Business Accounting » 2007

Accounting For Bill Of Exchange-Bills Payable(Part3)

Monday, October 29th, 2007

In earlier article Part 2, the accounting for Bills Receivable have been dealt with.

This article looks at the accounting for Bills Payable.

Bills Payable

As explained in Part 1 &2, 1. The bill of exchange after it is accepted is known as bill receivable to the drawer and PAYABLE TO THE ACCEPTOR [ When a drawee accepts the bill and signs he/she is known as the acceptor. The acceptor is primarily liable on a bill to the drawer so long as the drawer retains the bill. When the bill is negotiated and transferred to a payee, the drawer than become liable on the bill as well as the acceptor.] Refer below for the Accounting entries for Bills Payable and a simple illustration to demonstrate how to pick up Bills Payable in the Ledger Accounts.

Accounting Entries For Bills Payable

	DR	CR
Face value of bill of exchange accepted for payment to a creditor:
Creditor’s account	XX
Bills Payable account		XX

Face value of bill paid on maturity:
Bills Payable account	XX
Bank account		XX

Face value of bill returned:
Bills Payable account	XX
Creditor’s account		XX

Interest charged by customer due to return of old bill and re-issue new one:
Interest Payable account	XX
Creditor’s account		XX

Face value of new bill issued being face value of old one plus interest charged
Creditor’s account	XX
Bills Payable		XX

Illustration: On 1/1/200X, A sold goods to B for $50,000 and drew a bill on B at four months in settlement. B accepted the bill. On 30/1/0X, A discounted the bill with the bank at 6% per annum. At maturity, B failed to meet his bill and the holder had recourse against A. On 1/5/0X, A drew and B accepted a new bill at three months for the amount of the original bill, plus interest at 12% per annum.

Question: Show the ledger accounts in B’s books.

Solution: In B’s Books:

Bills Payable Account

		$			$
30/4	A’s account- Bills dishonored	50,000	1/1	A’s account-Bills accepted	50,000
			1/5	A’s account	51,500

A’s Account

		$			$
1/1	Bills Payable a/c- bill accepted	50,000	1/1	Purchases	50,000
1/5	Bills Payable Face value- $50,000 plus interest charged	51,500	30/4	Bills Payable a/c-Bills dishonored	50,000
			1/5	Interest payable	1,500

Interest Payable Account

		$			$
1/5	A’s a/c-interest charged	1,500

Note:On maturity, the bank will present the bill to B. On its dishonor, the bank will hand the bill back to A and will debit A’s bank account with the face value of the bill. In A’s book, the amount is debited back to B’s account to show that B is still in debt.

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Accounting For Bill Of Exchange-Bills Receivable(Part2)

Monday, October 29th, 2007

In Part 1, the common terms used in Bill Of Exchange have been explained.

This article deals with the accounting for Bills Receivable which are defined as:

Bills Receivable

As explained in Part 1, 1. The bill of exchange after it is accepted is known as bill receivable to the drawer and bill payable to the acceptor [ When a drawee accepts the bill and signs he/she is known as the acceptor. The acceptor is primarily liable on a bill to the drawer so long as the drawer retains the bill. When the bill is negotiated and transferred to a payee, the drawer than become liable on the bill as well as the acceptor.]

Below shows the accounting entries of Bills Receivable and an illustration on how to pick up the Bills Receivable in the Ledger Accounts.

Accounting Entries For Bills Receivable

	DR	CR
When the bill of exchange is received from the customer:
Bills Receivable account	XX
Customer’s account		XX

Bill paid on maturity by customer:
Bank account	XX
Bills Receivable account		XX

Where the bill has been discounted:
Discount Charges account	XX
Bills Receivable account		XX

Bill endorsed over to creditor
Creditor’s account	XX
Bills Receivable account		XX

Face value of bills dishonored where it has not been discounted or endorsed:
Customer’s account	XX
Bills Receivable account		XX

Face value of bills dishonored where It has been discounted with a bank:
Customer’s account	XX
Bank account		XX

Face value of bills dishonored where it has been endorsed over to a creditor:
Customer’s account	XX
Creditor’s account		XX

Face value of Bill returned:
Customer’s account	XX
Bills Receivable account		XX

Interest charged to customer as a result of returning old bill and issuing a new one:
Customer’s account	XX
Interest Receivable account		XX

Record with new bill amount being face value of old one plus interest charged
Bills Receivable account	XX
Customer’s account		XX

Illustration: On 1/1/200X, A sold goods to B for $50,000 and drew a bill on B at four months in settlement. B accepted the bill. On 30/1/0X, A discounted the bill with the bank at 6% per annum. At maturity, B failed to meet his bill and the holder had recourse against A. On 1/5/0X, A drew and B accepted a new bill at three months for the amount of the original bill, plus interest at 12% per annum.

Question: Show the ledger accounts in A’s books.

Solution: In A’s Books:

Bills Receivable Account

		$			$
1/1	B’s account	50,000	30/1	Bank-bill discounted	49,250
1/5	B’s account	51,500		Discount charges a/c	750

B’s Account

		$			$
1/1	Sales a/c	50,000	1/1	Bills Receivable a/c	50,000
30/4	Bank a/c	50,000	1/5	Bills Receivable a/c	51,150
1/5	Interest Receivable a/c	1,500

Bank Account

		$			$
30/1	Bills Receivable	49,250	30/4	B’s account -bill dishonored	50,000

Discount Charges Account

		$			$
30/1	B’s account	750

Interest Receivable Account

					$
			1/5	B’s a/c	1,500

See next article Part 3 on Accounting for Bills Payable

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Terms Used In Accounting For Bill Of Exchange (Part1)

Monday, October 29th, 2007

Before we can do any accounting for bill of exchange,we at least need to understand cthe following commonly used terms.

Basics:

1. Definition of a Bill of exchange:

“is an unconditional order in writing, addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand, or at a fixed or determinable future date, a sum certain in money to or to the order of a specified person or bearer”

2. Parties to a Bill of exchange:

There are three (3) parties to a bill viz:

(i) Drawer - the party who draws the bill and signs it ( usually creditor)

(ii) Drawee - the party to whom the bill is addressed (usually debtor)

(iii) Payee – the party to whom the bill is expressed to be payable 3. When a drawee accepts the bill and signs he/she is known as the acceptor. The acceptor is primarily liable on a bill to the drawer so long as the drawer retains the bill. When the bill is negotiated and transferred to a payee, the drawer than become liable on the bill as well as the acceptor.

4. The bill of exchange after it is accepted is known as bill receivable to the drawer and bill payable to the acceptor 5. When a bill receivable is discounted, the bill is actually being sold to the discount house for cash. The difference between the amount stated in the bill and the cash received is known as discount. This discount is the consideration payable for obtaining the money in advance of maturity date. The discount house will then hold the bill until maturity when it will present it to the debtor for payment.

Further Related terms used :

Dishonored bill	When a bill is not met by the acceptor on maturity
Noted dishonored bill	When the bill is being dishonored, it is often noted which means that the bill is handed to a solicitor acting as a notary public who will record the reasons for it dishonor to avoid any future dispute. The expenses incurred by reason of the dishonor of the bill must be charged to the person who dishonored it.
Returned Bill	Where a bill is returned, the bill is actually being withdrawn by the acceptor to avoid dishonor. A new bill maturing at a later date is given in place of the old bill.
Rebated bill	A bill that is met before the due date. Usually happens for the purpose of obtaining possession of goods or documents against which the bill was drawn and which cannot be released until the bill is discharged. A rebate representing the interest on the amount of the bill for the period unexpired is allowed.

Refer next article on Accounting & Example of Bill of Exchange

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What is Responsibility Accounting?

Saturday, October 27th, 2007

Responsibility Accounting is narrated as it’s very closed linked to budgetary control/budgeting.Responsibility Accounting is a system where:

managers are held responsible for the difference between the actual performance and those budgeted;

the managers are closely involved in the planning and controlling of the resources and

has a Responsibility centre which is a division or department in the organization for them to be responsible for their performance.

There are basically the following four types of Responsibility centres:

COST CENTRE

Here, the manager is responsible for costs.

Examples like the manager for Purchasing department and Maintenance department

REVENUE CENTRE

Here, the manager is responsible for generating sales.

A typical example is the Sales Department

PROFIT CENTRE

The manager is responsible for both revenue and cost. The reason been Revenue minus Cost is the Profit.

The manager is therefore overall responsible or accountable for making profit for the company.

A company has many restaurants which are all profit centre. A manager is assigned to each restaurant to make sure it is a profit centre.

INVESTMENT CENTRE

An example of an investment centre is a Corporate division responsible for project investments.

Here, the manager is responsible for the investments which includes all the revenue, costs and investments (invested capital or assets)

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Type Of Budget-Zero Based Budget

Saturday, October 27th, 2007

This article explain about the Zero Based Budgeting-its introduction/origin/history and the advantages and disadvantages.Introduction to Zero-based budgeting:

Zero based budgeting is not at all new. It was started in government budgeting in Great Britain and in 1962, the US Department of Agriculture devised the zero-based budgeting approach.

Zero Based Budgeting is an approach to budgeting that starts from the premise that no costs or activities should be factored into the plans for the coming budget period, just because they figured in the costs or activities for the current or previous periods. Rather, everything that is to be included in the budget must be considered and justified.

Zero-based budgeting naturally has always being vogue with management and usually is their keynote during the annual budget preparation .

They will always caution those preparers of annual budget: “ to justify each item of expenditure and avoids the mindset of accepting last year’s expenses as the starting point and then add some % factor into them.

Let starts with the various advantages of using Zero-based budgeting approach:

The main benefit is to focus attention on the actual resources that are required in order to produce an output or outcome, rather than the percentage increase or decrease compared to the previous year. More importantly, it complies with management’s directive not to blindly follow last year figure;It can be useful for shaking up a process that may have grown stale and counterproductive over time.
By starting at zero, it therefore increased all level of managers’ awareness first to identify their specific objectives, quantify them and consider the most cost effectiveness ways of achieving them which can lead to better resource allocation
Is an adaptive approach to changing circumstances

From a practical standpoint, if initially a company have utilised the traditional approaches of adding % to last year figure and then revert to zero based, normally they will be quite astonished to see expenses which in the first place should not be there. Hopefully, they will question these detailed costs. This therefore facilitates participation in the budgeting process;
Generally report some improvement quantitatively or qualitatively. That is, the process has either saved money, improved services, or both.
Make budget discussions more meaningful during review sessions.
It is more user friendly to operational managers than the traditional incremental budget model. It moves the process away from the bookkeeper’s number crunching spreadsheets, and engenders a balanced partnership between the finance professionals and the budget holders in the analytical and decision-making processes

Next, what are the cons or limitation of zero-based budgeting:

May increase the time and expense of preparing a budget. This is particularly true as it takes a lot of managerial time. It takes a considerable amount of time to go through the process of reviewing operations in enough detail to justify costs each budget cycle without relying on past expenditures.
Can make matters worse if not done in the right way. A substantial commitment must be made by all involved to ensure that this doesn’t happen.
The success of adopting zero-based budgeting hinges strongly on leadership that is dedicated to the task. It is important that the reviewer of the budget should not have a pecuniary interest in maintaining the status quo. If we involved people with self interest in the zero based budgeting, this will prove counterproductive as they will be very defensive to protect their interests.
As zero based budgeting involves a lot of time, it should not be conducted for every department, every year. Such a move may prove impossible to manage. Hence we should only choose several departments/divisions and by rotation basis.

Perhaps, a solution to onerous burden of preparing zero-based budgeting is that instead of re-establishing each line of expenditure from zero, the reverse approach is to have the last year figures and then deduct out all known and major expenditures and leaves with it the minimum operating expenditure of the company. By using this so-called working backward approach, much time is saved.

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Type Of Budget-Incremental Budget

Saturday, October 27th, 2007

There are many type of budget. This article discuss about the Incremental Budget, its pros & cons.

Incremental budget

Basics:

a budget prepared using a previous period’s budget or actual performance as a basis with incremental amounts added for the new budget period

and

allocation of resources is based upon allocations from the previous period.

Advantages of incremental budgeting

Relatively simple to use and easy to understand
The budget is stable and change is gradual.
Managers can operate their departments on a consistent basis.
Conflicts should be avoided if departments can be seen to be treated similarly.
Co-ordination between budgets is easier to achieve.
The impact of change can be seen quickly.

Disadvantages Of incremental Budgeting

Unlike zero based budget, incremental budgeting assume that the activities and methods of working will continue in the same way hence it fails to take into account changing circumstances.
As it is merely a marking up the previous year budget, it’s too simple a method where it does not provide incentive for employees to develop new ideas/ to innovate.
As it encourages spending up to the budget so that the budget is maintained next year. With this spend it or lose it mentality, cost cannot be reduced.
The budget may become out of date and no longer relate to the level of activity or type of work being carried out.
The priority for resources may have changed since the budgets were set originally.
There may be budgetary slack built into the budget, which is never reviewed-managers might have overestimated their requirements in the past in order to obtain a budget which is easier to work to, and which will allow them to achieve favourable results.

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Understand The Difference Between A Flexible & Fixed Budget

Saturday, October 27th, 2007

This article explains what is a FLEXIBLE budget and the difference between a fixed and flexible budget is being explained:-

A flexible budget is a budget which is designed to change in accordance with the LEVEL OF ACTIVITY attained.

It is also known as Variable budget as the budget recognizes the difference in cost behavior namely fixed and variable costs in relations to fluctuations in output or turnover. The budget is designed to change appropriately with such fluctuation.

For a fixed budget, the budget remains unchanged irrespective of the level of activity actually attained.

The fixed budget is prepared based only on one level of output.

Therefore, if the level of output actually achieved differs considerably from that budgeted, large variances will arise.

For some companies, due to the nature of business does not suit fixed budget preparation:

Affected by weather condition like the soft drink industry;
Companies frequently introduce new product line like the food canning industry;
Production is carried out only when orders are received from customers like shipbuilding,aircraft industries;
Affected by changes in fashion like millinery trade;
Export orientated business

THE MAIN DIFFERENCE Between Fixed & Flexible Budget:

For a fixed budget, the figures are for a SINGLE level of activity while a flexible budget is prepared for DIFFERENT levels of activity;

Under fixed budgets, managers are held responsible for variances not under his control ( both fixed and variable cost);

The fixed budget is never able to assess properly the efficiency and actual performance of the manager.

For example, a fixed budget is set with a planned 8,000 hours but an actual 10,000 hours are recorded, from both the motivational or control point, it is difficult to gauge the efficiency of the manager(s) who are involved in the manufacture of the output at that actual level;

The flexible budget allows more meaningful comparison as it flexs to the actual volume. It computes what costs should have bee

Archive for October, 2007