Tag Archives | transaction

Journal Entries (JEs)

See Also:
Double Entry Bookkeeping
Journal Entries For Factoring Receivables
Accounting Principles
Accounting Concepts
Adjusting Entries

Journal Entries Definition

A journal entry is a recording of a transaction into a journal like the general journal or another subsidiary journal. Journal entries for accounting require that there be a debit and a credit in equal amounts. Oftentimes, there is an explanation that will go along with this to explain the transaction.

Journal Entries Meaning

A journal entry means that a transaction has taken place whether it is a sale to a customer, buying goods from a supplier, or building a warehouse. These transactions affect both the balance sheet and income statement.

As said before, journal entry accounting requires that there be an equal debit and credit for every transaction. This is also known as double entry bookkeeping. Many journal accounts have a normal balance. For example, assets have a normal debit balance if the account is increased and it is a credit if it is decreased.


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Journal Entries Example

The following example will use both balance sheet and income statement accounts to show how they work.

Bill has been looking for a certain toy for his son. He walks into Toys Inc. to find it. After some searching, Bill finds a GI Joe for $14 and buys it to take home to his son. The toy cost Toys Inc. $9 to get the toy from its supplier. Thus, Toys inc. will record the following journal entries into the Sales Journal:

Cash………….$14

Sales Revenue…………..$14

COGS………….$9

Inventory…………………..$9

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Journal Entries

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Journal Entries

Originally posted by Jim Wilkinson on July 24, 2013. 

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General Ledger Reconciliation and Analysis

See also:
Account Reconciliation
Standard Chart of Accounts
Problems in Chart of Account Design
Cash Flow Statement
Income Statement
Subsidiary Ledger

General Ledger Reconciliation and Analysis Definition

Define a general ledger as the financial record of every transaction of a company. Commonly, it is referred to as the “books” of the company. In the general ledger, record each of the transactions twice as both a subtraction (debit) and addition (credit). The general ledger is the main accounting record of the company.

Consequently, general ledger reconciliation is the process of ensuring that accounts contained in the general ledger are correct. In short, reconciliation makes sure you place the appropriate credit and debit in the associated accounts. Seemingly simple, this process requires an experienced bookkeeper when applied to small companies. Complicated applications require the hand of a trained CFO or equivalent controller. In either situation, a general ledger reconciliation policy must by enacted to ensure consistency.


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General Ledger Reconciliation Explanation

Not every general ledger account has a detail subsidiary ledger to reconcile to. Monthly all balance sheet accounts should be analyzed for accuracy. In addition, periodically it may be necessary to reconcile revenue accounts, expense accounts and miscellaneous balance sheet accounts.

In these cases the procedures are similar to reconciling an account to a subsidiary ledger. Print a detail general ledger transaction report for the account. Then, eliminate reversing journal entries correcting errors. Finally, investigate any transactions that are unusual in nature. For example a debit entry or decrease to a revenue account would be unusual.

Finally, prepare a detailed schedule of transactions remaining in the final balance.

General Ledger Reconciliation Process

Some wonder “what is general ledger reconciliation?”. Others wonder how to do general ledger reconciliation. For bookkeepers, adhere to the following process:

First, study the accounting policy of the company. Ignorance to this is missing the essential foundation of the process; knowing the rules is key.

Then, gather information. These include receipts, invoices, account statements, invoices, and related financial reports. This data is the information the accounting staff puts into accounts.

Third, ask questions about the accounts. What items did the company purchase? Do they relate to company policy? Why are they included in the given account? When were they spent/made?

Finally, document your work. Proper documentation ensures properly reconciled accounts as much as it ensures effective bookkeeping in the first place.

General Ledger Reconciliation Template

A general ledger reconciliations template can be found at: Microsoft Templates.

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Periodic inventory System

 

General Ledger Reconciliation and analysis

Originally posted by Jim Wilkinson on July 23, 2013. 

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Sale and Leaseback

See Also:
Lessor vs Lessee
Lease Agreements
Capital Lease Agreement
Operating Lease
Working Capital

Sale and Leaseback Definition

Sale-and-leaseback is a transaction in which a company sells its property to another company and then leases that property. The company that sells the asset becomes the lessee, and the company that purchases the asset becomes the lessor. In this type of transaction, the lessor is typically an insurance company, a finance company, a leasing company, a limited partnership, or an institutional investor.

The property sale is done with the understanding that the seller will immediately leaseback the property from the buyer. The details of the lease agreement are arranged for a specific period of time and a set payment rate. Depending on the type of lease arrangement, whether it’s an operating lease or a capital lease, the lessee may or may not record the leased property on its balance sheet.

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Sale-and-Leaseback Justification

Why would a company sell an asset and then lease it? The company may want to free up cash tied up in the property. Also, the company may arrange for a capital lease, in which case it can keep the asset and the liability off of its balance sheet. Finally, since the sale-and-leaseback arrangement is a type of loan, the company may want to enter into this type of deal if the lease payments are lower than the interest payments it would have had to pay if it had borrowed money to finance the purchase of the asset.

Sale-and-Leaseback Advantages

The primary advantage of the sale and leaseback arrangement is that the company selling and then leasing the asset is essentially releasing the cash tied up in that asset prior to selling it. It also continues to benefit from the usage of the asset. If the lease is a capital lease, the company can keep the value of the property off of its balance sheet. Depending on the terms, the sale-and-leaseback arrangement may be cheaper than financing the purchase of the property with a bank loan.

Sale-and-Leaseback Example

For example, imagine a company owns an asset but is having difficulty freeing up cash for current liabilities and short-term debt payments. The company has poor credit, and a bank loan would be very expensive.

The company could instead choose to sell one of its long-term assets to an insurance company. Immediately, they should arrange to lease that asset back for a specific period of time. If the insurance agrees to lease the asset for a rate less than the interest rate the bank wanted to charge the company for a loan, then the sale-and-leaseback arrangement with the insurance company would be the superior alternative.

This way the company is relieved of its cash shortage. It uses the proceeds from the sale to payoff short-term debts and liabilities in order to continue operations. It is also able to continue to benefit from the utilization of its asset. If you’re looking to sell your company in the near future, download the free Top 10 Destroyers of Value whitepaper to learn how to maximize your value.

sale and leaseback

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sale and leaseback

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Point of Sale (POS) Method

Point of Sale (POS) Method Definition

The Point of Sale (POS) Method also known as the Revenue Method or Sales Method is one of the many methods under the Revenue Principle of Accounting. This method records the revenue at the point of sale because cash is received on site or it is reasonably certain that cash will be received soon and is thus a finalized transaction. They commonly use this method in grocery stores or other entities such as Wal-Mart. Companies can also record a sale if the amount of revenue can be measured objectively and the receipt is certain which becomes useful for companies such as a mining or lumber company. Another use of the method can be associated with a service that is provided like cable, car services, and certain utilities.

Point of Sale (POS) Method Examples

Incorporate the method of sales in several different ways. We will give various examples to explain the method.

Example 1:

Suppose that Fred goes into a music store to buy a CD. He makes a selection and then pays 15 dollars cash or the price of the CD to the store clerk. The music store would then use the sales method to record Fred’s purchase of the CD. The sales method would then post the following journal entries in recording the sale.

Cash…………………………………$15
Sales Revenue………………………………..$15

COGS………………………………..$10
Inventory……………………………………….$10

Example 2:

Timber Inc. specializes in the cutting and transportation of lumber. The company has recently sent a load of lumber with a costs of $10,000 to Furniture Inc. Since Timber Inc. has already delivered the goods to the customer (Furniture Inc.), Timber Inc. can go ahead and recognize the revenue because it has been objectively measured and there is reasonable certainty that the company will receive cash in the near future. Therefore, record journal entries as follows:

At time of Delivery:

Account Receivable (A/R)………..$10,000
Sales Revenue………………………………..$10,000

Upon Receipt of Cash:

Cash…………………………………..$10,000
A/R………………………………………………..$10,000

Example 3:

Plumber LLC performs plumbing work to households. Recently, they performed services to Brian because his kitchen drain was clogged. To unclog the drain Johnny the Plumber, an employee of Plumber LLC, snaked the piping and fixed the problem in an hour. Plumber Inc. can go ahead and bill Brian for an hour of service provided by Plumber LLC. Since the service has already been performed, the company needs to recognize the revenue under the sales method as follows:

At the time service is performed:

A/R……………………………………..$100
Service Revenue……………………………….$100

Upon the receipt of cash:

Cash…………………………………..$100
A/R………………………………………………….$100

Point of Sale (POS) Method

See Also:
Accounting Principles
Percentage of Completion Method
Completed Contract Method
Cost Recovery Method
Installment Method

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Materiality Definition

Materiality is the amount that an omission or misstatement within the financial statements will seriously mislead people who use the financial statements of that company.

Materiality Definition

Accounting materiality is often judged by the relative amounts and the nature of each item or transaction. Auditors use this concept everyday during the audit process. During the audit process, gather evidence of material. Then try and assess whether you should do something about that particular. Often times, address these serious issues before they become a problem. If an item is considered to be material, then either look further to address a change or disclose it within the notes of the financial statements.


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Materiality

Materiality

See Also:
Accounting Concepts
Accounting Principles
Audit Committee
Auditor

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Nominal Interest Rate Definition

See Also:
What is Compound Interest
Effective Rate of Interest Calculation
Interest Expense
When is Interest Rate Not as Important in Selecting a Loan?
Interest Rate Swaps

Nominal Interest Rate Definition

A nominal interest rate is the interest rate rate quoted on lending and borrowing transactions. Nominal rates represent the rate of exchange between current and future dollars, unadjusted for the effects of inflation. Since nominal rates are not adjusted for inflation, they do not convey the prices of lending and borrowing transactions as accurately as real interest rates.

Nominal Interest Rate, Real Interest Rate

Nominal interest rates are not adjusted for inflation. Whereas, real interest rates are adjusted for inflation. Make the adjustment with current or projected inflation rates. Furthermore, real interest rates offer a more accurate representation of the prices of lending and borrowing transactions. To calculate real interest rates, use the following formula:

Real Interest Rate = Nominal Interest Rate – Inflation Rate

For example, if a lender offers a loan with a nominal rate of 5% and the inflation rate is 3%, then the lender will earn real interest of 2%. However, if the inflation rate is 7%, then the lender will essentially be losing value on the loan.

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Nominal Interest Rate Definition

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Nominal Interest Rate Definition

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Net Cash

Net Cash Definition

The net cash formula is cash minus the liabilities. It is often used in business much like the current ratio. It determines a company’s ability to pay off its obligations. You can also use it to determine the amount of cash remaining after different transactions.

Net Cash Meaning

Net cash is generally used in testing for a company’s ability to pay off its liabilities. Many investors use this because it is an easy measure and understand if an investment is suitable for taking on. If a company can pay off all or the majority of its liabilities with solely cash then the investment can be considered safe. Its ratio can also be used to determine how much debt a company can take on to support operations or projects. If a company is looking at transactions then it can tell how profitable those particular transactions are for the company. It can also tell whether or not it is suitable for a company to continue going through those transactions.

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Net Cash
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Net Cash

See Also:
Current Ratio Analysis
Quick Ratio Analysis
Financial Ratios
Current Liabilities
Debt Ratio Analysis

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