Companies and individuals use bank accounts to facilitate their transactions. These accounts also come with the safety of their money and other benefits. However, these parties must also pay the bank for their services. The payments constitute an expense for the account holder while being an income for the bank. In most cases, these fees fall under bank services charges. What is a Bank Service Charge?A bank service charge is a fee that a bank charges its customers for the various services rendered. These services may include maintaining an account, processing transactions, issuing checks, etc. Usually, bank services charges cover the bank’s costs for providing these services and generating revenue. However, it may not be the primary income source for banks. Banks deduct bank services from their customer's accounts. Depending on the type of fee, the charge may occur at different intervals. For example, some banks deduct a monthly maintenance fee for accounts. On the other hand, some may be an annual or per-transaction basis. For customers, these service charges represent a deduction in the account balance. What is the accounting for a Bank Service Charge?Several factors determine the accounting treatment of bank service charges. The most crucial of these is the type of charge on the accounting. However, accounting standards may also dictate how companies account for these charges. Generally, this process involves recording an expense while decreasing the balance for the specific account in the cash book. Companies may maintain a separate account for each type of bank service charge incurred. This division may help assess the type of expense for further analysis. However, all bank service charges appear under financial expenses in the income statement. In some cases, companies may also capitalize bank service charges. It occurs when accounting standards require companies to include these charges as a part of an asset's cost. What is the journal entry for a Bank Service Charge?As stated above, the accounting treatment for a bank service charge may differ based on the underlying circumstances. In most cases, these charges are minimal expenses, often falling under financial expenses in the income statements. For these expenses, the journal entry is as follows.
If accounting standards require capitalizing the expense, the journal entry will vary. In this case, the bank service does not become a financial expense. Instead, it becomes part of the underlying asset's cost. The journal entry to record it, in that case, will be as follows.
ExampleA company, Red Co., maintains a bank account with a local bank. The company incurred an annual account service charge of $100. As per the relevant accounting standards, this charge does not become a part of an asset’s cost. Therefore, Red Co. records it as an expense in its books using the following journal entry.
ConclusionA bank service charge is a fee that banks deduct from a bank account. Usually, it includes maintenance, processing, and other bank fees. The accounting for bank service charges may differ based on various conditions. In most cases, though, they are an expense that falls under financial expenses in the income statement. Companies must track these charges and regularly update the cash book accordingly. Originally Published Here: Bank Service Charge: Definition, Journal Entry, Accounting Treatment, Example
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A lease is a contractual agreement between two parties. The lessor is the party that grants the use of an asset or property to another party, also known as the lessee. Usually, the lease agreement also includes other terms, for example, the duration, payment schedule, ownership, etc. In accounting, leases may fall into two categories, finance, and operating. In the past, accounting standards required a series of checks to classify leases. After changes in those standards, most lease agreements fall under a finance lease. Therefore, it is crucial to understand what it is. What is a Finance Lease?A finance lease is a type of lease agreement where the lessee assumes ownership of the underlying asset. Traditionally, this lease included contracts where the lessee reaps most of the rewards associated with that asset. Similarly, if they bear the risks associated with the leased asset, it constitutes a finance lease. However, new accounting standards do not have these requirements. In the newer standards, most lease agreements that last longer than 12 months fall under finance leases. Therefore, the accounting definition of a finance lease under the new standard includes long-term lease agreements. Companies use this type of lease for machinery, plant, vehicles, and real estate. It is a type of finance that companies utilize to obtain long-term assets. What is the accounting for Finance Lease?The accounting treatment for a finance lease requires the lessee to assume they have purchased the asset and taken on debt to pay for it. This accounting treatment goes with the essence of this lease agreement, which is primarily a type of financing. Nonetheless, this accounting treatment is complex and may require several calculations, including amortization. For finance leases, companies must recognize the leased asset based on the present value of minimum lease payments. The amount after discounting those payments over the lease term constitutes the value of the asset obtained. It is also the amount for which the company must create a lease liability. Companies must further divide this liability into current and non-current portions. Over time, companies must continue recognizing payments against the lease liability as per the repayment schedule. These payments get divided into their individual principal and interest portions. Usually, this process occurs at the end of each accounting period. Simultaneously, the company must keep depreciating the asset under the applicable accounting standards. What is the journal entry for Finance Lease?The first step in the accounting treatment for a finance lease is the journal entry at its initial recognition. As stated above, the amount for this entry comes by discounting the minimum lease payments over the lease term. Once calculated, the journal entry at initial recognition is as below.
Over time, the company must keep amortizing the finance lease. As stated above, it involves dividing the payment into its interest and principal portions. Consequently, the journal entry would be as follows.
This process will also include depreciating the asset at the end of each period. The journal entry to record depreciation is as follows.
ConclusionA finance lease is a type of lease agreement companies use to acquire assets. Essentially, it is a financing method for long-term assets. It differs from operating leases which are usually short-term. The accounting for finance leases involves various stages. This treatment results in an asset and a liability recognized in the balance sheet. Originally Published Here: Finance Lease: Definition, Journal Entry, Accounting Treatment, vs Operating Lease, Example When it comes to payments, it is important to stay on top of any arrears. This means knowing if the payments are late or missed and being proactive in dealing with them. Late payments can cause a financial strain and can negatively affect credit ratings. It is important to keep track of all payments that are due, as well as any arrears that may be owed. If arrears occur, it is important to address the issue quickly and efficiently - speak with the lender or creditor directly to establish a payment plan or look into any possible payment assistance options. Definition of ArrearsArrear is a financial term that refers to an unpaid debt or other financial obligation that has become overdue. They can arise for a variety of reasons, such as missed payments or unexpected expenses. It could be anything from a credit card bill, a loan payment, or an invoice for services. In any case, arrears occur when the amount that was due on the specified date has not been paid in full and remains unpaid. The risk of arrears increases when someone fails to make regular payments or misses out on important financial obligations like taxes or utility bills. If the debt remains unpaid for an extended time, the interest and penalties can accumulate quickly, making it more difficult to pay off the balance that’s owed. Different Types of ArrearsThere are different types of arrears in finance - here are some of the main ones
Annuities are payments made regularly over a certain period. For example, someone may pay $200 every year for 10 years. Arrears is when these regular payments do not get paid on time. This means that the full amount owed must be paid with additional interest payments to make up for the missed payment.
As the name suggests, a dividend in arrears is when a company fails to pay dividends regularly. This can occur if the company runs into financial difficulty and cannot cover its dividend payments. This can lead to investors being owed money as they have not received their expected returns.
Interest in arrears mostly happens in bonds - because the investor has not received their expected return, they accrue a larger amount of interest due to the missed payment. This can have serious consequences on the financial standing of the individual or company - so it's important to stay up-to-date with payments and avoid long-term arrears.
Call-in arrears is money that a shareholder was supposed to pay but didn't. It's calculated by subtracting the amount paid from the total amount owed. If someone does not pay, their shares can be taken away. If someone pays all the money they owe, then there will be no call-in arrears. Examples of ArrearsExamples of arrears would include a person missing their credit card payments, or not paying utility bills on time. It could also include someone not making regular loan repayments, or failing to pay rent in full and on time. In each case, these missed payments become arrears - money that is owed which has not been paid. If arrears remain unpaid for a long time, the interest and penalties can quickly add up, making it difficult to pay off the balance that’s owed. It's important to take steps to avoid becoming in arrears - otherwise, it can have serious financial consequences. ConclusionIn conclusion, arrears is the term used to describe a debt or financial obligation that has gone unpaid. It can be caused by missed payments, unexpected expenses, or failure to pay taxes or utility bills on time. Identifying these arrears and taking steps to avoid them is essential for keeping your finances in order. Post Source Here: Arrears: Definition, Meaning, Types of Payments, Examples Companies incur expenses that are a part of daily operations. These expenses are crucial in running the business and ensuring the generation of revenues over time. In some industries, companies may also incur pass-through expenses. These expenses are not the same as the ones that occur through the usual course of business for companies. What is a Pass-through Expense?A pass-through expense is a type of expense that one party passes through to another. This definition also matches the name it gets. Essentially, it is a cost incurred by one party but ultimately paid by the other party. In real estate, a pass-through expense can be an item the landlord incurs. However, the landlord passes the whole amount or a portion to the tenant. With a pass-through expense, the party that initially incurs the expense passes it on to another party for payment. The receiving party may not control the expenses incurred but are responsible for paying for them. Usually, both parties agree to the incursion of these expenses beforehand. Therefore, the receiving party already knows or expects the first party to pass these expenses on when they occur. Who is responsible for paying Pass-through Expenses in a business transaction?The responsibility for paying pass-through expenses can vary depending on the business transaction or contract. Generally, the party that incurs it is responsible for paying it initially. However, if the expense is a pass-through expense, the party that ultimately benefits from it will be responsible for paying it. For example, if a supplier incurs shipping costs to deliver a product to a customer, the supplier may pass on a portion of those shipping costs to the customer as a pass-through expense. In this case, the customer would be responsible for paying the pass-through expense, even though the supplier incurred the original shipping costs. What is the accounting for Pass-through Expenses?The party incurring a pass-through expense does not record it as an expense or revenue. They only recognize the portion that relates to them. For the amount passed through, the party incurring it creates a receivable in their accounts. Once they pass that expense to the other party, they record the receipt as a deduction in that receivable. On the other hand, the receiving party must record the expense as soon as it occurs. This accounting treatment applies regardless of whether the other party has passed through the expense. Practically, this may not be possible as the receiver may not be aware of these expenses occurring. In those cases, the receiving party must record it as an expense when the first party passes it through. What is the journal entry for a Pass-through Expense?The journal entry for a pass-through expense differs for both parties. For the party initially paying it, the amount does not categorize as an actual expense. Therefore, they must record it as a receivable from the receiving party. The journal entry to record it is as below.
For the receiving party, the accounting treatment will be the same as other expenses. Therefore, the journal entry to recognize it will be as below.
ConclusionA pass-through expense is a cost that one party incurs but passes through to another. The party receiving it is ultimately responsible for paying for it. Usually, it is common in commercial lease agreements where the landlord transfers the expense to the tenant. The accounting treatment for a pass-through expense differs for both parties. Originally Published Here: Pass-through Expense: Definition, Meaning, Journal Entry, How to Record, Examples Companies sell products or services that help generated revenues. For the former category, some companies purchase items to sell them after adding a margin. Some others also manufacture those products. Either way, these companies hold products that they can sell later. These products are known as inventory for the company in business terms. Usually, companies record sales in a revenue account. It holds a record of all items sold by a company. Some companies may also use a dedicated account for their inventory sales. What is Inventory Sale?Inventory sale refers to goods sold by a company through its selling process. It includes any items a company provides its customers in exchange for compensation. However, inventory sales may also refer to the accounts companies use to record these sales. This account holds the sale proceeds received from finished goods a company sells during its usual course of business. Sometimes, inventory sale may also refer to when a company sells its extra stock of products or goods to customers at a discounted price. Companies do so to dispose of stock they have held for a long time. This process is often prevalent in industries where finished goods have a limited period. For example, bakeries may offer their products at a cheaper rate when closing at the end of the day. What is the accounting for Inventory Sales?The accounting for inventory sales includes two sides. The first includes recording the sale for the sale proceeds received from the customer. In this case, the company selling the goods must recognize the revenue or income in exchange for compensation. In some cases, this compensation may come later, which will also require recording a receivable. The other side of this transaction involves recording a decrease in the goods the company has sold. It requires crediting the inventory account where the company has sold the finished goods. On the other hand, it also entails recognizing the cost of these goods as sold in the income statement. Overall, the accounting for inventory sales impacts the balance sheet and income statement. What is the journal entry for Inventory Sale?The journal entry for inventory sales is straightforward. However, companies must ensure to record both sides of this transaction. As mentioned above, the first side involves recognizing the revenues received from the customer. In this case, the journal entry would be as below.
The other side, as stated above, is to record the cost of those goods and the decrease in inventory. The journal entry for this side is as follows.
The first side only records the sale proceeds from the sale. On the other hand, the second recognizes the cost of the inventory sold. The difference between these two figures equals the gross profit or loss on the inventory sale. ConclusionInventory sale refers to the process of selling goods. However, it may also have other meanings based on the context. The accounting for inventory sales considers two aspects of the transaction. It records the sale proceeds while recognizing its cost in two journal entries. Inventory sale is a common process for companies that manufacture or resell items. Article Source Here: Inventory Sale: Definition, Journal Entry, Accounting Treatment, Formula Implicit costs are expenses that appear on a company's balance sheet and represent the opportunity cost of using resources. Unlike explicit costs, which are actual out-of-pocket payments for goods or services, implicit costs do not involve any cash exchange. As such, they can be difficult to recognize and measure accurately. Meaningful analysis of implicit costs requires knowledge and experience in the field. What is an Implicit CostAn implicit cost is a cost that already happened but isn't shown. It's like an opportunity that was missed because the company used its resources for something without getting paid for it. Implicit costs remain unseen, yet signify the potential revenue one would have earned. Despite not affecting one's profit directly, their presence is still felt and should be taken into account when evaluating any business venture. Implicit costs can also include the depreciation of assets or supplies used within the business. What this means is that any reduction in the value of an item due to its usage could be considered an implicit cost. This generally happens over some time, so it may not always be apparent until it's too late. How Implicit Costs WorkImplicit costs are also called imputed, implied, or notional costs. It is hard to figure out how much these costs are because businesses do not write them down on paper as they do with money. This means that it is more difficult to understand and measure the effects of implicit costs. These costs represent a loss of potential income and not the actual money spent by a business. This makes implicit costs different from explicit costs, which are those that result in a direct monetary exchange between two parties. A company might not make money if they use its resources instead of letting someone else use them, also referred to as an implicit cost. This means that if a company chooses to use its resources instead of having someone else do it, they are foregoing its potential income from the transaction. Although implicit costs can't be tracked in a traditional way such as explicit costs, there is still value in understanding them and taking them into account. This helps businesses make more informed decisions about how best to use their resources. By doing so, they can maximize their profits while minimizing the potential implicit costs. Example of Implicit CostsAs an example, let's say a company owns its factory and produces widgets. The company has to pay for the workers, materials, and other overhead costs that go into producing the product. These are all explicit costs incurred by the business, as they involve exchanges of actual money. However, the company also needs to take into account the implicit cost of not being able to use the factory for any other purpose. The opportunity cost associated with not being able to rent out the factory is an example of an implicit cost. The company may have missed out on a potential income by using its resources in that way instead of renting them out to someone else. Implicit costs can also be seen in situations where a company forgoes money-making opportunities. For example, if a company chooses not to make an investment that would have yielded positive returns, the implicit cost is the income it could have made from that investment. In this case, the opportunity cost of not investing is the implicit cost incurred by the company. Overall, implicit costs are an important consideration for any business. They may be difficult to measure, but taking them into account can help businesses maximize their profits and minimize potential losses. ConclusionBy understanding how implicit costs work and what they represent, businesses can make more informed decisions and be better prepared to manage their resources. This will ensure they are using the most cost-effective strategies that will lead to long-term success. Implicit costs can be difficult to measure, but businesses should still strive to understand them to make informed decisions about their operations and investments. Originally Published Here: Implicit Costs: Definition, Examples, Formula, Calculation, Meaning In the financial industry, data plays a critical role in enabling managers to make informed decisions and manage risk effectively. Financial data can come from a wide range of sources, including economic indicators, company financial statements, market data, customer transaction histories, and social media sentiment. By analyzing this data, financial professionals can identify trends, patterns, and opportunities that would be difficult or impossible to detect otherwise. This information can be used to inform investment decisions, optimize portfolio management, and develop more effective risk management strategies. In today's data-driven world, access to high-quality, accurate financial data is essential. However, despite the critical importance of financial data, it is often missing or incomplete. Financial data can be difficult to obtain due to a lack of standardization and regulatory requirements. Incomplete or inaccurate data can lead to flawed analysis, incorrect decision-making, and increased risk. As a result, financial professionals must carefully consider the quality and completeness of the data they use and take steps to address any gaps or inconsistencies. Techniques such as data cleaning, imputation, and statistical modeling can be used to address missing data, but it is crucial to ensure that any assumptions or limitations are well understood and accounted for in the analysis. Reference [1] studied the missing data in firms’ fundamentals and proposed methods for imputing the missing data. The authors pointed out, This paper focuses on a very widespread yet rarely recognized issue of missing data in firm-specific characteristics. First, we document the systematic feature of missing data: it is pervasive and widespread among the overwhelming majority of firms. In our representative data set of the 45 most often used characteristics, more than 70% of firms are missing at least one of them at any given point of time. We show that firm fundamentals are not missing-completely-at-random, but display complex systematic patterns. We leverage the complicated cross-sectional and time-series dependence in firm characteristics to propose a new imputation method, which is easy to use, and substantially outperforms existing alternatives… The problem of missing data is not limited to just firm characteristics, and is encountered universally in various applications in finance: I/B/E/S forecast data, ESG ratings of firms, and many others. It is also likely to be more severe in the international context. Given the growth in Big Data applications and new sources of information being available at an increasing speed, we suspect that the issue of missing data will become even more paramount going forward. We hope that our paper lays out foundations and general guidelines for imputing missing data that could be applied in many different settings in the follow-up work. We think that the proposed data imputation methods can be applied not only to fundamental data but also to financial derivatives data such as options. Let us know what you think in the comments below or in the discussion forum. References [1] Bryzgalova, Svetlana and Lerner, Sven and Lettau, Martin and Pelger, Markus, Missing Financial Data (2022). https://ssrn.com/abstract=4106794 Post Source Here: How to Deal with Missing Financial Data Lease agreements are prevalent for properties throughout the world. These agreements involve two parties. Firstly, they include the property owner, also known as the landlord. On the other hand, they also contain the party that leases the landlord's property, also known as the tenant. Both parties receive benefits from these agreements. The primary benefit that the landlord receives is the rent from the lease agreement. On the other hand, the tenant gets to use the property in exchange. Sometimes, the landlord may offer additional benefits to the tenant too. These may fall under lease incentives. What are Lease Incentives?Lease incentives are discounts or benefits landlords offer tenants to encourage them to rent their property. These incentives may include reduced rent, waived security deposits, free parking, or access to facilities like a gym or pool. However, it's crucial for both parties to carefully review and understand the terms and conditions of any lease incentives offered. The landlord benefits from offering these incentives because it can attract more tenants and reduce the time the rental property is vacant. The tenant receives more affordable rent or additional perks that make the rental more attractive. However, it may come with added costs to the tenant as landlords may include them in the rent price. How do Lease Incentives work?Lease incentives work by providing financial incentives or concessions to tenants to encourage them to rent a property. These incentives can help make a rental property more attractive to potential tenants. Usually, these incentives are more common in competitive rental markets where many properties are available. When a landlord offers lease incentives, they are reducing the cost of renting the property for the tenant. Lease incentives may be for a specified period, such as the first few months of a lease. Sometimes, they may even last for the entire lease agreement. The specifics of these incentives come from the lease agreement between both parties. What are the types of Lease Incentives?There are several types of lease incentives that landlords may offer to tenants to encourage them to rent a property. Some of the common ones include the following. Rent discountsLandlords may reduce the monthly rent amount for a specified period, such as the first few months of a lease. Waived security depositLandlords may waive the requirement for a security deposit, which can help to reduce the upfront costs for tenants. Free parkingLandlords may offer free or discounted parking to tenants, which can be a valuable perk in urban areas where parking is limited. Free utilitiesLandlords may include utilities such as electricity, gas, or water in the rent amount, which can reduce the overall cost of living for the tenant. Move-in bonusesLandlords may offer a cash bonus or gift card to tenants who sign a lease agreement within a specific timeframe. ConclusionLease incentives are rewards or benefits offered by landlords to their tenants. The objective of these rewards is to motivate tenants to rent a property. However, these incentives may come with some added costs to the rent. Lease incentives may also come in several forms. Some common ones include rent discounts, waived security deposits, free parking and utilities, and move-in bonuses. Originally Published Here: Lease Incentives: Definition, Types, Examples, Accounting Setting the price for a product or service can be a complicated task. From satisfying customers to staying competitive in the market, there’s a lot to consider. Economy pricing is one strategy that businesses can utilize to achieve their desired pricing objectives. Economy pricing, also known as low-price or cost-based pricing, is a simple way for businesses to set prices based on costs alone. It not only helps to attract a wide range of customers, but it can also help businesses save time and money by forgoing the need to assess market demand and analyze competitors’ pricing. What is Economy PricingEconomy pricing is a strategic approach that allows businesses to offer goods and services at reduced costs to remain competitive. Through this cost-saving option, companies can benefit from lowered overhead expenses while still providing quality products and services. This means that companies can save on variable and fixed costs such as manufacturing, marketing, research and development, and overhead expenses. By cutting down on these costs, businesses can keep their prices low while still earning a decent profit margin. Economy pricing is usually used for simple products or services that don’t require a lot of customization or high-end features. Examples include basic items such as grocery products, retail clothing, and fast food restaurants. Economy pricing also applies to services such as budget hotels and discount airlines. Understanding the Economy Pricing StrategyThe basic formula of price is - Production Cost + Profit Margin. This means that companies set prices based on the cost of producing a product or service plus additional profit to make money. With economic pricing, businesses reduce their production costs and adjust their prices accordingly. The goal of this strategy is to remain competitive in the market while still earning a decent profit margin. This means that companies have to consider factors such as suppliers’ costs, competitors’ pricing, and customer demand. Companies should also consider the potential impact that economic pricing could have on their brand identity and reputation. For example, some customers may view a lower price as an indicator of lower quality. Companies can counter this perception by emphasizing the value they offer to customers. It depends from company to company and how they want to balance between value and price. Benefits of Economy PricingThe main benefits of economy pricing are
Downsides of Economy PricingDespite the potential benefits, there are also some drawbacks to economic pricing.
ConclusionIn conclusion, economy pricing can be a viable option for companies looking to reduce costs and remain competitive. However, businesses need to assess their production costs and profits carefully before implementing this strategy. By understanding the potential pros and cons, businesses can make an informed decision about whether or not to use economy pricing. Article Source Here: Economy Pricing: Definition, Strategy, Examples, What It Is, Advantages and Disadvantages Common stock is a type of equity ownership in a company. It is the primary instrument to indicate the shareholders' rights to a company's assets. Sometimes, they are also known as ordinary shares. Common stocks have various features, including voting rights, dividends, limited liability, etc. Companies use these instruments to raise finance and collect funds for several activities. Companies provide common stock to shareholders in a process known as issuance. When companies issue shares, they must also account for the proceeds received. Before discussing that, it is crucial to understand what the issuance of common stock means. What does the Issuance of Common Stock mean?Issuance of common stock refers to the process by which a company sells shares of its common stock to investors in exchange for cash or other assets. It can occur in several ways, including through an initial public offering (IPO) and a secondary offering. Overall, it is a critical mechanism for companies to raise capital and finance operations. When a company decides to issue common stock, it hires an investment bank or underwriter to facilitate this process. The investment bank helps set the offering price and may also provide marketing and promotional services to attract investors. Once the shares are sold, they become "issued common stock". However, companies must consider various aspects of this transaction when accounting for it. What is the accounting for the Issuance of Common Stock?Accounting for the issuance of common stocks involves several steps to record the transaction. The first step is to determine the stock's par value. While it is the base value for that stock, it does not reflect its market value. The second step during the process is to establish the issue or offering price. This price is usually higher than the par value and is what shareholders pay to receive it. Companies must divide the proceeds received for the issuance of shares into two accounts. The first is the share capital or paid-in capital account, which only records the par value of those shares. On the other hand, the remaining amount for the transaction goes into the additional paid-in capital account. These values appear under shareholders' equity in the balance sheet. What is the journal entry for the Issuance of Common Stock?The journal entry for the issuance of common stock reflects the accounting treatment discussed above. Usually, companies receive cash through the bank for the transaction. Therefore, the journal entry records the change in assets and equity. The equity part of the journal entry gets divided into two accounts, as mentioned above. Overall, the journal entry for the issuance of common stock is as below.
ExampleA company, Green Co., issued 1,000 shares with a par value of $10 to its shareholders. However, the company received $30 per share, reflecting the stock's current market value. In total, Green Co. got $30,000 from this transaction. The journal entry to record it is as follows.
ConclusionThe issuance of common stock is a process companies use to raise finance for their activities. This process involves issuing shares (known as common or ordinary stock) to shareholders. In exchange, companies receive cash through the bank. However, accounting for it requires recording the par and offering value in separate accounts. Originally Published Here: Issuance of Common Stock: Meaning, Accounting Treatment, Journal Entry, Example |
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