the difference between short-term notes payable and bonds payable

A liability is created when a company signs a note for the purpose of borrowing money or extending its payment period credit. A note may be signed for an overdue invoice when the company needs to extend its payment, when the company borrows cash, or in exchange for an asset. An extension of the normal credit period for paying amounts owed often requires that a company sign a note, resulting in a transfer of the liability from accounts payable to notes payable. Notes payable almost always require interest payments. Short-term notes payable are notes that must be repaid with 12 months. One source of financing available to corporations is long-term bonds. (Bonds are almost never short-term). Bonds represent an obligation to repay a principal amount at a future date and pay interest,...

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Capital Lease Criteria

  Transfers ownership of the property                --> to the lessee by the end of the lease term.        Contains a bargain purchase option.        Lease term is                --> equal to 75 percent or more                     ...

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International Financial Reporting Standards

In the over 100 countries that govern accounting using International Financial Reporting Standards, the controlling standard is IAS 17, "Leases". While similar in many respects to FAS 13, IAS 17 avoids the "bright line" tests (specifying an exact percentage as a limit) on the lease term and present value of the rents. Instead, IAS 17 has the following five tests. If any of these tests are met, the lease is considered a finance lease: ownership of the asset is transferred to the lessee at the end of the lease term; the lease contains a bargain purchase option to buy the equipment at less than fair market value; the lease term is for the major part of the economic life of the asset even if title is not transferred; at the inception of the lease the present value of the minimum lease payments...

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Finance lease

A finance lease or capital lease is a type of lease. It is a commercial arrangement where: the lessee (customer or borrower) will select an asset (equipment, vehicle, software); the lessor (finance company) will purchase that asset; the lessee will have use of that asset during the lease; the lessee will pay a series of rentals or installments for the use of that asset; the lessor will recover a large part or all of the cost of the asset plus earn interest from the rentals paid by the lessee; the lessee has the option to acquire ownership of the asset (e.g. paying the last rental, or bargain option purchase price); The finance company is the legal owner of the asset during duration of the lease. However the lessee has control over the asset providing them the benefits and risks of (economic)...

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Capital Lease vs Operating Lease

Firms often choose to lease long-term assets rather than buy them for a variety of reasons - the tax benefits are greater to the lessor than the lessees, leases offer more flexibility in terms of adjusting to changes in technology and capacity needs. Lease payments create the same kind of obligation that interest payments on debt create, and have to be viewed in a similar light. If a firm is allowed to lease a significant portion of its assets and keep it off its financial statements, a perusal of the statements will give a very misleading view of the company's financial strength. Consequently, accounting rules have been devised to force firms to reveal the extent of their lease obligations on their books. There are two ways of accounting for leases. In an operating lease, the lessor...

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Long term liabilities

Long term liabilities are those that are due to be paid in more than an year. Those due in less than a year or on demand are current liabilities. The most important type of long term liability is debt. Preference shares are not debt, but given that they are "debt like" this is often something investors should adjust for. Similarly, some short term debt can keep being renewed, so it in fact provides long term funding. This sometimes happens with overdrafts: they are repayable on demand and therefore short term debt, but a company may maintain an overdraft for many years. Conversely debt instruments that originally had a long term that are now close to expiry are short term debt, and shown as such in the accounts. Long term liabilities are looked at by investors assessing a company's financial...

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Common Stock

As already mentioned in discussing the stock market, a stock is a share in the ownership of a company. Stock represents a claim on the company's assets and earnings. The more stock you are holding, the greater is your ownership stake in the company. Being a shareholder, however does not mean you have any input in the day-to-day running of the business. Instead, the degree of influence of a person holding the stock is restricted to one vote per share to elect the board of directors at annual meetings. Although meaning of the stock is quite easy to grasp, all the variations of the stock can make investing in the stock market somewhat confusing. Common stock is the most typical type of stock. When people discuss investing in stocks in general they are most likely referring...

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Treasury Stock

When analyzing a balance sheet, you're apt to run across an entry under Shareholder Equity called "Treasury Stock". This refers to the shares a company has issued and somehow reacquired either through share repurchase programs or donations. Companies sometimes buy back their shares for a variety of reasons. In most cases, it is a sign management believes the stock is undervalued. Depending upon its objectives, a company can either retire the shares it purchases, or hold them with the intention of reselling them to raise cash when the stock price rises. When a corporation purchases its own stock, the cash on hand is reduced. This lowers the total shareholder equity. In order for investors to know the reduced cash and equity was a result of share repurchases and not debt or losses,...

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Paid in capital

Paid in  capital (also called contributed capital) is a balance sheet item, showing what has been invested by stockholders through purchase of stock from the corporation (not through purchase of stock on the open market from other stockholders). When investors buy shares directly from the company, that is, the company receives and keeps the funds as contributed capital (paid in capital). When shares are bought on the open market, of course, funds go to the investor selling them. Contributed (paid in capital) capital is one of the two main categories on the balance sheet under owner’s equity (the other is retained earnings). Contributed capital, in turn, has two main components: Stated capital, which is usually defined as the stated, or par value of the shares of...

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Retained Earnings on the Balance Sheet

When a company generates a profit, management has one of two choices: They can either pay it out to shareholders as a cash dividend, or retain the earnings and reinvest them in the business.  When the executives decide that earnings should be retained, they have to account for them on the balance sheet under shareholder equity. This allows investors to see how much money has been put into the business over the years. Once you learn to read the income statement, you can use the retained earnings figure to make a decision on how wisely management is deploying and investing the shareholders' money. If you notice a company is plowing all of its earnings back into itself and isn't experiencing exceptionally high growth, you can be sure that the stock holders would be better served...

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Accounting And Reporting Corporations

Companies and close corporations (CCs) must keep the following: records showing assets and liabilities; a register of fixed assets; records containing daily entries of all cash received and disbursed; records of all credit purchases or sales and services received or rendered on credit, in sufficient detail to identify the nature of the transactions and the parties concerned; statements of annual stock taking; records enabling the value of stock at the end of the year to be determined and vouchers supporting entries in the accounting records. A corporation must also keep records of members' contributions, un-drawn profits and revaluations of fixed assets and amounts of loans to and from members, in sufficient detail to identify the nature and purpose of the individual transactions...

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Accounting For Partnership

Most of the on-going accounting for partnerships is the same as for any other form of business organization. The chart of accounts differs only for the equity accounts where we find a drawing account and a capital account for each partner. There are, however, some areas which are peculiar to partnerships. The formation of a partnership, the distribution of income, the admission of new partners and the dissolution and liquidation of a partnership all require special accounting treatment. When a partnership is formed, a separate entry is made for each partner's investment. Assets contributed by a partner are debited to the appropriate accounts. If the partnership assumes any liabilities, the proper accounts are credited. The partner's capital account is then credited for the difference. A partner...

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Accounts Receivable Management

In managing accounts receivable, the following procedures are recommended: Step-1. Establish a Credit policy A detailed review of a potential customer’s soundness should be made prior to extending credit. Procedures such as a careful review of the customer’s financial statements and credit rating, as well as a review of financial service reports. As customer financial health changes, credit limits should be revised. Marketing factors must be noted since an excessively restricted credit policy will lead to lost sales. If seasonal datings are used, the firm may offer more liberal payments than usual during slow periods in order to stimulate business by selling to customers who are unable to pay until later in the season. This policy is financially appropriate when the return on the additional...

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Accounts Receivable Financing

Accounts receivable financing has several advantages, including avoiding the need for long-term financing and obtaining a recurring cash flow base. Accounts receivable financing has the drawback of high administrative costs when there are many small accounts. However, with the use of computers these costs can be curtailed. Accounts receivable may be financed under either a “factoring“ or “assignment arrangement“. Factoring refers to the outright sale of accounts receivable to a bank or finance company without recourse. The purchaser takes all credit and collection risks. The proceeds received by the selling company are equal to the face value of the receivables less the commission charge, which is typically 2 to 4 percent higher than the prime interest rate. The cost of the factoring...

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Basic Accounts Receivable Management

This article will outline some of the basic components for managing accounts receivable, ranging from policies and measurement to outsourcing options. The foundation behind account receivables is your policies and procedures for sales. For example, do you have a credit policy? When and how do you evaluate a customer for credit? If you look at past payment histories, you should be able to ascertain who should get credit and who shouldn't. Additionally, you need to establish sales terms. For example, is it beneficial to offer discounts to speed-up cash collections? What is the industry standard for sales terms? There are several questions that have to be answered in building the foundation for managing accounts receivables. A system must be in place to track accounts receivables....

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Analyzing Inventory

To analyze inventory activity and the resulting accounting transactions, you can use the following two types of reports produced by the NCAS: Daily reports which detail the inventory activity of the previous day, including receipts and receipt reversals transfers to and from warehouses issues and returns cost and quantity adjustments account changes Summary reports which summarize inventory activity for the previous period Each report listed has a brief description of the report, including its contents, use and suggested frequency. This description also includes information on how to access the report: the reporting tool (RMDS or IE), the report group or report series, and the report ID. A sample of each report will be added to the topic at a later da...

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Payroll Accounting

Perhaps one of the most important accounting functions, at least from the perspective of the average worker, is payroll accounting.The wages an organization pays its employees is the actual amount of money a worker receives from an employer.Real wages represent the amount of goods and services workers can buy with their money wages. Benefit packages, on the other hand, can represent a major portion of an overall compensation package provided by an organization, and an important function of a manager is to help design a benefits package which will make the organization attractive to potential and current employees, while balancing the economic realities of the costs associated with each component of the package.According to one expert, "Many employers provide insurance coverage,...

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Business Accounting

As shown by the valuable results of researches on the existing records of accounts, business accounting has traveled a long and winding path to the present double entry bookkeeping system through much trial-and-error for hundreds of years since the beginning of the thirteenth century (Izutani, 1980). Initially, business accounting was formulated as an income determination system for individual companies. With the establishment of the modern corporation system, particularly in the first half of the 19th century, business accounting, which had been working as the income determination system for individual companies, assumed a...

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Forensic Accountant

Black’s Law Dictionary tells us that "forensic" means, "Belonging to courts of justice" (1990, p. 648).A recent term coming into wider use is forensic accounting, which has been described as the application of financial expertise to legal disputes and investigations (Bologna, Lindquist & Bologna, 1995).Consequently, forensic accounting is accounting that involves litigation. "In such circumstances, accountants may be called on to provide expert investigations and evidence" (Hussey, 1999, p. 170).According to Marc A. Siegel (2001), the first step in conducting a forensic investigation is to gather as many details as possible...

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Bankruptcy Accounting

As the term implies, bankruptcy accounting deals with the laws surrounding the various chapters of the Bankruptcy Code.There is a growing need for this type of service.During the 1980s approximately 20,000 businesses a year filed for Chapter 11 protection, while individual bankruptcy filings exceeded 700,000 by the end of the decade (Quintero, 1991). More significant still has been the recent trend of filings, with the majority of the 25 largest bankruptcies in U.S. history have been filed in the last 10 years.A number of companies languish in bankruptcy and appear to be unable to make any apparent progress toward rehabilitation....

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Process in Accounting

The accounting process is a series of activities that begins with a transaction and ends with the closing of the books. Because this process is repeated each reporting period, it is referred to as the accounting cycle and includes these major steps: Identify the transaction or other recognizable event. Prepare the transaction's source document such as a purchase order or invoice. Analyze and classify the transaction. This step involves quantifying the transaction in monetary terms (e.g. dollars and cents), identifying the accounts that are affected and whether those accounts are to be debited or credited. Record the transaction by making entries in the appropriate journal, such as the sales journal, purchase journal, cash receipt or disbursement journal, or the general journal. Such...

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Reversing Entries

When an adjusting entry is made for an expense at the end of the accounting period, it is necessary to keep track of this expense so that the transaction will be allocated properly between the two periods. Reversing entries are a way to handle such transactions. Consider the case in which a note is issued on the 16th of September, with interest payable on the 15th of October. If the total interest to be paid at the end of the 30 day period is $100, then half of the amount would be allocated to the month of September using the following adjusting journal entry: Period-End Adjusting Entry Date Account Title      Debit...

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TRIAL BALANCE IN ACCOUNTING

If the journal entries are error-free and were posted properly to the general ledger, the total of all of the debit balances should equal the total of all of the credit balances. If the debits do not equal the credits, then an error has occurred somewhere in the process. The total of the accounts on the debit and credit side is referred to as the trial balance. To calculate the trial balance, first determine the balance of each general ledger account as shown in the following example: General Ledger Cash Sep  1    7500 17400 25425 Sep  15    1000 28500 Bal.    6825...

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