Category: Accounting

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.

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.