Is Unearned Income a financial Liability?

Is Unearned Income a financial Liability?

No, Unearned Income is not a financial liability

Reason:

Since it is not an obligation to pay. Two essential conditions for financial liability are 
1) It must be settled into cash
2)It must a contractual obligation, not a legal obligation.

Point to ponder:

Any liability which is settled into cash provided that it is a contractual obligation is a financial liability.
For the Same purpose, Tax liability is not a financial liability as it is a legal obligation and not a contractual obligation

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General concepts about IFRS9 Financial instrument

Is Prepaid rent a Financial asset?

Answer:

No, Prepaid rent is not a financial asset 

Reason:
A financial asset can be classified into the following categories:

-Cash
-Right to receive cash
-shares of another company 
-Derivative

Point to ponder

Any Asset which converts into cash afterward is Financial asset, if it converts into expense it is not a financial asset.

Since Prepaid Rent gradually converts into expense so it is not a financial asset.

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IFRS 9 (Financial Instruments)

Financial Instruments

 Case 1 Journal entries for Issuer 

When Issuer gives Shares/equity to the Investor 

In the books of Issuer 

                                               Debit                     Credit 

Cash                                       100

Share capital                                                       100

(Share capital is an obligation to pay on the issuer)

In the books of Investor 

                                            Debit                    Credit 

Investment                          100

Cash                                                                  100

Case 2: When Loan/debt security or debenture

In the books of Issuer 

                                          Debit                         Credit 

Cash                                  100

Debenture payable                                              100      

In the books of Investor

                                        Debit                           Credit

Investment                      100

Cash                                                                    100

(Investment is the right to Receive cash)               

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Variance, cost accounting

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Terms related to Audit

Materiality= materiality means a matter of significant import, it includes both qualitative and quantitative materiality.

Engagement Partner= The Partner or other person in the firm who is responsible for the Engagement and its performance, including a report that is being issued on behalf of the firm.

Engagement team= All the individuals and staff in a firm performing the engagement or any other person appointed by the firm or a network of firm to perform the procedure on the engagement. It excludes external experts engaged by the former network firm.

Reasonable assurance= High level but not absolute assurance

Those charged with governance= Person responsible for overseeing the strategic direction of the entity.

Practioner= A professional accountant in Public Practice

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Brief analysis of IFRS 9 Financial instument

Financial Instrument (IFRS 9)

A contract that gives rise to Financial assets of one party and Financial liability and Financial liability and equity for another party.

One party is The ISSUER( who issue either Debt security or equity security)

And the Other is the INVESTOR( who invest either in Debt security or equity security)

Debt security = Loans/debentures

Equity security =Shares

Then we have FINANCIAL ASSET, FINANCIAL LIABILITY, EQUITY

FINANCIAL ASSET= Right to receive cash, Shares of another company and derivative

FINANCIAL LIABILITY= Obligation to pay

Equity= Shares

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DEPRECIATION EXPENSE

Depreciation expense

What is depreciation?

Definition of depreciation:

Depreciation is the systematic allocation of a 
the depreciable amount of an asset over its useful life.

1. Depreciation is a process of allocation not of valuation.
2. Depreciation for the year is the portion of the total
    charge under such a system that is allocated to the year.
3. Depreciable assets are sort of long term prepaid 
   expense accounts.
4. Usually Land has an indefinite life so land is
    not depreciated.

What is the difference between Depreciation,
Amortization and Depletion?

1. AMORTIZATION is a process of allocating 
   the amortizable cost of intangible assets.
2. DEPLETION is a process of allocating the cost 
   of using (decreasing) resources,such as mineral deposits.

Rate of depreciation:

Mostly in all the standards depreciation is calculated at the rate of 
10%,which means the useful life of the Non current asset is 
10 years, however in other cases the rate or useful life of the 
A noncurrent asset is mentioned in the question.

Straight-line depreciation:

This method recognizes equal periodic depreciation charges over the
 the useful life of a noncurrent asset,thereby making depreciation a function 
solely of time without regard to asset productivity, efficiency or usage.

In straight-line depreciation method depreciation of every 
the year is the same if full-year policy is in place.

FORMULA FOR CALCULATING  STRAIGHT LINE DEPRECIATION:

DEPRECIATION CHARGE =(cost-residual value)/useful life

FOR THE YEAR

RATE OF DEPRECIATION=100/USEFUL LIFE

OR ALTERNATIVE COULD BE

Depreciation for the year=(cost - residual value)*rate of depreciation

Where residual value is not given, depreciable cost and cost are 
the same amounts

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FIFO METHOD

FIFO METHOD

Following two methods are generally used for measuring the historical
 cost of inventory

1. FIRST IN FIRST OUT (FIFO)
2. WEIGHTED AVERAGE COST(WAVG)

With FIRST IN FIRST OUT METHOD, it is considered that the inventory 
is consumed in the strict order in which it was manufactured or purchased. 
The first items that are received into inventory are the first items that go out.

The FIFO METHOD of inventory valuation is used within the PERIODIC
INVENTORY SYSTEM however it can also be used with PERPETUAL 
INVENTORY SYSTEM.

FOLLOWING RECORD MUST BE KEPT TO ESTABLISH THE 
COST OF INVENTORY USING FIFO:

• The date that units are issued from inventory and the number of units 
  issued.
• The date that units of inventory are received into inventory,the number 
  of units received and their purchase price(or manufacturing cost)

Since it is assumed that the first items received into inventory are the first 
units that are used, it follows that the value of inventory at any time should be 
the cost of the most recently-acquired units of inventory.

The choice of valuation method, FIFO, LIFO OR WEIGHTED 
AVERAGE THEREFORE AFFECTS THE REPORTED PROFITS 
FOR EACH PERIOD.

However, LIFO IS NOT ALLOWED AS A VALUATION METHOD, BUT IT 
CAN BE USED IN COST ACCOUNTING SYSTEMS, WHICH ARE NOT 
GOVERNED BY THE RULES OF ACCOUNTING STANDARDS

The different methods of inventory valuation will give significantly different
 values of closing inventory and cost of sales when the inflation is 
high however for the weighted average method it will be lower which will 
be explained in the upcoming blog.

Let’s have a look on the ADVANTAGES AND DISADVANTAGES OF 
FIFO METHOD:

ADVANTAGES OF FIFO METHOD

1. Easy to understand and can be explained to staff with ease
2. Represents Physical reality
3. Gives a value near to replacement cost

DISADVANTAGES OF FIFO METHOD

1. In a period of high inflation,inventory issue prices will lag behind 
   current market value.
2. Managers may find it difficult to compare costs and make decisions 
   when they are charged with different prices for the same materials.
3. Some managers might find it complex.

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What is Periodic inventory system

As we have discussed in the previous session, in order to prepare a
 statement of comprehensive income we have to calculate gross profit, 
which requires the calculation of the cost of sales figures.

There are two methods for the recording of inventory so as to allow the
 calculation of the cost of sales:-

1. Perpetual inventory system what is a perpetual inventory system

perpetual inventory system general entries

2. Periodic Inventory system

Here in this session, we will analyze what is a periodic inventory system.

Periodic Inventory system

The period inventory system is also known as a Period end system.

Under the periodic inventory system, two ledger accounts are used 

1. Purchase account which is used to record all purchases during the 
   year 
2. Inventory account which is used to record the value of inventory at
    the beginning of the financial year 

Under the periodic inventory system, Inventory balance and COGS are 
not updated after every sale and are calculated at the year-end hence no
 COGS is maintained in trial Balance during the year. A separate account 
for opening stock, Purchases, Return outward and carriage inward for
 accumulating the cost of inventory is maintained.

Physical counting is performed to determine closing stock, the amount 
of closing stock is determined and the remaining amount is COGS.

Periodic inventory system general entry

In periodic inventory system Quantity schedule is used

Example:- Following is an example of Quantity schedule

Description	Units	Rates	Amount
opening	400	6.25	2500
purchases	300	6.50	1950
purchases	200	6.75	1350
purchases	500	6.8	3400
purchases	300	7.00	2100
Available for sale	1700		11300 (Total)
Sold	(1200)
Closing stock	500

SOLUTION VIA FIFO METHOD:-

Closing stock

                

300	@ 7.00	2100
200	@6.80	1360

TOTAL=3460

COGS:-

OPENING INVENTORY	2500
PURCHASES	8800
AVAILABLE	11300
CLOSINGSTOCK	(3460)
COGS	7,840

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