to the decisions and actions that other partners have made or taken. In some occasions, the partners may have to suffer from the consequences of some mistakes made by other partners even though they have not made any mistake.

Do you know that there are three different classes of cash flow activities? One of them is the cash flow from financing activities. These activities are the cash inflow and outflow arising from the company’s financing activities. Some examples of such activities include a change in capital that arise from the issuance of securities and debentures. These activities also include the payment of short-term or long-term liabilities (Also see Can You Differentiate Debt and Liability?), interests on securities, as well as payment of dividends.

When the accountants from an accounting firm in Johor Bahru is preparing the cash flow statement, they will place the cash flow from financing activities as the last of the three types of cash flow activities (Also see Types of Cash Flow Activities – Cash Flow from Investing Activities). These activities include cash inflows generated by the activities for the company to obtain funds, as well as the cash outflows generated when the company is paying for such funds.

The financing activities that cause cash inflows include the increase in short-term and long-term borrowings, as well as the sale of the company’s shares. On the other hand, cash outflow can be caused by a drop in the short-term loans that the company has obtained, or when the company is paying for its long-term borrowings. If the company pays cash dividends to its shareholders or it buys back its shares, then there will be an outflow of cash arising from financing activities.

If a company always have positive cash flow, we may assume that the business is operating (Also see Types of Cash Flow Activities – Cash Flow from Operating Activities) in a safe zone. When the cash that the company has generated is more than that of it has spent, the excess will result in the payments of dividends, a decrease in the company’s liabilities, the repurchase of stocks, and so on. People will consider these as good signs that help in creating good shareholder value. 

In the early days, people used to focus on the company’s balance sheet and profit and loss statement when they want to assess the company’s situation. However, as time passes by, they started studying both the statement with the company’s statement of cash flow. In fact, this helps them to get a clear picture of the financials (Also see What is a Financial Statement Review?) of the business before they make any decisions. This can be proved by the points that we have discussed above, that is, by looking at the statement of cash flow, we will be able to know the company’s main financing activities in the section of cash flow from financing activities.

In short, cash flows from financing activities are the cash flows that arise from the repurchase and issuance of the stocks and bonds of the company as well as dividend payment. These transactions are related to the company’s capital, and they will appear in the company’s balance sheet under the section of long-term capital.

Cash flow from investing activities appears as the second part of the cash flow statement. It reflects the inflows and outflows of cash arising from the investing activities that have taken place in a company. Cash flows that are related to the investments of tangible and intangible assets, asset procurement, the purchase of property, plant and equipment or shares, earnings from the sale or disposal of assets, and so on, are all in the category of cash flow from investing activities.

Apart from investing activities, the other two types of cash flow activities include operating activities and financing activities. Classifying business activities into the right category may not be an easy task for business owners who do not know accounting well. If you are one of them, feel free to contact an accounting firm in Johor Bahru if you need assistance on this matter.

Cash flow from investing activities takes into account all business transactions that are related to the sale and acquisition of plant, property and equipment. In the company’s balance sheet, one will be able to find these items in the non-current parts. Investing activities that will lead to cash inflow are the sales and disposals of property, plant and equipment. On the other hand, the activities that will bring about a cash outflow include the property, plant and equipment procurement, investments made in joint ventures or the acquisition of a business, as well as the payments for the investment in the marketable securities.

As an example, XYZ Corporation is a newly incorporated firm. In the first month after it started running the business, it did not earn any revenue, and there is not related operating expense. Also, it did not get involved in any investing activities. Hence, its cash flow from investing activities will be zero too. Then, in the second month, it has invested in a property worth RM200,000. In this transaction, the business needs to spend cash. Thus, this is an example of cash outflow for investing activities.

By studying the cash flow from investing activities, one will get to know the trend of the capital expenditures of a company. Thus, he can determine whether the company’s current condition and stage, whether it is growing rapidly or in a stable phase. Knowing this will be very helpful when we want to forecast the company’s financial statements and its performance in the future. Besides, another aspect that one may focus on is the earnings that the company has obtained from the disposal of fixed assets. If the earnings from the disposal are abnormally high, one may need to study why the business has disposed of those assets.

In short, cash flow from investing activities includes the sales and purchases of property, plant and equipment, as well as the investments made. By studying this section in the statement of cash flow, one will be able to know the primary investing activities that the company has carried out. If one intends to assess the financial position of a business, besides looking at the statement of cash flow, he should study the balance sheet and profit and loss statement as well.

Among the three different types of cash flow activities, cash flow from operating activities is the first part of an income statement. It presents the cash inflows and cash outflows of the business that arise from its operating activities. The cash flow from these activities includes the amount of money the business has received from its sales, as well as the expenses that the company has paid for various costs. The accounting (Also see An Overview of Accounting Procedures) records related to these business transactions are quite complicated and time-consuming to handle, particularly if your company has a large transaction volume. Thus, you may consider hiring an accounting firm in Johor Bahru to let the professionals help you out.

Cash flow from operating activities focuses on the inflows and outflows of cash arising from the primary business operations of the company. Hence business owners get to know the amount of cash their business has spent on the production and the cash the company has generated from the sales of its goods and services. By studying the operating activities section, one will be able to know the changes that have taken place in cash, depreciation, accounts payable, accounts receivables, inventories and so on.

Most financial analysts will focus on the cash flow from operating activities as this indicates the company’s ability to conduct the business operations successfully. For the business to remain solvent, business owners need to make sure that the company’s cash flow from operating activities remains positive. This means that they should ensure that operating activities that the business has carried out must generate positive cash flows.

The accountants may use two different methods to calculate the company’s cash flow, which is the direct method and the indirect method. If an accountant chooses to use the direct method, he needs to extract information regarding various cash receipts and payments from the company’s income statement. This includes the amounts that the company has paid to its suppliers and employees, as well as the cash that it has received from its customers. Then, the net of cash receipts and cash payment will be the company’s operating cash flow.

On the other hand, if the accountant prefers using the indirect method, he should take the company’s net income from its income statement. As most companies would prepare their financial statements by using the accrual basis, they will recognise their revenue (Also see How to Differentiate Revenue and Income?) when they have earned it, but not when they receive it. Thus, net income (Also see The Difference Between Net Income and Operating Income) will not be able to reflect the cash flow related to their operating activities. Therefore, the accountant should adjust the company’s earnings before taxes for the items that bring an impact on the net income (Also see Mistakes To Avoid When Filing Self-employed Income) of the company even though there is no cash receipts or payments for that transaction. Besides, by using the indirect method, the accountant needs to add back the cash flow from non-operating activities as the cash flow related to these activities will not influence the operating cash flow of the business.

In short, cash flow from operating activities plays a role as a crucial indicator of the company’s core operations. By studying this, the investors will be able to analyse the company’s operations so that they can determine whether the core business activities of the company are generating income for the business.

Have you ever wondered how the accountants from an accounting firm in Singapore complete the accounting tasks that the business owners hand over to them? When they are doing those tasks, they need to follow the accounting procedures. Generally, these are the processes that execute certain accounting functions which are created to suit the company’s risk management policies to complete those functions more efficiently.

Typically, the accounting procedures start with the process of collecting financial documents. Some of the examples include receipts, cash register tapes, invoices, incoming bills, as well as records of salaries. Then, the next step is to reconcile and verify the accounts. The accountants need to log in to the system and verify the evidence they have with the financial information. They need to reconcile the accounts and perform internal and external reporting based on accounting procedures.

The accountants (Also see How Do the Accountants Close the Books?) should make sure that the accounting procedures can record accurate, objective and valid data. Also, they should use consistent and comparable procedures. As an instance, the accountants should not change the method they use in inventory valuation as they wish. If they have decided to record and value the inventories by implementing the first-in, first-out (FIFO) method, they should not change the method of valuation to the last-in, first-out (LIFO) method.

Another example is the accounting (Also see Comparing Computerised Accounting and Manual Accounting) procedures executed when determining the employees’ payroll. The personnel in charge may need to collect timesheets before reviewing and approving them. This is to make sure that the employees have worked for the said hours. Then, they need to apply the wage rate for the work that the employees have performed. After that, they can use this amount to identify the gross salaries and net salaries of the employees.

Besides, in the billing procedures, the accountants need to issue invoices to the customers. To do this, they need to collect information about the invoices, create the invoices and issue them to their clients. This means that they need to review the billing information daily and confirm the prices before processing the order. After reviewing the order, they need to generate the invoices and send them to the customer.

As the accounting procedures vary, the skills that the accountants should master to record the information into the accounting (Also see The Accounting Estimates That the Accountants Use) systems are different too. If the accountants have applied the correct accounting procedures, the process of recording transactions can be very efficient, and it would not take a long time. Also, accounting procedures enable people to cross-verify the information recorded. These procedures make sure that the companies follow the legal requirements too.

In a nutshell, the accounting procedures are the processes that the accountants would use when performing accounting (Also see What You Need to Know About Reserves in Accounting) functions. With the help of these processes, they will be able to manage the information better as the transparency will increase. Also, proper accounting procedures will facilitate the process of preparing financial statements.