Category: Accounting

Most people think that both “revenue” and “income” mean the same, that is, a company has earned money. Some of the business owners may face the same problem, too; that is, they could not really tell the differences between them. However, these two terms are completely different in terms of concepts.

Revenue refers to the sum of money the company has generated by selling its products and services to the customers. Income, on the other hand, is the sum of money remaining after one has deducted all expenses a company has incurred from the sum of revenue generated. Both revenue and income are useful when you want to determine the financial position of your business.

If you want to calculate the sum of revenue your company has generated, you should multiply the prices of goods or services that you have sold with the number of units sold. This is the gross sales that your company has made. To calculate income, you need to subtract the sum of all expenses that the business has incurred in a given accounting (Also see Things You Should Know About Accounting Estimates) period from the total revenue it earned in that period. This is the total earnings of your company in that period.

For example, XYZ Corporation has sold 5,000 chairs in a year. The chairs cost RM80 each. Thus, we know that the sum of revenue it has generated is RM400,000. Then, in that accounting (Also see The Responsibilities of Accounting Department) period, XYZ Corporation has spent RM 300,000 on acquiring raw materials, maintenance of machines, paying employee salaries and so on. So, let us take RM300,000 as the total expenses incurred. To calculate the income that XYZ Corporation has earned, we need to subtract the total expenses from its sum of revenue. Thus, we get to know that its total income is RM100,000.

Both revenue and income (Also see What Can You Find in an Income Statement?) will appear in the profit and loss statement of your business. However, they will appear in different places, where revenue will appear on the top, and income will show up at the bottom of the statement. Hence, revenue is also called the “top line”, and the term “bottom line” refers to the company’s income. The amount of income that a company has earned is a subset of revenue. This means that income is included in the revenue of a company.

In short, revenue is the sum of money a business has earned from its sales. On the other hand, income is the total profit of that company. If you still find it challenging to differentiate revenue and expenses, please do not hesitate to hire an accounting firm in Singapore. The professionals will be able to help you with the accounting (Also see The Importance of Cost Accounting) tasks, and you do not have to worry about the mistakes that you may commit when you are recording the transactions on your own.

Do you have an accounting department in your company? Instead of having one, most small businesses may choose to engage an accounting firm Singapore as hiring in-house accountants may be too costly, especially for start-up companies. Doing so can ensure that all the business books are well-organised, and all the financial statements are accurate and can represent the company’s financial position. However, as your business grows, you may consider establishing an accounting department in your company to cater to the increasing need of getting piles and piles of accounting tasks done quickly.

The responsibilities of the accounting department include a lot of administrative functions. Although these functions will be treated as “back office” activities, all the companies will need them so that they can run their business activities smoothly. Listed below are some tasks that the accounting department is responsible for:

– Accounting for payroll

The accountants who are responsible for payroll (Also see Essential Audit Objectives for Payroll Audits) should collect information from the company’s human resource department on the time that the employees have worked as well as their pay rates. Then, they need to calculate the tax and any other deductions that they should make from the employees’ pay before issuing the amount of net pay to the employees by using cheques, direct deposits or by cash.

– Accounting for taxes

The responsibilities of the tax accountants are to estimate the sum of taxable income (Also see Importance of Statement of Comprehensive Income) the company may earn and pay income (Also see What Can You Find in an Income Statement?) tax to the government regularly according to the amounts they estimated. Also, they need to issue tax fillings in other areas like sales taxes, property taxes, and so on.

– Collecting payments

The company’s accounting department should track the outstanding invoice payments from their client and collect the payments from them by using various methods such as attorney letters, phone calls, as well as emails.

– Billing invoices

This means that the accounting department should gather information from the sales department as well as the shipping department. Then, it needs to create invoices by using that information and send them to their clients.

– Generating financial statements

The reporting group in the accounting department should create adjusting entries so that the initial financial results of the company will comply with the applicable accounting frameworks. Also, it should write some footnotes and attach them in the financial statements (Also see What is a Financial Statement Review?), as well as release the company’s financial after each reporting period has ended.

– Internal reporting

The accountants in the department who are responsible for cost accounting should provide the management with considerable values. To achieve this, they should calculate the profitability of different client groups, products, services, product lines, stores, sales region and more. The management may change the areas of analysis regularly so that it can see the business from various aspects and at the same time, place the growth of the company’s financial results as the top priority.

– Settling the accounts payable

The accountants who are responsible for this should collect the supplier invoices as well as the employee expense reports. Then, they need to confirm that the amounts are authorised for payments before issuing them to the recipients on the dates they have planned for those payments. Also, they need to pay attention to any early payment discounts and determine whether taking those discounts will be economical for the company.

There is a high possibility that the company will integrate a lot of controls in the areas mentioned above.

In accounting (Also see What is the Purpose of Accounting?), reserves refer to the gains that a company allocates for specific purposes. Typically, companies will set up reserves for the procurement of fixed assets, to settle debts, to pay for repairs and maintenance as well as to pay bonuses to employees. After the company has decided on the types of reserves and their respective amounts, it needs to record them in the books of accounts and the financial statements. This is when it may need help from the accountants. If the business owners are unfamiliar with these accounting (Also see What are Provision and Accrual in Accounting?) procedures, they may choose to either employ an in-house accountant or hire an accounting firm in Singapore.

At the end of an accounting (Also see Things You Should Know About Accounting Estimates) period or a year, if a company has earned a profit, it may choose to retain part of the profit to prepare for the growth and development of the business or meet future demands. The sum of money that it keeps aside for this purpose is called reserves. Reserves would help a business in making sure that its financials are always in good condition. Also, the company can use the reserves to ensure that it can pay stable dividends to its shareholders. Some companies will expand their business or make investments by using the reserves.

Where are reserves in the financial statements (Also see What is a Financial Statement Review?) then? One would record reserves in the company’s balance sheet on the liability side under the “reserves and surplus” heading. In most cases, a company will not create reserves if it suffers a loss. Generally, there are three types of reserves, which are general reserves, specific reserves, as well as the revenue and capital reserves. In this article, we will look into the third type.

Business owners will create revenue reserves by using the gains that the company has earned from its business operations. This type of reserve will typically show up in the profit and loss appropriation account. While profit and loss account determines the net profit or loss of a company in a specific period, people would use profit and loss appropriation account to distribute net profit among partners, for the distribution of dividends, as well as to allocate reserves. Apart from distributing dividends, business owners can use the reserves to expand the business too.

For capital reserves, business owners would establish them by using capital profits but not the profits generated from the company’s business operations. Most of the time, they will not use capital reserves to distribute dividends to their shareholders. The premium that the company obtains from the issuance of shares and debentures is a type of capital reserve. Other examples include the gain acquired by selling the company’s fixed assets, capital redemption reserve, as well as the surplus after revaluing the assets and liabilities.

Accounting estimates refer to the estimations that the accountants would make on the amounts that they should debit or credit (Also see Accounting – Understanding credit and debit in the business) on the items that do not have a defined and accurate method of measuring the value. Thus, the accountants need to use their knowledge and expertise they obtain from training and experience to make the judgement. If you are doing accounting tasks on your own without having much accounting knowledge, this part can be challenging for you. Thus, the best way to solve this problem is by hiring an accounting firm in Singapore.

In some occasions, the accounting estimates that the accountants have made may change. This may happen when new information appears, and it has replaced the data that the company has used to make the decision earlier. This will cause a change in the carrying amount of a particular asset or liability. At the same time, the subsequent accounting for the recognition of assets and liabilities in the future would be different too.

When we account for business transactions, we have to consider the number of estimates we have made, as well as the things that we use our own judgment or prudence. Some examples of these items include the provisions for obsolete inventories, change in the liability, bad debt reserve, as well as a change in the useful life of some depreciable assets (Also see Introduction to Impairment of Fixed Asset). Sometimes, we may realise that our estimates or judgment are inappropriate since the basis that we use to make assumptions have changed. Thus, we will need a change in the accounting estimates so that our books of accounts will be in line with the subsequent changes.

However, some people may be confused between the change in accounting estimates and the change in accounting policies. Note that both of them are totally different. A change in the accounting estimates will cause the valuation of financial data of that company to change. On the other hand, a change in the accounting policies that a company has been using will result in a change in the way it calculates the financial statements (Also see What is a Financial Statement Review?).

An example of the change in accounting (Also see What is the Purpose of Accounting?) estimate would be a change in the salvage value of an asset. As an instance, a company that has been using the straight-line method for the depreciation of assets has predicted that the salvage value of a machine will be RM5000. However, as the trends in the marketplace has changed, the salvage value has decreased to RM2500. As this value has changed, the depreciable value will vary too. This leads to a change in the accounting estimates.

For the change in accounting policies, an example would be changing the method that the company is using for valuation of inventory. For example, a company has been using the FIFO method (first-in, first-out method) to deal with its inventories. Then, it changed to the LIFO method (last-in, first-out method) to comply with the requirement of law.

The management of a company should do their best to minimise the risk associated with the changes in accounting estimates. This can be done by implementing internal controls on this matter. For example, the management should appoint a qualified individual to make necessary adjustments on the estimates when required. It should also list out the differences between the amount before it changes the accounting estimate as well as the sums after the change is made. Also, the management needs to understand the crucial methods and assumptions that the company is using and make sure that the controls can identify unnecessary changes regularly.

Accounting is the key to success for every business as it helps business owners to have an in-depth understanding of the financial health of their company. The records and interpretation of business activities form the central part of accounting. If business owners (Also see Tips to Become Intelligent Business Owners) get to know the inflow and outflow of their business funds well, they will be able to make sound decisions based on the data so that their business can continue growing.

When you are planning for your business, you should never underestimate the importance of accounting. If you totally have no idea on how your money flows, you will most probably lose control of the finances of your business. However, you don’t have to be too worried if you do not know much about accounting or if your small business cannot afford to employ full-time accountants. There is an alternative to this, that is to hire an accounting firm in Singapore and let the experts complete the accounting tasks for you.

The primary purpose of accounting is to keep records of the financial activities that a business has carried out. When the business owners or the accountants want to track the revenue earned as well as the expense incurred in the normal course of business operations, they may look at the ledger. If they have kept accurate records of their financials, they will know the trends in the cash flow, and they will be able to plan for the future.

Apart from making future plans, accounting also provides information for business owners to analyse the performance of their company. This is what successful business owners would always do. By using historical records and the current data, they will be able to evaluate the company’s financial health. This helps business owners to determine the well being of their business (Also see Ways to Increase Your Business Revenue). Furthermore, referring to the historical data provides them with a chance to learn from past experience, and they will be able to make sound decisions for the future.

Besides, accounting (Also see Are Accounting and Bookkeeping the Same?) help business owners to be in compliance with the requirement of laws. If they always keep up-to-date and accurate records, they do not need to worry that they have overlooked small details, which may bring serious consequences to the business. Insufficient or unorganised records can result in errors in tax filings, which can cause the tax authorities to audit your company. This can bring you some unnecessary legal problems if not properly managed.

Without a doubt, all business owners hope that their business can be successful and can sustain for a long time. If they want to achieve this, accounting is something they should never leave behind. Apart from tracing business transactions, business owners will be able to prepare financial (Also see What is a Financial Statement Review?) reports that help in decision making with the help of accounting too.