January 5th, 2009
Sometimes it’s the little things about keeping the books that can drive you nuts, like how exactly to book a loan payment. I hope I can be a resource for you in your day to day dilemmas!
Here’s a question from a reader last week:
I have a loan showing as a liability on my balance sheet. Do I bill it to pay it ,so it shows as an expense to the company?
Because liabilities (loans) have a positive credit balance, in order to reduce it you’ll need to debit that account. The offsetting credit will be to [reduce] cash. However, most loans come with interest. While repayment of loan principal itself is not an expense, interest is. To book the entry you should debit an interest expense account, offsetting with a credit to cash.
All together it looks like this:
Debit to Loan Liability $principal
Debit to Interest Expense $interest
Credit to Cash $payment amount
If you have been booking interest payable (credit balance), then you’ll debit that instead of expense.
Why Isn’t a Loan Repayment of Loan Principal an Expense?
The loan itself is not an expense, but some of the things you finance with those funds are. When money comes into the company in the form of a Loan/Liability, Cash is increased (debited), and a loan is created (credited). When that cash is spent, Cash is reduced (credited) and an expense is increased (debited). Unless of course the Cash is spend on an Asset, in which case you debit the Asset and expense it over time through Depreciation.
I hope that answers your question. Keep ‘em coming!
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By Lela -- 0 comments
January 2nd, 2009
Our business network here at b5 Media is ripe with juicy money news and commentary. Check out these fine posts from around Bizzia this week:
Enjoy and have a great weekend!
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Tags: Bizzia
By Lela -- 0 comments
January 1st, 2009
Happy New Year from Accounting Solver!
Do you have any accounting related resolutions for the new year? I’d love to hear them!
As for me, I’m going to be more vigilant of my time tracking. I have a great spreadsheet I’ve been using for about seven or eight months. I use it to track all the time I spend on my various freelance writing projects. That way I know how much I make per hour on all my different jobs. This is hugely important when deciding whether or not to take on new work, and in prioritizing my currnent work load.
Money’s not everything, but it is money! The problem with my system is that while I’ve been really good at entering the data, I haven’t analyzed it in three or four months!
What’s your accounting goal?
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Tags: accouting resolutions, happy new year, new years resolutions
By Lela -- 0 comments
December 31st, 2008
Mark to market, or fair value accounting is the process of restating assets on the balance sheet reflect their current market value. The accounting rule has gotten a lot of attention lately because of its role in the current financial crisis. The rules have been amended, but the controversy continues.
What on the surface seems like a fairly straight forward rule has many implications. At the forefront now is the fact that financial institutions have had to recognize (take a hit) for billions on (devalued) mortgage-related securities because of the rule. Most economists agree that mark to market accounting has at least exacerbated the problem, if not flat out caused it.
Alex Dumortier at Motley Fool put it well:
You know you’re in a financial crisis when a technical accounting rule becomes front-page news.
Dumortier also does a great job explaining some of the finer points of mark to market.
William M. Isaac at the American Spectator has got a whole series on how mark to market accounting is the major cause of our current economic situation. I encourage you to read up on the subject.
I’m no econ genius, so enlighten me if you can. It’s hard for me to understand how the way we describe something in the financial statements can really be the cause of all this turmoil. Seems to me if the underlying assets are really worth something, the books will even out next year, right? The accountants may be responsible for the rule, but not the leveraged economy it attempts to
represent fairly.
If our markets are really that fragile, then there’s something fundamentally wrong.
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By Lela -- 5 comments
December 30th, 2008
This week I’m featuring a few blogs dedicated to non-profit accounting. We’ll want at least one really good non-profit accounting blog on our Accounting Solver blogroll. Which will it be?
- Non-Profit Accounting - I know, I know - another exciting blog name. However, I think non-profit accountants will find a valuable resource in this site run by the California Association of Nonprofits. There are lots of materials, resources and links related to non-profit accounting.
- Non-Profit Law Prof Blog - Great news and views here on current issues in non-profit accounting.
- Non-Profit SOS - This blog is devoted to all things non-profit, not just accounting. However, there are some wonderful practical resources here so I thought I’d put it out there.
As always, I’m waiting with fingers poised over the keys to hear what you think!
Image: Joshua Davis, Flickr
By Lela -- 0 comments
December 29th, 2008
Accounting rules have been in the news a lot lately. One in particular, the mark to market rule, has become something of a scapegoat for the current economic crisis. I thought we’d take a step back today and look at the purpose of accounting standards and their role in our free market economy.
Why Do We Need Accounting Standards and Where Do They Come From?
To ensure uniformity in financial statements, publicly traded companies must follow a set of rules known as the generally accepted accounting principles (GAAP). Basically, GAAP is designed to help investors (including bankers) compare financial apples to financial apples. Without accounting standards, you’d be on your own to determine the profitability or soundness of a given company.
Accounting standards are the rules everyone agrees to play by.
In the US, the Financial Accounting Standards Board (FASB) develops and issues rules on accounting practices. They work with academia and corporate America to create accounting rules that result in financial statements that are economically correct and useful to investors, without being cost prohibitive to implement.
SEC and Sarbanes-Oxley
In 1934 the Securities and Exchange Act of 1934 granted SEC broad authority to to set, execute and oversee the accounting practices of public companies. However, until recently CPAs who audit the companies were almost entirely self-regulated. Accounting scandals like Enron prompted the SEC and Congress to get more directly involved in the oversight of the standards setting process and in monitoring corporate governance.
The Sarbanes-Oxley Act of 2002 created the Public Company Accounting Oversight Board (PCAOB). They make sure companies are following the accounting rules by conducting inspections of registered public accounting firms and enforcing compliance related to the preparation and issuance of audit reports. They also establish auditing, quality control, ethics, independence, and other standards relating to the preparation of audit reports for issuers.
International Standards
As the world moves to a single economy, the need for international accounting standards is pressing. Investors must be able to compare information about companies with confidence that revenue in Italy will be reported according to the same rules as revenue in the US. The International Accounting Standard Board (IASB) was formed to develop a set of international accounting rules.
Aside from the current kerfuffle over fair value, or mark to market, accounting for distressed assets (like sub-prime mortgages) the move to international accounting standards is the hottest topic in accounting today.
Accounting standards must evolve over time to meet the ever-changing needs of businesses and the the investing public.
Image Credit: SSu, Flickr
Tags: fair value accounting, FASB, IASB, mark to market
By Lela -- 0 comments
December 26th, 2008
Certified Public Accountants are supposed to be your trusted financial advisors. They help you choose the right accounting software, prepare your financial statements, and teach you how to maintain control over your cash flow - not to mention your cash.
Another thing most CPAs will suggest is that your business has a succession plan in place. That is, what happens to the business if certain principals become ill, or leave the business for retirement of other opportunities. This is a crucial component of successful and responsible business plans.
That’s why I’m shocked to learn how many CPA firms don’t have their own succession plan in place. A recent survey of accounting firms by the AICPA found that a staggering 22% of firms do NOT have a succession plan on paper. The importance of these plans can’t be overstated for small, closely held partnerships, which most CPA firms are.
Not cool, guys. Not cool.
I’ll plan to post some succession plan how-to tips here soon! But in the mean time….
Do you have a succession plan in place?
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Tags: CPA firms, succession planning
By Lela -- 1 comment
December 25th, 2008
Merry Christmas! And if you celebrate something else - have a happy one of those!
Image Credit: PhotosoRandomness, Flickr
Tags: merry christmas
By Lela -- 0 comments
December 24th, 2008
One good thing that’s come of the financial crisis is a new commitment to create financial literacy in the American public. Creating lifelong habits is a lot easier when you’re young. Many of the campaigns we’ve seen recently are targeted at teens and young adults. And many incorporate interactive components of social media and gaming.
The latest attempt to educate teens about smart financial choices is a video game created by Missouri State Treasurer Sarah Steelman, JPMorgan Chase & Co, and Visa Inc. The game is part of a Missouri effort to improve the money management skills of high school students.
The interactive money management video game with an NFL theme, "Financial Football" will be distributed free to every high school and public library in Missouri. A classroom curriculum is also available.
"Financial Football" is the centerpiece of Visa’s nationwide educational initiative with the NFL and PLAYERS INC. Together, they hope to help students tackle their financial futures.
A brief message from an NFL star may impact some kids more than parental and teachers’ warnings.
"High school kids need to know how to make smart money management decisions before heading off to college or entering the workforce," said Torry Holt. "It takes the combined efforts of parents, teachers and mentors within the community to give teenagers a strong background in personal finance."
"It doesn’t matter whether you make minimum wage or millions," added Josh Brown. "If you don’t learn to budget, save, invest and pay bills on time, the consequences can be devastating."
Other states soon to launch the program in schools and libraries are West Virginia, Indiana, Ohio, California, Pennsylvania, Colorado, Wisconsin, Nevada, Massachusetts, New Hampshire, Rhode Island, Connecticut, Maine, Vermont, Kentucky, Illinois, Louisiana and Arizona.
Visa claims their study shows 91% of consumers surveyed believe all high school students should take a financial education class before graduating.
What do you think? Should kids have to demonstrate financial literacy before graduation?
Image Credit: Army.mil, Flickr
By Lela -- 0 comments
December 23rd, 2008
I’ve fostered fantasies of returning to school for an MBA for some time, but for me it’s not practical. I’m not in a position that requires the degree, nor do I plan to be. Still, I’d love the knowledge.
Now there’s a systematic way for all of us to learn many of the things covered in a traditional MBA program without setting foot in a classroom. Until a couple of weeks ago, I’d never heard of a PMBA (Personal Master’s of Business Administration). Now I’m telling everyone. Get the list, read the books!
Oliver at Books That Can Change Your Life is reading 52 of the best businesses books in 52 weeks to ‘earn’ his PMBA in a year. He’ll spend $1,500 in the process. Quite a bargain.
Accounting and financial books included on the list are:
While I don’t think you can grasp every nuance of accounting by reading books alone, if you’re trying to understand the big picture and enough details to make intelligent decisions these books will take you far.
Do you have any other great reading lists can you share with fellow Accounting Solver readers?
Image Credit: miss rogue, Flickr
Tags: accounting books, best business books, business books, MBA, personal MBA, PMBA
By Lela -- 0 comments
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