Tangible Assets

What is Tangible Assets

Tangible assets are those assets have physical existence . The example of tangible asset are Land, Building, Machinery and Inventories. The Tangible assets form an important part of financial statements . Tangible assets  are kept in the organization for production , supply of good , and administrative purposes.

Types of Tangible assets

There are mainly two types of tangible assets . Long term Tangible asset are those asset which has useful life for more than one year also known as Fixed Assets. Example of long term tangible asset are building, plant and machinery.

The other type of tangible asset are current tangible asset which are expected to be utilized within one year. The assets are called current Tangible assets. Examples of current tangible assets are inventories items.

Useful life of Tangible Assets

This refers to the period during which the economic benefit would be derived from the assets. In other word it is the period during which tangible asset will be  utilized by the organization. 

Accounting Treatment of Long term Tangible Asset

1. Initial Recognition

Initially assets would be recognized at cost.

2. Subsequent Recognition 

subsequently asset may be recognized at cost or revalued amount.

Impairment of Assets

Impairment of Assets

Impairment is a situation where the carrying amount of an assets exceeds its market value or value in use . The asset is to be impaired and adjusted for the impairment effect.

Market value is simply the market price prevailing in the market for the same asset.

The value in use is the present value of future cash flow expected to result from the use of assets. There are many indication which require that asset need to be tested for impairment.

Types of indication for impairment of Assets

There are mainly two types of indication of impairment of asset . one is internal indications and other is external indications. The internal indications include the damage to the property, heavy losses,  employee turnover. The external indication includes the decline in market value of asset and adverse economic conditions.

Accounting Treatment of Impairment of Assets

The carrying amount of assets is compared with market value or value in use ( whichever is lower) and any excess amount is charged to profit and loss account.

However if any amount is available in revaluation surplus then the excess may be adjust against such amount to the extent of surplus available.

Intangible Assets

Intangible Assets

Intangible assets are those assets having no physical existence. The famous examples of such assets are logos, Trade Marks, Good will, Employees competence, Customer list.

Types of Intangible Assets

There are two main types of intangible assets. one intangible assets which can be expressed in financial terms. for example , goodwill, trade mark , logo and other assets which cannot be expressed in financial terms , for example, customer list, employee competence or trust. The standard deals only for those which can be expressed in financial terms.

Accounting Treatment of Intangible Assets

1. Initially Recognition 

Initially the intangible assets are recognized at cost. 

2. Subsequent Recognition of intangible Assets

subsequently measurement of intangible assets at cost or at fair value mode.

a. Cost Model

The asset has finite useful life will be depreciated over its useful life . In case asset has infinite useful life it will not be depreciated rather tested for impairment

b. Fair value Model

 In case of fair value model the active market conditions must be satisfied. Those condition includes the items are similar, buyers and seller are available and public can freely get the prices. 

Revenue

What is Revenue

The revenue is gross cash received which would ultimately result in increase of equity other than contribution of share holders. it is very important to remember that revenues is only gross inflow whereas the profit is a net inflow, furthermore, the items like taxes and import duties are not form part of revenue because those amount are collected on behalf of Govt and will not result in an increase of equity.

What are Types of Revenue

There are many types of revenue ,however, the main categories of revenue are as under:

1. Sale of Good
2. Rendering Services
3. Commission
4. Interest
5. Royalties
6. Dividends

Revenue Measurement

Revenue is measured at fair value of consideration received or receivable. For example Mr. A sold a washing machine to B at USD 500 , where the market value of machine is 800 USD .The revenue recognized by Mr. A will be 800 USD being the fair value of washing machine instead of $ 500.

Revenue Recognition.

1. Revenue Recognition from Sale of Good

 revenue from the sale of good will be recognized when

1. Risk and reward of good has been transferred to buyer
2. Managerial control have been transferred to buyer
3. The amount of revenue can be measured reliably
4. it is expected that amount of revenue will be received

Examples of revenue recognition from sale of good

A is selling the washing machines on behalf of B for a fixed commission , where A has right to return the unsold washing machines to B without any penalty . in this case B will not recognized revenue as risk and reward have not been transferred to B.

A sold washing machines to B and did  issue an invoice to B of $ 500 subject to change as Mr. A has not yet calculated the imported cost on washing machine. in this case Mr. A will not recognized the revenue because the amount of revenue cannot measured reliably as this is subject to change.

2.Revenue Recognition from rendering Services

The revenue shall be recognized subject to following condition.

1. The amount of revenue can be measured reliably
2. it is expected that amount of revenue will be received
3. The extent of services rendered can be measured reliably.

Example of Revenue recognition from rendering Services

A need to install 100 Air condition at facility of Mr. B. At Balance sheet date all 100 Air condition are partly installed. An inspection by third party verified that all Air conditioner are partly installed and installation is vary in each single installation. in above stated situation the stage of completion of installation cannot be measured accurately, therefore no revenue will be recognized at balance sheet date.

3.Revenue Recognition from Interest, Royalties, Dividend

The revenue shall be recognized subject to following conditions

1. The amount of revenue can be measured reliably
2. it is expected that amount of revenue will be received
3. Interest revenues will be recognized on bases of effective interest Rate
4. Royalties revenue will be recognized on accrual bases
5. Dividend revenue is recognized on bases of share holder right to receive

Example of Revenue recognition from Royalties

Mr. has received 300,000 royalty for mining activity shall be carried out by Mr.B for expected output of 3000 tons in coming three year. in first the output is 100 tones.

 in this case the amount of revenue recognized will be 10,000 UDS because only 100 tones has bee extracted which form bases of accrual recognition.
per ton royalty = 300,000/3000 = 100 USD
100 tons Royalty= 100 tones * 100 = 10,000 USD

4. Revenue Recognition from Dividend Income

Mr.A has declared a dividend of $ 300 as on 30 September ,2014 per share however the payment shall be made at the end of next year i.e 31 December ,2015. in this case Mr B will recognized revenue as on 30 September ,2014 because has right to receive the dividend.

Lease

What is  Leases

Leases means that you give some one something on rent.

What are Types of leases

There are mainly two types of leases one is finance lease and other is operation lease. Under finance lease the risk and reward are transferred to buyer where under operating lease such risks and rewards remain with seller. the classification of lease is decided at the time of lease agreement. lease of land is normally considered to be operating lease because economic life of land is indefinite.

Conditions for finance lease

The following condition must be fulfill to classify the lease as finance lease

1. Risks and rewards has been transferred to buyer
2. Buyer uses the major economic benefit of the asset
3. Buyer has option to buy the asset at end of lease term
4. asset can only be used by buyer because of special nature
5. buyer can cancel the lease during the lease term

Accounting of Finance and operating leases

1. under finance lease the asset is recognized in the books of lessee where under operating lease asset appear in book of lessors.
2. Under finance lease lessee charge the depreciation expense for leased asset under operating lease no depreciation is charged by lessee.
3. Under finance lease
4. Under operating lease rental is treated as expense in book of lessee.

Inventories

Accounting of Inventories

Inventories is a technical word used for stock. inventories form an important part of business and change in value of inventories has direct effect on profit . for example the amount of closing stock is overstated by 100 $ means one have overstated the profit by $ 100. therefore inventories is considered to be one of the major area of manipulation of accounts.
Cost of inventories include the purchase cost, cost of conversion and other cost to bring the inventories to business location. cost of purchase includes the invoice price minus trade discount, inward transportation, handling cost, custom duties and other direct taxes. Cost of conversion directly allocated cost and systematically allocation of variable and fixed production overhead cost.
Types of costs not form part of inventories

1. Storage Cost other than important as production processes
2. Selling Cost
3. Wastage or Error Cost
4. Administrative handling

Example of Storage cost
Mr. A is engaged in production of ice cream and cold storage expense cost 2 $ per cup of ice cream. Mr. A will include this cost as inventory cost and cold storage is important element of production process.
Types of inventories
The main types of inventories are as under

1. Raw Material to be used in production
2. Work in progress
3. Finished Good
4. Tools and supplies

Measurement of inventories
Inventories are measured at lower of cost or Net realizable value. Normally the net realizable value is selling price , however, the exact definition is selling price minus cost of completion an necessary expenses to sell.
Examples of NRV
Mr. A has inventory of washing machines 100 each cost 100 , however, Mr. A expect that he could only sale the machines for 80 $ each. in this case the inventories would be value at 8,000 ( because selling price is lower than cost)
Mr. A has inventory of washing machines 100 each cost 100 , however, Mr. A expect that he could only sale the machines for 80 $ each , furthermore,Mr. A is required to install a new timer in the washing machine as per the market demand and without such timer there is fair chances that machines can not be sold. in this case the inventories would be value at 6,000 ( because selling price is lower than cost 8,000- 2,000 cost necessary to make sale)

Investment Property

Investment Property

Investment property is a property kept to earn rental income from it or for the purpose of capital gain, however, it does include the property held for own use or sale.
Accounting Treatment of Investment Property.

Accounting Treatment of Investment Properties

1. Initial Recognition

Initially the investment property is recognized at cost. 

2. Subsequent Recognition

Subsequently the investment property may be recognized at cost of at fair value. 

a.Cost Model

When property is recognized under cost model depreciation is charged and property is shown in balance sheet at carrying amount. 

b. Fair Value Model

When investment property is valued at fair value then no depreciation is charged and increase or decrease in fair value is charged to profit and loss account.

Earning Per Share

Earning Per Share

Earning per share simply mean how much a share investment has earned or in other word total profit is divided by number of ordinary shares. Earning per share is important indicator because investment is made in entity for profit. Most of the investor don't have the deep accounting understanding and therefore are unable to understand the financial statement, therefore , EPS give them an idea about the entity performance and help them to make informed decision.

Types of Earning Per Share

There are mainly two types of earning per share.

1. Basic Earning per Share
2. Diluted Earning Per Share

Accounting Treatment of Earning per Share

it is important to remember that earning per share is a disclosure requirement and not an accounting transaction like revenue, therefore, EPS is not recorded in books of account rather it is calculated and disclosed in financial statements. 

Basic Earning per share is calculated simply dividing the profit by number of ordinary shares. when there is additional issue of shares during the year then it is divided by average number of shares outstanding during the year. 

In case there is bonus issue during the year , then bonus issue is treated to have been issued at the start of year because bonus shares bring no additional resources to the organization.


In case there is right issue during the year , then it involves more complex calculation . first of all theoretical ex Right price is calculated then this price is used to calculate an adjustment factor and then this adjustment factor is multiplied with number of shares outstanding before such issue.

Diluted earning per share

Diluted earning per share is calculated on the bases that how the earning per share is effect if the shares has option to be issued are issued.

Types of Diluted Earning per Share

There are basically two types of Diluted Earning per share

1. Convertible debts are converted into shares
2. Share under options are issued.

Limitation of Earning per share

The earning per share is calculated from the historical information and does not take into account future prospect of entity, moreover, the earning per share is not a sole performance indicator and should not be look in isolation.

Borrowing Costs

What is Borrowing costs

Borrowing costs simply the cost of borrowing of funds and primarily these cost are interest charged by the lender, however, those cost may also include the cost necessary to arrange the borrow.
Accounting Treatment of Borrowing Costs.

Accounting Treatment of Borrowing Cost

Borrowing cost are charged as expenditure in the related period , however, in case funds are borrowed to construct an asset which takes substantial time for its completion, then, such costs are capitalized.

 It is important to remember that during the suspension period of construction and upon completion of construction no borrowing cost will be capitalized. furthermore, any temporary investment income from the investment of borrowed fund is deducted.

What are condition of Capitalizing the borrowing Cost

Conditions for capitalization of borrowing costs.

1. Assets takes substantial time for its completion
2. interest is being incurred against such borrowing
3. Construction is being constructed

Types of construction Contracts

Types of construction Contracts

There are basically two types of construction contracts

1. Fixed Price Contract
2. Cost Plus contract

Fixed price contract is such a contract where a project has a fixed price ,However ,any agreed variation in project may be charged by the contractor.
Cost Plus contract is such a contract where contractor charged a fees for his services . it means the contract is reimbursed with cost plus fees .

Advantage of Cost Plus Contract

The biggest advantage of cost plus contract is guaranteed profits unless and until some unseen circumstances the contractor knows his profit ration and this is a risk free investment. The risk free investment is a great opportunity.

Disadvantages of Cost Plus Contract

The biggest disadvantage of cost plus contract is the cost control as contact awarding party has to reimbursed the cost therefore contractor give less consideration to cost controls.