how Setting Up Your Chart of Accounts

how Setting Up Your Chart of Accounts

While installing your new accounting software you have most likely been asked whether you would like to use one of the default charts of accounts included with the program or develop your own. Unless you are very familiar with setting up a set of financial books you will want to choose from one of the selections offered. And even if you have the experience choosing one of the defaults will save you a great deal of time. But you may ask what if I don’t need all these accounts and how do I know which accounts I should keep. And should I use a numbering system or not? Let me help you by explaining just what a Chart of Accounts is and how to adjust the default list to your needs.

First of all a Chart of Accounts in its simplest definition is a list of accounts used to track all financial transactions that flow through a business. This list is typically broken in to eight segments: Assets, Liabilities, Equity, Income, Cost of Goods Sold, General and Administrative Expenses, Other Income and Other Expenses. You might see Equity referred to as Capital, Cost of Goods Sold referred to as Direct Costs, and General and Administrative Expenses referred to as Expenses. Companies that wish to track Sales Expenses such as commissions, salaries and related expenses of sales personnel and other costs related directly to sales activity might also add a Sales Expense segment.

The first three segments represent the accounts you will find on a Balance Sheet and they will be broken down into sub-segments. Under Assets you will find sub-segments for Current Assets, Fixed Assets and sometimes Other Assets. Current Assets accounts are used for assets that can be readily liquidated into cash, such as cash, investments, accounts and notes receivables, and deposits. You may choose when setting up more than one cash account or receivable account to create a further segment. This will allow you to summarize all your cash accounts, for example, on your balance sheet while keeping a separate recording account for each bank account. Fixed Assets accounts are used to record the cost of items purchased that have a useful life that extends beyond one year. The Fixed Assets segment also includes contra-accounts (reduction of the value of an asset) that are used to record the depreciation of your fixed assets. These contra-accounts are typically named “Allowance for Depreciation – (name of type of fixed asset)”. You should have a fixed asset account and corresponding depreciation account for each type of fixed asset you purchase. Some examples are vehicles, office equipment and furniture, building or leasehold improvements. The Other Assets segment is used for all other types of assets.

Likewise the Liabilities segment is broken into Current Liabilities and Long-Term Liabilities. Current liabilities represent the company’s liabilities that are to be paid in less than one year. Examples are Accounts Payable, Payroll Tax Liabilities, and Note Payables. Long Term Liabilities represent liabilities that are to be paid over a longer term than one year such as mortgages, vehicles loans and other long term debt.

The third segment of the balance sheet is the Equity, or Capital, segment. This segment consists of accounts that record the owner’s, partners or shareholders investments, draws of profits taken from the company by the investors and the net earnings of the company. For each owner or partner within a business entity there should be an individual investment account and draw account. When a company is incorporated than the capital investment by the shareholders is recorded into capital stock accounts. These accounts may be broken down further if different types of stock are issued. The Retained Earnings account is used to record the profit, or loss, the company has earned from the beginning of its existence. Usually you will not be posting to this account, as this is the account your software program will use to close out your end of year income statement accounts.

Moving on to the Income Statement segments, you will want to have in the Income segment accounts to record each type of income you earn in the course of your business. You may want to break out your sales income into more than one account if you have more than one type of service or product. For example if you are a general contractor you may want to track how sales compare between remodeling and new homes.

Cost of Goods Sold or Direct Costs are those expenses that relate directly to the sale of a product or service. Again if you are a contractor these typically would include payroll and payroll expenses of your workers, materials, subcontractors, permits, general liability and workman’s compensation insurance, equipment rentals, etc. They would not include rent or office supplies.

General and Administrative Expenses are business expenses incurred that are not dependent on the sale of a product or service. They include rent, phone, office payroll and payroll expenses, employee benefits, office supplies, utilities, etc.

Other Income typically includes non-sales income such as interest income. Federal and State Income Taxes and any related interest and penalty expenses are what you will find in the Other Expense segment.

Now that you have an idea of how a Chart of Accounts if typically set up, how do you pick and choose what accounts to keep and which to delete? Print out the default list and go through it choosing the accounts you think you will need. You will need at least one cash account, an account receivable and accounts payable account. If you do not have employees and don’t ever expect to have any than by all means delete all accounts with payroll in the name. If your company will not be making investments than delete all accounts having to do with investments under Current Assets. You get the picture – however it is easier to keep what you think might be needed sometime in the future. Your program may not let you delete some accounts because they are being used in conjunction with another account or accounts. Let them be. You can also edit account names – as long as the new account name belongs in the same segment as the one you are replacing.

Now, to number or not number. Numbers are used in a Chart of Accounts to sort the accounts correctly. Also, between you and me, accountants are much better at remembering numbers than they are at names so they prefer numbers. When using numbers, each segment is assigned a specific group of numbers. Typically these are as follows:

Assets – 1,000’s

Liabilities 2,000’s

Equity 3,000’s

Income 4,000’s

Cost of Goods Sold 5,000’s

General & Administrative 6,000’s

Other Income 7,000’s

Other Expense 8,000’s

When a Sales Expense segment is used it is assigned the 6000 range and each of the remaining segments move up a range. Leave room between sub-segments so you will be able to add if needed. And when setting up numbers within a segment make sure you leave some room between each account as you may also want to add accounts.

And when in doubt ask a professional. Your software advisor or accountant can get you started in the right direction from the start which may save you a lot of time and aggravation down the road. As with most endeavors, doing it right the first time is always best.

A well set up and maintained financial management system is the cornerstone of any business. Without well organized financial records and the ability to review your data in meaningful reports a company cannot be at its best.

Accountant Supply List

Accountant Supply List

Not many years ago, accountant supply lists involved items such as ledgers, stamps with inkpads, and a very large cup of sharp pencils. Today, accountant supply lists are much different.

Computer

First and foremost, the most important accountant supply to purchase is a computer. This is a given in nearly every existing business in the United States today, and choosing a computer can be complicated and confusing due to the many options that are available. If you don’t have a computer that you can use for your accounting business, visit your local accountant supply store, office supply store, or computer dealer.

Shop around at a minimum of three places, and ask a sales representative to demonstrate the different features, as well as review features on memory. Bring a note book to write down the different types of computers you’ve seen, as well as the pros and cons of each different computer. If you have a relative or close friend who knows computers, share your findings in order to make the most educated purchase that is best for your business.

Accounting Software

After purchasing a computer, or if you already have a computer suitable for your accounting office, the obvious next accountant supply that will be needed is a good accounting software package. Rather than choosing accounting software by brand, though, choose software that is right for your particular business.

Out-of-the-box accounting software is most suitable for small and medium-sized businesses that have standard accountant supply needs. If your business needs unique data reports, make sure the accounting software you choose offers customizable reports. If you run a service-related business, check to be sure the accounting software includes features such as a time and billing module. When choosing your software, ask a few pertinent questions to make sure the package is right for your accounting business.

– Does the accounting software allow you to print or electronically send cheques, purchase orders, and invoices?

– Does it have internet connectivity so you can bank online?

– Is it integrated with other software that you often use, such as Microsoft Office?

– Is it able to convert data from other accounting programs or databases? In other words, will the accounting software be able to meet all of your needs, now and in the future?

– Does it work easily with tax forms and configurations?

If you anticipate your business to grow and include other staff accountants, consider these additional questions as well.

– Is the accounting software networkable?

– How easy or expensive is it to move from one user to multi-users?

– With some accounting software, adding new users is just a matter of buying the appropriate number of user licenses; with others, you have to purchase multiple copies of the accounting software program, which is much more expensive.

Some software accountant supply packages, such as Peachtree by Sage, offer areas of accounting software specialty as well, such as accounting for construction, accounting for distribution, accounting for manufacturing, and accounting for nonprofit organizations. Therefore, as with a computer purchase, get several opinions from various sources in order to make the most educated purchase for your accounting businesss.

Other Supplies

Once a computer system and software package is installed, filling an accountant supply cabinet is the next item a self employed accountant should choose to complete. Before spending your hard earned dollars, though, carefully research the items that you will need the most and those items that you will need immediately in your particular accounting specialty.

A few basic items for your effectively equipping your office, which are available at most any accountant supply or office supply store, are as follows:

– Client tax guide organizers

– Presentation materials and client folders

– Accounting forms

– Filing cabinet with file folders

– Accounting reference materials

– Telephone with headset

– Desk top calculator and adding machine

Some items that will be needed in your accountant supply cabinet can be purchased at an accountant supply or office supply store, but could also be obtained at no charge through the Internal Revenue Service (IRS) or ordered at irs.gov.

– W2 and 1099 tax forms

– Federal and State envelopes

– Federal and State income tax forms for the current tax year

Basic office supplies that should be included on your accountant supply list are:

– Pens

– Pencils and an electric pencil sharpener

– Paper clips

– Stapler

– Rubber bands

– Desk organizers and baskets for organizing paperwork to be kept on your desk

– Envelopes of various sizes

– Postage meter if you do or plan on doing a lot of daily mailings on a very regular basis

– Self inking stamps – one with your business mailing address and one for stamping bank deposits

– Letterhead and envelopes with your business name printed on them

– Business cards

Additionally, consider a unique accountant supply that could be of great benefit to you and your clients — a subscription to a tax update newsletter, or another resource that will keep you regularly informed of tax updates, and can help you remain updated on the latest changes in taxes and tax laws

Article Source: http://EzineArticles.com/158877

Chart of Accounts for a Small Restaurant

Independent restaurant owners often do their own bookkeeping. Even if they hire a professional accountant at year’s end, they may save considerable money by handling the weekly tasks themselves.

Setting up a chart of accounts to fit the restaurant needs generally requires customizing the default choices of any accounting program. The selection of sales and cost of goods accounts on most systems does not provide for the separation of food and beverage categories that are needed.

Even the leading bookkeeping program for small business, while it has a default selection for restaurants, fails to provide all of the accounts that most restaurant owners require. In addition, many of the expense accounts that are added are rarely used, leading to confusion during data entry, and don’t help with the overview of the business finances.

The National Restaurant Association publishes a book titled Uniform System of Accounts for Restaurants. The book provides detailed descriptions of the application of generally accepted accounting principles to the restaurant industry.

That book includes a sample chart of accounts, but notes that “the codes used here are not the only method for classifying the accounts”. It points out that most restaurants will not use all of the categories listed, and it also notably lacks breakdown of inventory and cost categories beyond “food” and “beverage”. Many restaurant owners want further separation of those categories to include sub-categories such as “meat”, “seafood”, and “produce”, and possibly “beer” and “wine” for beverage categories.

While many programs do not require the use of account numbers, the NRA book states that some type of account numbering system must be used. If your program is not showing account numbers, it should have an option on a set up screen to activate that feature.

Any account numbering system is generally grouped so that accounts of a particular type fall within a specific range of numbers. For example, assets may be in the 1000 range, and income accounts in the 4000 range. On systems with many detail accounts, 5 digit numbers may be used to allow more sub-categories, but that is rarely needed for a small restaurant.

Typical number ranges that are used by many accounting systems are as follows:

Asset accounts: 1000-1999
Liability accounts: 2000-2999
Equity accounts: 3000-3999
Revenue accounts: 4000-4999
Cost of goods: 5000-5999
Expenses: 6000-8000
“Other” accounts: 8000-9999

Asset Accounts

Asset accounts include cash, bank accounts, inventory, and everything else that is owned.

It is common to assign the first account number, 1000, to Cash, since they are usually ordered, within each group, by liquidity (ease of converting to cash).

A separate account should be used in the chart of accounts for each bank account maintained for the business. If merchant deposits take a few days to reach the bank, a merchant account can be used. Also, if checks are accepted and not processed electronically, an account should be created for checks to be deposited.

New accounts are normally numbered 10 digits apart, so your first two bank accounts may use 1010 and 1020 as account numbers in the chart of accounts. Leaving gaps between the numbers makes it easy to add another account later and squeeze it in to the sort order in any position.

The asset accounts can be numbered as such:

1000 Cash
1010 Primary Bank Account
1020 Bank Account #2
1060 Merchant Deposit Account
1080 Checks Received
1100 Accounts Receivable
1200 Food Inventory
1210 Meat Inventory
1220 Poultry Inventory
1230 Seafood Inventory
1240 Dairy Inventory
1250 Produce Inventory
1260 Bakery Inventory
1270 Frozen Inventory
1280 Grocery Dry & Canned Inventory
1320 Beverage Inventory
1330 Liquor Inventory
1340 Beer Inventory
1350 Wine Inventory
1360 Merchandise Inventory
1380 Bar & Consumable Inventory
1400 Prepaid Expenses & Advances
1450 Recycle return value

Assets that have a lifespan of several years or more are referred to as Long Term Assets. This also includes any real estate.

1500 Fixed assets
1510 Land & Building
1520 Automobile
1530 Furniture Fixtures & Equipment
1540 Leasehold Improvements
1600 Accumulated Depreciation
1700 Capitalized Start Up Expenses
1800 Security Deposits

Liability Accounts

Liability accounts includes things like credit cards and payables to vendors. It also includes money that has been received for things like tax that is due to the state, tips due to the employees, and gift cards sold but not yet redeemed. Real estate loans and other major financing is sub-categorized as long-term liabilities.

Liability accounts can be numbered as:

2000 Accounts Payable
2110 Credit Card
2120 Credit Card #2
2130 Credit Card #3
2140 Credit Card #4
2210 Sales Tax Payable
2220 Second Tax Payable
2250 Payroll Liabilities
2260 Second Payroll Liability
2280 Tips held
2300 Gift cards & certificates
2350 Customer Credits
2400 Notes Payable
2500 Other debt

Equity Accounts

The owners’ investment in the company is represented in the equity accounts. For a corporation, this includes the shareholders equity. It is effectively the money that the business owes back to the owners. When an accounting period is closed, the balance of the income and expense categories is transferred to Retained Earnings, which is also an equity account.

The most basic equity accounts could be numbered:

3000 Owner Capital
3100 Common Stock
3300 Retained Earnings

Income Accounts

Sales fall into the general category of income accounts. A restaurant will obviously want separate categories for food and beverage sales, and may want further separation of beer, wine, and liquor sales.

Typical income accounts are:

4000 Sales Revenue
4200 Food Sales
4320 Beverage Sales
4330 Liquor Sales
4340 Beer Sales
4350 Wine Sales
4360 Merchandise Sales
4500 Catering & contracts
4700 Other Operating Income
4900 Discounts

One difference between the NRA recommendations and many other lists involves the placement of the “other income” accounts. This can include income from sources such as cover charges, games or vending machines, and banquet room rental. Most lists place these accounts in the 8000 range, above expenses, but the NRA list places them in the 6000 range.

Most smaller locations will only need a single category for other income. Since “cost of goods” is a general sub-category of expenses, it makes sense to avoid placing an income category in the middle of the range from COGS through expenses. A single account has been placed in this list within the 4000 range.

Putting the discounts into the revenue category implies that this will be a “contra” account. Where most of the sales categories will have a credit balance, discounts will normally have a debit balance.

Cost of Goods Accounts

The Cost of Goods accounts, also called Cost of Sales or Cost of Goods Sold, represent the food and beverage purchases to provide the meals. Other expenses directly related to sales may be included, such as merchant fees or consumable cups and napkins.

The numbers used here also provide consistency across all accounts, as the last 3 digits of each COGS category is the same as the last 3 digits on the associated inventory account.

A cost of goods list could include:

5000 Cost of Sales
5200 Food Cost
5210 Meat Cost
5220 Poultry Cost
5230 Seafood Cost
5240 Dairy Cost
5250 Produce Cost
5260 Bakery Cost
5270 Frozen Cost
5280 Grocery Dry & Canned Cost
5320 Beverage Cost
5330 Liquor Cost
5340 Beer Cost
5350 Wine Cost
5360 Merchandise Cost
5380 Bar & Consumable Cost
5600 Delivery & direct labor Cost
5700 Merchant Fees

Expense Accounts

This example separates the expense accounts into three primary categories: payroll expenses and other expenses. The payroll expenses are grouped in the 6000 range, with the other operating expenses in the 7000 range. Overhead like rent, taxes, and amortization are bumped into the 8000 range.

While accounts must be broken down at least far enough to separate tax lines, combining rarely used accounts will make the overview much easier to understand. The following list combines several categories that are often separated on other charts.

You should check with your accountant or tax preparer to ensure that anything you combine does, in fact, share the same tax line.

The Inventory Loss/Waste account has been slid in under the 6000 marker, as some may consider it to belong with the Cost of Goods categories.

5800 Inventory Loss/Waste
6000 Labor related expenses
6100 Management Wages
6200 Staff Wages
6300 Contract Labor
6400 Commissions paid
6500 Employee Benefits
6600 Workers Comp Insurance
6700 Employers Payroll Taxes
6800 Payroll processing expense
7100 Direct Operating Expenses
7110 China – Glassware – Flatware
7120 Restaurant & Kitchen Supply
7130 Cleaning Supply & Expense
7140 Decorations & Guest Supply
7150 Laundry – Linen – Uniforms
7160 Fees – Permits – Licenses
7200 Pest – Security – other contract
7250 POS – Tech support – Online serv
7300 Marketing
7310 Media & Print advertising
7320 Promotional events
7400 Automobile & travel
7500 Music and Entertainment
7600 Repairs and Maintenance
7700 Utilities
7750 Telephone & net connection
7800 General and Administrative
7810 Bad Debts – Over/short
7820 Bank fees
7830 Insurance
7840 Interest
7850 Professional fees
7890 Misc. Office expense
8100 Rent and Occupancy costs
8200 Equipment Rental
8600 Sales tax paid on purchases
8700 Amortization
8900 Other expense
9000 Income Tax

Other Accounts

The only remaining items to account for are the sale of major assets, other income from sources besides restaurant operations (such as investments or sub-letting space), and a placeholder account for transactions where the business owner needs their accountant’s assistance.

9500 Gain/Loss on sale of assets
9900 Other Income (not from operation
9999 Ask My Accountant

Rectification concept Of Accounting Errors

Rectification concept Of Accounting Errors

Accountants prepare trial balance to check the correctness of accounts. If total of debit balances does not agree with the total of credit balances, it is a clear-cut indication that certain errors have been committed while recording the transactions in the books of original entry or subsidiary books. It is our utmost duty to locate these errors and rectify them, only then we should proceed for preparing final accounts. We also know that all types of errors are not revealed by trial balance as some of the errors do not effect the total of trial balance. So these cannot be located with the help of trial balance. An accountant should invest his energy to locate both types of errors and rectify them before preparing trading, profit and loss account and balance sheet. Because if these are prepared before rectification these will not give us the correct result and profit and loss disclosed by them, shall not be the actual profit or loss.

All errors of accounting procedure can be classified as follows:

1. Errors of Principle

When a transaction is recorded against the fundamental principles of accounting, it is an error of principle. For example, if revenue expenditure is treated as capital expenditure or vice versa.

2. Clerical Errors

These errors can again be sub-divided as follows:

(i) Errors of omission

When a transaction is either wholly or partially not recorded in the books, it is an error of omission. It may be with regard to omission to enter a transaction in the books of original entry or with regard to omission to post a transaction from the books of original entry to the account concerned in the ledger.

(ii) Errors of commission

When an entry is incorrectly recorded either wholly or partially-incorrect posting, calculation, casting or balancing. Some of the errors of commission effect the trial balance whereas others do not. Errors effecting the trial balance can be revealed by preparing a trial balance.

(iii) Compensating errors

Sometimes an error is counter-balanced by another error in such a way that it is not disclosed by the trial balance. Such errors are called compensating errors.

From the point of view of rectification of the errors, these can be divided into two groups :

(a) Errors affecting one account only, and

(b) Errors affecting two or more accounts.

Errors affecting one account

Errors which affect can be :

(a) Casting errors;

(b) error of posting;

(c) carry forward;

(d) balancing; and

(e) omission from trial balance.

Such errors should, first of all, be located and rectified. These are rectified either with the help of journal entry or by giving an explanatory note in the account concerned.

Rectification

Stages of correction of accounting errors

All types of errors in accounts can be rectified at two stages:

(i) before the preparation of the final accounts; and

(ii) after the preparation of final accounts.

Errors rectified within the accounting period

The proper method of correction of an error is to pass journal entry in such a way that it corrects the mistake that has been committed and also gives effect to the entry that should have been passed. But while errors are being rectified before the preparation of final accounts, in certain cases the correction can’t be done with the help of journal entry because the errors have been such. Normally, the procedure of rectification, if being done, before the preparation of final accounts is as follows:

(a) Correction of errors affecting one side of one account Such errors do not let the trial balance agree as they effect only one side of one account so these can’t be corrected with the help of journal entry, if correction is required before the preparation of final accounts. So required amount is put on debit or credit side of the concerned account, as the case maybe. For example:

(i) Sales book under cast by Rs. 500 in the month of January. The error is only in sales account, in order to correct the sales account, we should record on the credit side of sales account ‘By under casting of. sales book for the month of January Rs. 500″.I’Explanation:As sales book was under cast by Rs. 500, it means all accounts other than sales account are correct, only credit balance of sales account is less by Rs. 500. So Rs. 500 have been credited in sales account.

(ii) Discount allowed to Marshall Rs. 50, not posted to discount account. It means that the amount of Rs. 50 which should have been debited in discount account has not been debited, so the debit side of discount account has been reduced by the same amount. We should debit Rs. 50 in discount account now, which was omitted previously and the discount account shall be corrected.

(iil) Goods sold to X wrongly debited in sales account. This error is effecting only sales account as the amount which should have been posted on the credit side has been wrongly placed on debit side of the same account. For rectifying it, we should put double the amount of transaction on the credit side of sales account by writing “By sales to X wrongly debited previously.”

(iv) Amount of Rs. 500 paid to Y, not debited to his personal account. This error of effecting the personal account of Y only and its debit side is less by Rs. 500 because of omission to post the amount paid. We shall now write on its debit side. “To cash (omitted to be posted) Rs. 500.

Correction of errors affecting two sides of two or more accounts

As these errors affect two or more accounts, rectification of such errors, if being done before the preparation of final accounts can often be done with the help of a journal entry. While correcting these errors the amount is debited in one account/accounts whereas similar amount is credited to some other account/ accounts.

Correction of errors in next accounting period

As stated earlier, that it is advisable to locate and rectify the errors before preparing the final accounts for the year. But in certain cases when after considerable search, the accountant fails to locate the errors and he is in a hurry to prepare the final accounts, of the business for filing the return for sales tax or income tax purposes, he transfers the amount of difference of trial balance to a newly opened ‘Suspense Account’. In the next accounting period, as and when the errors are located these are corrected with reference to suspense account. When all the errors are discovered and rectified the suspense account shall be closed automatically. We should not forget here that only those errors which effect the totals of trial balance can be corrected with the help of suspense account. Those errors which do not effect the trial balance can’t be corrected with the help of suspense account. For example, if it is found that debit total of trial balance was less by Rs. 500 for the reason that Wilson’s account was not debited with Rs. 500, the following rectifying entry is required to be passed.

Difference in trial balance

Trial balance is affected by only errors which are rectified with the help of the suspense account. Therefore, in order to calculate the difference in suspense account a table will be prepared. If the suspense account is debited in’ the rectification entry the amount will be put on the debit side of the table. On the other hand, if the suspense account is credited, the amount will be put on the credit side of the table. In the end, the balance is calculated and is reversed in the suspense account. If the credit side exceeds, the difference would be put on the debit side of the suspense account. Effect of Errors of Final Accounts

1. Errors effecting profit and loss account

It is important to note the effect that an en-or shall have on net profit of the firm. One point to remember here is that only those accounts which are transferred to trading and profit and loss account at the time of preparation of final accounts effect the net profit. It means that only mistakes in nominal accounts and goods account will effect the net profit. Error in the these accounts will either increase or decrease the net profit.

How the errors or their rectification effect the profit-following rules are helpful in understanding it :

(i) If because of an error a nominal account has been given some debit the profit will decrease or losses will increase, and when it is rectified the profits will increase and the losses will decrease. For example, machinery is overhauled for Rs. 10,000 but the amount debited to machinery repairs account -this error will reduce the profit. In rectifying entry the amount shall be transferred to machinery account from machinery repairs account, and it will increase the profits.

(il) If because of an error the amount is omitted from recording on the debit side of a nominal account-it results in increase of profits or decrease in losses. The rectification of this error shall have reverse effect, which means the profit will be reduced and losses will be increased. For example, rent paid to landlord but the amount has been debited to personal account of landlord-it will increase the profit as the expense on rent is reduced. When the error is rectified, we will post the necessary amount in rent account which will increase the expenditure on rent and so profits will be reduced.

(iil) Profit will increase or losses will decrease if a nominal account is wrongly credited. With the rectification of this error, the profits will decrease and losses will increase. For example, investments were sold and the amount was credited to sales account. This error will increase profits (or reduce losses) when the same error is rectified the amount shall be transferred from sales account to investments account due to which sales will be reduced which will result in decrease in profits (or increase in losses).

(iv) Profit will decrease or losses will increase if an account is omitted from posting in the credit side of a nominal or goods account. When the same will be rectified it will increase the profit or reduce the losses. For example, commission received is omitted to be posted to the credit of commission account. This error will decrease profits ( or increase losses) as an income is not credited to profit and loss account. When the error will be rectified, it will have reverse effect on profit and loss as an additional income will be credited to profit and loss account so the profit will increase ( or the losses will decrease). If due to any error the profit or losses are effected, it will have its effect on capital account also because profits are credited and losses are debited in the capital account and so the capital shall also increase or decrease. As capital is shown on the liabilities side of balance sheet so any error in nominal account will effect balance sheet as well. So we can say that an error in nominal account or goods account effects profit and loss account as well as balance sheet.

2. Errors effecting balance sheet only

If an error is committed in a real or personal account, it will effect assets, liabilities, debtors or creditors of the firm and as a result it will have its impact on balance sheet alone. because these items are shown in balance sheet only and balance sheet is prepared after the profit and loss account has been prepared. So if there is any error in cash account, bank account, asset or liability account it will effect only balance sheet.

Outsourcing Tax Returns: The Benefits

Outsourcing Tax Returns

Whether you have just set up your business or have been running your company for ten years or more you will no doubt know of the importance of correctly managing your business finances. From payroll and invoicing to vat and bookkeeping, there are many areas to consider and take care of but with careful management and control you can keep your business in great shape.

From new opportunities to employee management and even marketing, for those in charge there are more than a handful of tasks to regularly deal with that as a result leave very little time to focus on financial obligations.

For this reason a number of business owners choose to outsource their business finances to accountants. The expertise, knowledge and understanding that a financial specialist can bring to a business is worth its weight in gold which is why many business owners will happily hand the management of everything from payroll to bookkeeping straight over.

The peace of mind that comes with knowing your business finances are in the best hands possible is unbeatable but do you know what is even better? Knowing you never have to face the dreaded tax return again! A tax return is a legal obligation, whether a retailer, building firm or interior designer as a business you are required to ensure that every year you complete and file your return by the set date.

Whether you have done it once, twice or a million times over filing a tax return can be a complete nightmare but outsourcing can make your life a lot easier…

A business finance specialist will work with you to truly understand your business and compile a clear and accurate return on your behalf.
If you have outsourced bookkeeping, payroll and so on then you’ll know that your finances will be well managed and in the best shape possible which will ultimately max preparing for a tax return far easier.
The cost of outsourcing your return is far less than the cost you would face if you were to hire an in house accountant or worse yet, if you attempted to complete the return yourself only to fail to include details or miss the deadline and be handed a penalty.
A financial specialist will be up to date with any and all rules and regulations implemented by HMRC
Whilst you focus on all other areas of your business an accountant will be dedicated to dealing with your business finances and will therefore plan for your return in advance; ensuring your business never misses the deadline.
Completing a tax return is not where it ends, an accountant will also provide planning tips and ensure you have regular suggestions on how you can save money.

The Benefits Of An Experienced Accountant

For any business owner, managing expenses and dealing with costs is of great importance. Whether a retail store, restaurant or a firm of solicitors it is only natural to want to ensure that as a business you keep on moving forwards and in order to do so you will want to ensure that you spend far less than you make.

The dream financial situation for any business is to have more money coming in then going out and often in order to achieve this business owners can try to take on too much but this isn’t always a wise move. From employee training to sales and business growth; there are a number of issues to deal with including business finances.

Payroll, tax and bookkeeping, business finance is vast to say the least but as such an important part of your business it requires constant care and attention. For this reason many business owners will choose to hire an accountant.

Whether hiring in-house or outsourcing, the benefits of an accountant are plenty…

Experience and Familiarity- From looking at your business profits and losses to understanding tax and vat return the experience that comes with hiring a professional accountant is truly invaluable. From ensuring your business meets all legal financial obligations to helping you cut costs and control your financial position.
Time- Payroll, invoicing, tax returns and bookkeeping; business finances require a great deal of care and attention. Even the most basic of tasks is incredibly time consuming and you could easily find yourself spending days and days dealing with it all. An accountant however could free up your time, giving you the opportunity to focus on developing your business whilst feeling at ease knowing that everything is in the hands of those who know exactly what to do.
Control- Being able to manage finances is one thing but in the hands of an accountant you can control things with far more efficiency. From monitoring where the most money is being spent to providing suggestions on how you can make savings, the right accountant will provide invaluable support for your business. Whether you are looking to purchase new premises, invest in a new business deal or simply wish to keep your business steady, having professional support behind you can make vital difference.

Classification of Accounts – Hints for Journalizing – Advantages of Journal

Personal Accounts

Accounts recording transactions relating to individuals or firms or company are known as personal accounts. Personal accounts may further be classified as :

(1) Natural person’s personal accounts: The accounts recording transactions relating to individual human beings e.g., Anand’s A/c, Remesh’s A/c, Pankaj’s A/c are classified as natural person’s personal accounts.

(2) Artificial person’s personal account: The accounts recording transactions relating to limited companies. bank, firm, institution, club. etc. e.g. Delhi Cloth Mill; Hans Raj College; Gymkhana Club are classified as artificial persons’ personal accounts.

(3) Representative personal accounts: The accounts recording transactions relating to the expenses and incomes are classified as nominal accounts. But in certain cases due to the matching concept of accounting the amount, on a particular date, is payable to the individuals or recoverable from individuals.

Such amount (a) relates to the particular head of expenditure or income and (b) represents persons to whom itis payable or from whom it is recoverable. Such accounts are classified as representative personal accounts e.g. “Wages Outstanding Account”, Pre-paid Insurance Account. etc.

Real Accounts

The accounts recording transactions relating to tangible things (which can be touched, purchased and sold) such as goods, cash, building. machinery etc., are classified as tangible real accounts.

Whereas the accounts recording transactions relating to. intangible things (which do not have physical shape) such as goodwill, patents and copy rights. trade marks etc., are classified as intangible real accounts.

Nominal Accounts

The accounts recording transactions relating to the losses, gains. expenses and incomes e.g., Rent, salaries, wages, commission, interest, bad debts etc. are classified as nominal accounts. As already discussed, wherever a nominal account represents the amount payable to or receivable from certain persons it is known as representative personal account.

Rules of Debit and Credit (classification based)

1. Personal Accounts: Debit the receiver, Credit the giver (supplier)

2. Real Accounts: Debit what comes in, Credit what goes out

3. Nominal Accounts: Debit expenses and losses, Credit incomes and gains.,

Hints for Journalizing

The following discussion will help in diagnosing the transaction with a view to find out which accounts are relevant for passing the journal entry.

1. Treatment of cash/credit transaction.

Read carefully the following transactions:

(i) Purchased goods for Rs. 1,200 cash. .
(ii) Purchased goods for Rs. 1,200.
(iii) Purchased goods for Rs. 1,200 from Arun.
(iv) Purchased goods for Rs. 1,200 from Arun on cash.

Transaction (i) and (iv) are clear as it has been specifically stated that purchases have been made on cash. Thus the entry is :

Purchases account Dr. 1,200 To Cash account 1,200

Transaction (ii) and (iii) are not specific as to whether the purchases are for cash or on credit. However transaction (ii) does not mention any name of the supplier; therefore it implies that the purchases are for cash. Similarly transaction (iii) mentions the name of the supplier but is silent regarding cash-it implies that purchases are on credit: Thus the entry for transaction (iii) is

Purchases account Dr. 1,200 To Amex 1200.

2. Treatment of payment on personal/expenses account.

When payment is made to a person against amount due to him as per his ledger account-the personal account of the creditor should be debited. However if the payment is being made to a person representing business expenditure then the particular expenditure (nominal) account should be debited.

3. Treatment of receipt on personal/ income account.

When amount is received from a person against amount recoverable from him as per ledger account-the personal account of the debtor should be credited. However if the amount received represents business income, then the particular income (nominal) account should be credited.

4. Treatment of trade discount.

In many cases the seller allows to the buyer deduction off the list price. Such deduction is known as ‘trade discount’. Trade discount as such is not recorded in the books. The transaction is recorded with only the net amount i.e. (list price -trade discount).

5. Treatment- of cash discount (full settlement).

In some cases creditor may allow some concession to his debtor to prompt him to make the payment within the period of credit allowed. Such concession is known as ‘cash discount’. It is allowed by the person receiving the payment and represents, expenditure. It is availed by the person making the payment and represents income.

6. Treatment of Bad debts (debtor becoming insolvent).

An amount due from a debtor may become irrecoverable either partially or wholly. Reason may be that he has been declared insolvent or any other. Such irrecoverable amount represents loss to the business and is debited to Bad debts amount.

7. Treatment of Bad debts recovered

It is evident from the above entry that whenever irrecoverable amount is written off the personal account is credited. If after some time any paymentis received against a debt previously written of then it represents income and as such should be credited to an account styled as ‘Bad debts recovered account’. Personal account must not be credited.

8. Treatment of personal expenses of the owner

It is quite common for the proprietor to withdraw cash or goods from the business for personal or domestic use. Sometimes premium on the life policy of the owner may also be paid by the business. Similarly income tax payable by the proprietor may be paid by business. All this represents owner’s personal expenses and are debited to his personal account viz. Drawings account.

9. Treatment of payment/ receipt on behalf of customer or supplier.

In some cases business might pay expenses on behalf of its customers. Such payments do not constitute the expenditure of business. Hence it should be debited to the personal account of the concerned customer.

10. Treatment or exchange or new asset with old one.

Sometimes business may exchange its old asset with new one-only the difference in value is paid in cash. In such cases asset account needs debit only with the actual amount paid.

11. Treatment of goods given as charity/ advertisement.

Business might distribute goods as ‘free samples’ to advertise its products. In some cases it may also distribute goods as charity to boost its image. Both ‘advertisement’ and ‘charity’ are expenses of the business, hence should be debited and purchases account should be credited.

12. Treatment of goods lost in accident/ fire.

In certain case a business might suffer loss of goods due to some accident or fire etc., destroyed or damaged goods might have been insured also. In such cases total value of goods lost or destroyed is credited to purchases account and the (i) insurance claim admitted is debited to Insurance Company (ii) balance is debited to loss by accident/ fire account.

13. Treatment of depreciation charged on fixed assets.

Fixed assets are those properties/ possessions of the business which are used for carrying on of business viz. plant, machinery, building etc. Depreciation is the permanent decrease in the value of an asset due to wear and tear, passage of time and obsolescence. Depreciation is treated as a business expenditure. Depreciation account is debited and the respective asset account is credited.

14. Treatment of payment/ receipt of representative personal accounts.

At the close of the previous accounting year a business might have incurred expenditure which remained unpaid. It is known as ‘Outstanding expenditure’. It is a representative personal account. When actual payment is made in current accounting period the concerned account is debited and cash account is credited.

Advantages of Journal

(1) Transactions are recorded in the chronological order, thus reducing the chances of omitting any transaction.

(2) Transactions, invariably, are accompanied by narration. Thus, the entry is supplemented with basic information regarding the transactions.

(3) Debit and credit amounts are written side by side. It minimizes the chances of entering wrong amount.

Restricted use of Journal

Originally the system of recording the financial transactions developed consisted of (1) writing each transaction, with narration, in the book of original entry,
i.e.. Journal and then (2) posting therefrom to the respective accounts in the principal book, i.e., ledger. As the number of transactions’ grew the system was modified and the transactions of similar
nature say purchases, sales, cash etc. were recorded in sub-journal instead of journal for the following
reasons:

(i) If too many transactions are recorded in journal it will be unwieldy.

(ii) In every business cash balance is required to be ascertained at frequent intervals, say, everyday: therefore it was found convenient to use a separate book for recording cash
transactions.

(iil) By recording transactions of similar nature. in one sub journal, say, purchases of goods in purchases journal saves time and efforts in recording and posting.

Because of the reasons listed above, nowadays, journal is used to record only such transactions which are infrequent. Now a days computerized accounting has made the entry of journal very easy and accurate.

Double Entry System

In the 15th century a Franciscan Monk, Lucas Pacioli, described a method of arranging accounts in such a way that the dual aspect (present in every account transaction) would be expressed by a debit amount and an equal and offsetting credit amount.

Double Entry system is the system under which each transaction is regarded to have two fold aspects and both the aspects are recorded to obtain complete record of dealings. Double Entry system of book keeping adheres to the rule. that for each transactions the debit amount (s) must equal the credit amount(s). That is why this system is called Double Entry.

Advantages of Double Entry System

(i) It enables to keep a complete record of business transactions.

(ii) It provides a check on the arithmetical accuracy of books of accounts based on equality of debit and credit.

(iii) It gives the results of business activities either profit or loss during the accounting period.

(iv) It tells the financial position of the business at a point of time. Total resources of the business, claims of the outsiders, amount due by outsiders etc. are revealed by a statement known as Balance Sheet.

(v) It makes possible comparison of the current year with those of previous years helping the owner to manage his business on better lines.

(vi) It reduces the chances of errors creeping in the accounting records because of its equality principle. .

(vii) It helps to ascertain the details regarding any account easily and accurately. Other systems of book-keeping. In addition to the double entry system, there is also single entry system.

The single-entry system is “a system of book-keeping in which as a rule only records of cash and of personal account are maintained; it is always incomplete double entry varying with circumstances. Such system may be economical but it is incomplete, unscientific and full of defects.

Compound Journal Entries

If in a journal entry only one account is to be debited and only one account is to be credited then such an entry is ‘Simple Journal Entry’. However, in some cases the entry may require more than one debit or credit or both. Such entries are known as compound entries. Compound entries should be created where

(i) Transaction occur on the same day

(ii) One aspect of these transactions is common; and

(iii) Accounts involved are more than two In fact compound entry is the combination of two or more simple journal ntries.

Accountant Job Description

An accountant’s job entails working to ensure that business firms and individuals are keeping good records and paying taxes properly and on time. Though the accountant job description for some accounting positions may be simple, other accountant job descriptions are not quite as clear because of the number of duties that are required.

In general, an accountant performs vital functions to businesses, as well as individuals, of all types by offering a very wide array of business and accounting services, including public, management and government accounting, as well as internal auditing. These four major fields of accounting, and in addition to having a minimum of a bachelor’s degree, each has a separate accountant job description.

1. Public Accountant

A public accountant job description can be summed up in what most people envision as “typical” accountant’s work. It involves performing a broad range of accounting, auditing, tax, and consulting activities for their clients, which may be corporations, governments, nonprofit organizations, and individuals. Specialties in public accounting are often chosen. For example, a public accountant may choose to concentrate on tax matters, such as advising companies about the tax advantages and disadvantages of certain business decisions and preparing individual income tax returns. Other public accountants may choose areas such as compensation or employee health care benefits, or may design accounting and data processing systems. Still other public accountants may choose to specialize in auditing financial statements and inform investors and authorities that statements have been correctly prepared and reported. Public accounts are usually Certified Public Accountants (CPAs), and generally own their own businesses or work for public accounting firms.

2. Management Accountant

Another accountant job description is that of a management accountant. Also called a cost, managerial, industrial, corporate, or private account, management accountants record and analyze the financial information of the companies for which they work. The management accountant job description includes a detailed listing of responsibilities, such as budgeting, performance evaluation, cost management, and asset management. Management accountants are often a part of executive teams involved in strategic planning or the development of new products, where they analyze and interpret financial information that corporate executives need in order to make sound business decisions. They also prepare financial reports for other groups, including stock holders, creditors, regulatory agencies, and tax authorities. Management accountants are usually a part of an accounting department, employed a large company, and may work in many areas that may include financial analysis, planning, budgeting, and cost accounting.

3. Government Accountant

A government accountant works in the public sector, maintaining and examining the records of government agencies and auditing private businesses and individuals whose activities are subject to government regulation and/or taxation. This accountant job description, while detailed, is much more specialized. Government accountants are employed by Federal, State, or local governments, and work to guarantee that revenues are received and expenditures are made in accordance with laws and regulations. Those employed by the Federal government may work as Internal Revenue Services agents or in financial management, financial institution examination, or budget analysis and administration.

4. Internal Auditor Accountant

The accountant job description of an internal auditor can basically be summarized by the job title. Internal auditors verify the accuracy of their organization’s internal records, and check for mismanagement, waste, or fraud. It is an increasingly important area of accounting, because internal auditors examine and evaluate their firms’ financial and information systems, management procedures, and internal controls to ensure that records are accurate and controls are adequate to protect against fraud and waste. They also review company operations, evaluating their efficiency, effectiveness, and compliance with corporate policies and procedures, laws, and government regulations. The accountant job description of an internal auditor can vary with different companies, and may include job duties such as electronic data processing, environmental auditing, engineering, legal auditing, insurance reviews, banking, and health care auditing.

Accountants in all four areas can work for a company, or can be employed by an accounting firm, which would in turn be hired by a company for consulting. An accountant can also be self-employed, and provide accounting services to individuals, businesses, or both.

Most accounting jobs include an accountant job description that requires a bachelor’s degree, at minimum, in accounting or a related field, and some accountant job descriptions might include the requirement of a master’s degree or Certified Public Account (CPA) certification, obtained through a four-part, Uniform CPA Explanation prepared by the American Institute of Certified Public Accountants (AICPA). While the two-day CPA examination is rigorous, and only about 25 percent of those taking the exam pass every part they attempt, CPA certification can greatly assist in the rate of pay received, and in most states, the examination can be taken in two parts, which may assist in preparing for and passing the exam.

According to the United States Department of Labor, employment of accountants and auditors is expected to grow at a faster than average rate, for all accounting occupations from all accountant job descriptions mentioned, through the year 2014. This is due to an increase in the number of businesses nationwide, changing financial laws and regulations, and increased scrutiny of company finances. In addition to these reasons for new accounting jobs opening up, there will also be a need to replace accountants and auditors who will retire or transfer to other occupations.

The field is also becoming more specialized due to technology and new, accurate accounting and auditing software experience becoming a crucial addition to an accountant job description. An accountant job description may include, in addition to educational and technological requirements, strong interpersonal and communication skills, simply due to the fact that most accountants work on teams with others from different backgrounds, and will need the ability to communicate accounting and financial information clearly and concisely.

Regardless of one’s qualifications, competition in the accounting field will remain strong for the most prestigious jobs, as well as for obtaining clients for those accountants that are self-employed

Forensic Accountant – A New Career

       Forensic Accountant 

One of the newer areas, and also the fastest growing area, of accounting is forensic accounting. A forensic accountant has a unique job because the responsibilities involve the integration of accounting, auditing, and investigative skills. Using all of these skills, a forensic accountant is, in summary, a true investigator. Forensic accountants are trained to look beyond the numbers and deal with the business reality of the situation.

A forensic accountant is typically an accountant that is hired by a large firm or company, but can also be engaged in public practice, or can be employed by insurance companies, banks, police forces, government agencies, or other organizations. The forensic accountant would be hired by such organizations to investigate, analyze, interpret, summarize, and present complex financial and business information so that it can be easily understood and properly supported. One that is employed as a forensic accountant can assist corporations in two main ways.

1. Investigative Accounting.

By performing investigative accounting duties, a forensic accountant reviews the factual situation of the company and suggests possible courses of action. A forensic accountant can also assist with the protection and/or recovery of assets, and can coordinate with other experts such as private investigators, forensic document examiners, and consulting engineers in the event that a white-collar crime has occurred. The forensic accountant will also assist with the recovery of assets by way of civil action or criminal prosecution.

2. Litigation Support.

Another main duty of a forensic account is to assist in obtaining documentation to form an initial assessment of the case and identify areas of loss. The forensic accountant may review the relevant documentation to assess the case and identify loss. This may require the financial accountant to assist with settlement discussions and negotiations, as well as attend a trial to hear the testimony of the opposing expert, and to provide assistance with cross-examination.

Forensic accountants become involved in an array of investigations. This may involve:

– Criminal Investigations, where a forensic accountant may be required to prepare a report with the objective of presenting evidence in a professional and concise manner;

– Shareholders’ and Partnership Disputes, involving assignments that require a detailed analysis of numerous years of accounting records in order to resolve, for example, compensation and benefits disputes of shareholders or partners;

– Personal Injury Claims, when a forensic accountant is asked to quantify economic losses resulting from an accident, often calculating resulting economic damage in cases of medical malpractice and wrongful dismissal;

– Business Interruption, reviewing the details of an insurance policy, for example, to investigate coverage issues and the appropriate method of calculating the loss of areas such as business interruptions, property losses, and employee dishonesty (fidelity) claims;

– Fraud Investigations, which involves a forensic accountant’s work in determining funds tracing, asset identification, and recovery, most commonly performed with employee fraud cases;

– Matrimonial Disputes, which require a forensic accountant to trace, locate, and evaluate assets, including businesses, properties, and other personal assets;

– Business Economic Losses, that of which includes areas such as contract disputes, construction claims, expropriations, product liability, trademark or patent infringements, and losses occurring from a breach of a non-competition agreement;

– Professional Negligence, either through a technical perspective, where the forensic accountant will investigate a breach in an agreement, or through a loss quantification; and

– Mediation and Arbitration, where a forensic accountant may be hired to become involved in an alternative dispute resolution so that individuals and businesses may resolve disputes with minimal disruption and with a minimal amount of time.

While each forensic accountant will receive a unique assignment with each client, most assignments will include the following steps.

1. Meet with the client to understand the important facts, people, and issues at hand.

2. Perform a conflict check.

3. Perform an initial investigation.

4. Develop an action plan, setting objectives to be achieved, as well as the methods that should be used to accomplish them.

5. Obtain relevant evidence that may include documents, economic information, assets, or other proof of the occurrence of an event.

6. Perform the analysis, which may involve calculating economic damages, summarizing transactions, tracing assets, performing present value calculations, performing a regression or sensitivity analysis, utilizing a spread sheet, database, or other computerized model.

7. Preparing a final report.

A forensic accountant may be hired by a variety of institutions, including attorneys and law firms; police forces; insurance companies; government agencies; banks, credit unions, and financial lenders; courts; and business owners. They may hire a forensic accountant based on their experience and qualifications, as well as their neutrality to their particular situation, especially if damages are involved.

The typical forensic accountant will have a minimum of a bachelor’s degree, and often a master’s degree, in accounting or a related field. A forensic accountant is also usually a Certified Public Accountant (CPA). In addition to education, a forensic accountant should have personal characteristics that include curiosity, persistence, creativity, discretion, strong organizational and communication skills, confidence, and sound professional judgment.

Forensic accounts that find the most career success are extremely detail-oriented as well. A forensic accountant may be employed by an accounting firm or by a large corporation to perform in-house investigations, or may be self employed as a consultant to such organizations.