Category: Accounting

Control account (Also known as a controlling account or adjustment account) is a ledger account that consists of the balance of the accounts or subsidiary accounts. The business transactions’ details are usually recorded in different subsidiary ledgers and then summed up and balanced into the matching control account.

Control accounts enable high-level analysis concentrating on every account’s balance, while subsidiary accounts are very important for recording a business’s transactions. They are vital for reconciliation in a big organization with a high quantity of trades when the account (Also see Practices and Advantages for Modifying Chart of Accounts) balance is required. However, if accounting (Also see An Overview of Accounting Procedures) is not your thing, you should get assistance from the accounting firm Malaysia.

A business that sells goods on credit might have many trades in the trade receivable sub-ledger. The transaction’s details should be recorded in the sub-ledger, and the balance should be recorded in the control account. The trade receivable control account will only reflect the total amount that is owed to the business at the time.

Example of the common control accounts:

How do a Control Accounts Works?

• Inventory

• Equipment

• Trade Payable

• Trade Receivable

A control account is a vital part of double-entry accounting and composes the structure of the ledger. They enable a streamlined analysis of a business’s balance sheet and summarize the total balances for every sub-ledger.

Based on the size of a business or company, a ledger can in some cases have numerous control accounts, like trade receivable. When it comes to a business’s trade receivable, every transaction’s details, including the consumer information, the sale details, payment terms and refunds will be recorded and managed by the trade receivable sub-ledgers. If a smaller business remains balanced using double-entry accounting, it might have the ability to count on control accounts. Basically, the trade receivable control account shows the business’s total amount, while its sub-ledger reflects how much every consumer owes.

Control accounting (Also see Do You Know What Are Accounting Controls?) not only provides checks and balances for reconciliation and also helps create a tidy financial report. When it comes to the trade receivable control account, the total of the consumer balances in the sub-ledger has to match up to the control account. However, there might be a mistake somewhere if it does not.

Nevertheless, extra control accounts might be helpful regarding the business’s size, the products sold, and the sector. Considering that control accounts compose the ledger, it’s vital to make sure a control account is related to every field of your company.

Your chart of accounts summarizes all the accounts for your company. From the details in your chart of accounts, you can run practically any financial record you need. Hence, if you are unsure how to do it, do not hesitate to seek help from professionals in a bookkeeping firm in Singapore.

Below are some vital standards to comply with when modifying your Chart of Accounts:

Develop a logical hierarchy for your sub-accounts: Do not go much more than three levels deep. The first level needs always to be among the five account types (Asset (Also see Guide to Deferred Tax Asset) Account, Liability (Also see Guide to Deferred Tax Liability) Accounts, Equity Accounts, Revenue Accounts and Expense Account).

Do not remove or archive accounts during the year: You may find yourself with errors if you delete accounts during the year. The best method is to add modifications instead of getting rid of accounts.

Use common account numbers: A Chart of Accounts has a specific order. Balance sheet accounts are detailed initially and then comply with the income (Also see How Do Net Income and Gross Income Differ from Each Other?) statement accounts.

Keep it simple: Adding in excessive information can lead to complications.         

Constructing the ideal Chart of Accounts for your company can establish you up for success regarding coverage and tax filing. However, it relies on your objectives and the reporting you want and needs.

Advantages of customizing your accounts to your company: 

• You can classify financial information which gives you better insight into more specific information. 

• More accurate information means more specific financial reporting and is less complicated when filling out tax forms. 

• It could make tax compliance less complicated. You can modify your Chart of Accounts classifications to straighten with financial reporting standards. 

• It produces an easier working connection with your accountant. They will not require you to explore when it’s all set out thoroughly in your Chart of Accounts. 

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.