CONTENTS

Click here to go to Accrual

Click here to go to Allocation

Click here to go to Account Receivable

Click here to go to Bad Debts

Click here to go to Cash & Bank

Click here to go to Fixed Assets & Depreciation

Click here to go to Inventory

Click here to go to Prepaid

Click here to go to Reclass

Click here to go to Revenue

Click here to go to Taxes

All these topics are divided into following sections:

Meaning & Concept

Account Summary

End-to-end

JE Flow

Points to be noted

Live Example of JE from Freedom (with brief procedure)

 ACCRUALS

MEANING & CONCEPT

Accrual means accounting on “Due” basis. It can be ‘due to be received’ or ‘due to be

paid’. When we say, “accrue this amount”, we mean that the amount should be
recognized in the books, even though it is not yet paid or received, as the case may be.
The fact that an amount ‘belongs’ to a period is enough for it to be recognized in that
period, irrespective of whether it is paid/received or not during that period.

Thus, if an entity has used an office building to carry on its operations in a month, the
rent due for that month should be ‘accrued’ in that month itself even though it is actually
paid in next month. Here, by accruing the rent, we create a Liability – a payable.

Similarly, if an entity has lent an amount to an employee as Loan, it will accrue for the
interest due on it for a period, despite the fact that the employee will pay interest at the
end of tenure of loan (assuming that is in the terms of loan). Here, by accruing the
interest, we create an Asset – a receivable.

Accrual stems from “Matching Concept”. Accordingly, to ascertain true and fair picture
of Profit or Loss of an entity, revenue and expense of a period should be matched with
each other, whether they are received or paid in the same period or not. Most of the
entities make Accrual entries as ‘Reversing’ entries, that is, they get reversed in the
next period. Freedom does the same. Alternatively, some entities do not reverse it in
next period; rather adjust the payment/receipt against the accrual.

In Freedom, IBPO is mainly accruing for the following –

1. Payroll related expenses viz. Payroll, Bonus, Vacation, P4P, MBO, Severance
2. Raw Material related viz. Newsprint, AP, Ink
3. Expenses related viz. Commission, Telephone, Marketing, ABC, Facilities
4. Tax related viz. Sales Tax, FICA, 401K

This list is not exhaustive and is only indicative.

Account Summary

This may be an Asset or a Liability account and accordingly have a Dr. / Cr. Balance.
 End-to-end (Assuming it as Reversing JE)

Accrual for Expenses

Accrual for Income

JE Flow

1 3 4

* Nomenclature may differ

Please see the T-Accounting hereunder for more clarity (and on the use of
numbers above)
 Rent Account
1 __________________________________________________ 2
Jan 31 To O/s Rent XXJan 31 By P&L A/c XX
(Creation of liability) XX (Exp transferred to P&L) XX
3
4 Feb 1 To Bank A/c XX Feb 1 By O/s Rent XX
(Exp paid) (Accrual reversed)
Feb 28 To O/s Rent XX
(Creation of liability)

* Nomenclature may differ

Points to be noted

1. Accruals should always be supported by an Invoice, Agreement, Calculation etc.

Look for the appropriate document for checking the accuracy of Accrual.
2. Freedom has the policy of designating Accrual entries as ‘Reversing’ JEs, make
sure it is properly marked in the JE. It is necessary because the system
automatically reverses the JE in next period if the JEs are marked as ‘reversing’
JEs. Failure to do so will result in incorrect accounting.
3. Regularly, match accrual with the actual. This exercise will assist in concluding
that the process of making estimation is smooth and results in very small
variation, if any. Carrying over-accrual of expenses for a long period in books
implies reporting of lesser profit. Such redundant accruals should be written
back.
 4. Accrual having Opening Balance continuing without any transaction in the
account should be investigated. It may happen that it is not reversed; or the
expense/income against it is booked to some other account.

Live Example of JE from Freedom (with brief procedure)

JE for accruing Newsprint

Purchase bills are updated in Papex sub-system from which a report is generated to
ascertain the amount of purchase. It is cross-verified with Production Department to
check the accuracy of purchase. If there is a difference between the two sources, it is
informed to the client who resolves the difference and gives the final figure. Since the
payment for these purchases is made in next period, an Accrual Entry is passed as
follows:

Dr. Newsprint Inventory

Cr. Accounts Payable

(Source: Yuma)
 ACCOUNT RECEIVABLE

MEANING & CONCEPT

AR is the money that an entity is to receive against sale of goods or rendering of

services which were on credit basis. This is a Current Asset i.e. convertible into cash
within short time. An AR is created when the entity decides to extend credit to any
customer. The amount of credit and the period of credit depend on his credit-rating.

In Freedom, for Circulation, generally credit is not allowed and it is against Advance
Payment. However, for customers who had been with Freedom for long period of time,
a grace period may be allowed if there subscription period ends and they do not make
payment before end date. Freedom continues delivering copies for few weeks and
requests them for payment. For this facility, a fee is charged for the grace period along
with the revenue for the copies delivered during this period.

For Advertisement, Freedom does not give any credit period to one-time customers who
just walk-in for printing of an advertisement. Apart from this, generally, the credit period
is 15 days’ net for Advertisement (also known as Courtesy Credit). If payment is not
made within this period, further printing of Ad for those customers is suspended. For
running customers, the credit period ranges from 30 days to 90 days depending upon
their credit report, business given by them to Freedom, past payment history and other
relevant factors.

Most big organizations have a sub-system to record AR. This sub-system will capture
each minute detail related with each customer. The sub-system is capable of generating
various reports for analysis and decision making. This sub-system is linked to GL
wherein final numbers flow. Freedom uses AR 2000, AR 2005, AR 5000, Mactive at
various locations as AR sub-system.

Account Summary

This is an Asset Account with Dr. Balance

End-to-End
JE Flow

Points to be noted

1. On receipt of AR reports from sub-system, see that revenue is booked in correct

accounts. Since it involves manual key-in of transaction codes to excel file from
where JE is created, mistake can happen.

Live Example of JE from Freedom (with brief procedure)

A report is generated by AR 2000 on monthly basis which gives the details of all AR
accounts and the revenue generated from them. The team takes the numbers from this
report and based on their transaction codes, classifies it to appropriate revenue account
viz. Classified Advertisement, Display Advertisement, National Revenue, Preprint
Revenue, Retail Colour Revenue etc. After this, the JE is made as follows:

Dr. AR

Cr. Respective Revenue (illustrative list given in above paragraph)

(Source: FENC, Shelby)

 BAD DEBTS

MEANING & CONCEPT

Bad Debts mean the amount of receivables that could not be collected due to
insolvency, death, default etc. of debtor. The receivable could be against sale of goods,
rendering of services, Loans & Advances to supplier/employee. It is a loss of the entity
which owned this receivable. In Freedom, Bad Debts would arise on account of AR from
Circulation Revenue and Advertisement Revenue.

Provision for Bad Debts stems from Principle of Conservatism. Accordingly, an

anticipated loss should be provided for. This results in presentation of true and fair
picture of Profit or Loss of a period. It implies reduction of Profit or increasing Loss, as
the case may be.

The key feature of Provision for Bad Debts is that it is estimated figure. Based on past
experience (i.e. historical data) or availability of new information (e.g. debtor filing for
Bankruptcy) or aging of debtors, an estimate is made for the provision. Mostly, there is
a business policy for creation of this provision.

Bad Debt recovered is the amount of cash realized against a Bad Debt that has
already been written-off to P&L Account. It is treated as Income of the entity.

Account Summary

Bad Debt is a Nominal A/c (Loss) and has a Dr. Balance. Provision for Bad Debt is
Liability and has a Cr. Balance. Bad Debts Recovered is Nominal A/c (Income) with a
Cr. Balance.

End-to-end
JE FLOW

Points to be noted

1. Look for business policy for creation of Provision for Bad Debts. The amount in
GL should adhere to the policy.
2. Look at actual Bad Debt v/s Provision for Bad Debt. Ideally, they should be close
to each other. If there is significant difference, the Provision needs revision.
3. Having excess Provision is not good for the bottom-line of business. It is an
unnecessary hit which results in lower Profit being reported.
 4. Study the debtors closely. If you see any debtor approaching/moving above the
credit period, inform the client immediately. Timely action can save Bad Debts
Loss.
5. Do a comparative and trend analysis of Sales Revenue, AR and Bad Debts.
Since they are inter-related, this analysis can highlight areas where special
attention is needed. Try to cover a period of 6-12 months for trending; or present
a comparative study with the figures of last year for comparable period.
6. Ratio Analysis (like Debtor Turnover; Average collection period) will assist in
highlighting focus areas.

Live Example of JE from Freedom (with brief procedure)

Provision for Bad Debts

In first two months of every quarter, Provision is created by using Budgeted figures. In
the third month, it is trued-up to actual provision calculated by applying the percentage
to AR as provided in Aging Schedule. Any shortfall in Provision for Bad Debts Account is
made good by passing following JE:

Dr. Bad Debts A/c

Cr. Provision for Bad Debts A/c

(Source: OCR)
 CASH & BANK

MEANING & CONCEPT

This category primarily takes care of Cash & Bank Receipts, Transfers made from/to
Bank, Petty Cash and charges levied by Bank.

Payments are excluded as they fall in “Expenses” category.

The major component of Cash & Bank will be collection/deposit of Circulation and
Advertisement Revenue. Next important feature would be Cheque Returns/NSF.

The purpose of opening any Bank Account is very important. That determines the type
of transactions one can expect in those accounts. There are some Bank Accounts
which are ‘Zero Balance’ Accounts, thus, every day the balance therein will be swept to
another Bank Account. Some Bank Accounts may be opened only to record receipts &
collections while some may be for disbursements only. Carefully note the purpose of
each Bank Account.

Account Summary

This is an Asset A/c having Dr. Balance. Cash A/c should necessarily have Dr. Balance
while Bank A/c may, at times, have Cr. Balance.

JE Flow
Points to be noted

1. All collections/transfers/payments will be reflected in Bank Statement/Petty Cash

Expenses Sheet. Therefore, that statement will be the back-up for the JE.
2. Look for business policy to understand the limit and nature of expenses that can
be met from Petty Cash Account.
3. Have full knowledge of purpose of Bank Account. This will enable control over
the transactions flowing in the account. Any entry which belongs to other account
but appearing in an account need to be re-classed to correct account, thus
correcting accounting error.
4. For a better understanding and control over Cash & Bank Accounts, look for
Bank Reconciliation Statement. There are some entries in GL which can come
there only after they are reflected in Bank Statement and not before, for
example, Bank Charges. Thus, if you see any transaction in GL which should
necessarily have been in Bank Statement but is not there, it indicates that the
entry belongs to some other account and is wrongly appearing in this GL
Account.

Live Example of JE from Freedom (with brief procedure)

Cash Receipts

Cash is received on daily basis. It can be from sources like Circulation or

Advertisement. In Yuma, daily cash receipt is accumulated in a Suspense Account
which is cleared on each month-end. On month-end, this entry is reversed and moved
to respective AR Account. Until then, the respective AR will continue showing a Dr.
Balance irrespective of the fact that money has already been received against it. The
JE is as follows:

Dr. Bank A/c

Cr. Daily Cash Suspense A/c

(For recording daily cash receipt)

Dr. Daily Cash Suspense A/c

Cr. Bank A/c

(Reversal of JE on month-end)

Dr. Bank A/c

Cr. Respective AR Account

(Applying cash to respective AR Account on month-end)

(Source: Yuma)

FIXED ASSETS & DEPRECIATION

MEANING & CONCEPT

Fixed Assets are those assets which are used for production of goods, rendering of
services or for administrative purposes. It includes, Land, Building, Machinery,
Equipments, Vehicles and the like. As compared with Current Assets, Fixed Assets
generally have a useful economic life of more than one year and are intended by
management to be utilized for business for a longer term.

On acquisition, Fixed Assets are initially recognized in the books at Cost. Cost
comprises of Purchase Price, All non-refundable taxed and duties, and all other costs
necessary to bring the asset to its present location and condition e.g. transportation
cost, installation cost etc.

Subsequently, Fixed Assets are measured either at Cost less Accumulated Depreciation
and Impairment Loss, if any or at Fair Value. At Freedom, they follow the former method
of measurement of Fixed Assets.

If Fixed Assets are developed internally, for example, if a building or a machinery is self-
constructed, the cost would be ascertained using the normal principals of Cost
Accounting. It includes Material, Labour and Overhead.

Depreciation is a measure of decline in the value of Fixed Assets due to use, wear-
and-tear, passage of time, etc. Depreciation is bound to happen on all Fixed Assets
(except Land) irrespective of its current market price is more/less than its Cost Price.
Depreciation is an accounting adjustment – there is no outflow of Cash in it. It
systematically reduces the value of Fixed Asset over its useful economic life. Thus, it
complies with Matching Principle, whereby, cost and benefit of Fixed Assets are
matched over the useful life of the asset. It also assists the entity in retaining sufficient
cash within business for replenishment/replacement of asset at the end of its useful life.

There are two methods of charging Depreciation – Straight Line Method and Written
Down Value Method. Under the former, equal amount is charged as Depreciation
throughout the useful life of asset. Under the latter, the amount of depreciation is higher
in the initial years vis-à-vis the later years.

Provision for Depreciation is creating a method whereby Depreciation is not charged

directly to the Asset Account; instead it is accumulated in a separate account. On
disposal of asset, the Provision for Depreciation Account is set-off against the Fixed
Asset Account to ascertain its Book Value and Profit/Loss on disposal. Under this
method, Fixed Assets appear at Cost in Balance Sheet and Provision for Depreciation.
Freedom creates Provision for Depreciation instead of directly charging Depreciation to
Fixed Assets.

Account Summary

Fixed Asset is an Asset Account with Dr. Balance. Depreciation is a Nominal Account
with Dr. Balance. Provision for Depreciation is a Liability Account with Cr. Balance.

End-to-End

JE Flow
Points to be noted

1. Carefully note the amount capitalized. Capitalization means adding an amount to

cost of Fixed Asset. If it is acquired, the purchase price (i.e. invoice price), non-
refundable taxes paid on acquisition and all other direct costs associated with
purchase. This will have a significant bearing on the amount of Depreciation.
Mostly you have to rely on the copy of invoice available in Webextender.
2. Wherever possible, judge the accuracy of assumption about the useful life of
asset. Mostly, the business will have documented estimated life of each asset in
its policy and Fixed Asset sub-system.
3. If an asset is acquired somewhere in mid of a year, depreciation is applied on
pro-rata basis for the period during which the asset is put to use.
4. Depreciation commences only from the day when the asset is put to use or
allocated to the project for which it is acquired. Until then, the asset which is
acquired is not transferred to Fixed Asset A/c; rather it is kept in an account like
“Fixed Asset – Not in Use” Account. You can see one such account in McAllen
process.
5. If an asset is acquired and is not put to use for a significant period of time,
questions should be asked to business for the delay. Reason: for this period, the
business is losing the benefit of depreciation; also the capital invested in that
asset is blocked from being used productively elsewhere; so is the outflow of
interest on capital used to buy the asset.
6. Any project that is completed should be capitalized immediately. In normal
circumstances, it should be not be capitalized retrospectively. If this is being
done, questions should be raised for the delayed capitalization which presents
wrong picture of accounting information.
7. Intangible assets are amortized over their useful economic life or their
legal/contractual life, whichever is shorter. If you see the reverse happening, i.e.
being amortized over the longer term, please get clarification.

Live Example of JE from Freedom (with brief procedure)

Acquisition of Asset

At Freedom, if the payment for the Fixed Asset is already made, the JE for acquisition is
passed by Corporate and IBPO has nothing to do in it. We can directly see the
acquisition in Great Plains. However, if the payment is not yet made (i.e. it is credit
purchase), we get a report from Xendocs in Webextender which gives the details of
assets acquired on credit. We pass an accrual entry for them as follows:

Dr. Fixed Asset

Cr. Accounts Payable

(For recording acquisition of asset on credit)

It is a reversing JE. Next month, it will reverse and we will make the same JE again next
month as the payment is still not made. This repeats until the payment is made. See
below for the explanation:

Dr. Accounts Payable

Cr. Fixed Assets

(For reversing the accrual created earlier above)

Since this reversal would again reduce the Fixed Asset which is already put to use,
depreciation will cease to apply causing incorrect accounting. Hence, we will again
make accrual entry (as the payment is not yet made). This entry would again be a
reversing JE.

Dr. Fixed Asset

Cr. Accounts Payable

(Re-creating the accrual)

Assume that the payment is made in next month, so the following entries will follow:

Dr. Accounts Payable

Cr. Fixed Assets

(For reversing the accrual created earlier above)

Dr. Fixed Assets

Cr. Bank A/c

(For recording payment for Fixed Assets)

Provision for Depreciation

To make this JE, we look for the additions in Great Plains. We also check with
Departments if there is any addition of Fixed Assets during the period. Accordingly, we
update BNA (Fixed Asset Sub-system) for these acquisitions. Updating in BNA is our
responsibility. We pull a report from BNA to find out the amount of Depreciation
applicable on each of the assets and make the following entry:

Dr. Depreciation

Cr. Provision for Depreciation

(Source: Yuma, McAllen)

 INVENTORY

MEANING & CONCEPT

Inventory consists of Raw Material (e.g. Newsprint, Ink, Plates), Work-in-progress (e.g.
semi-finished goods), Finished Goods (e.g. Newspaper, Magazines) and Consumables
(e.g. Rubber Bands, Plastic Bags, Lubricants, etc.).

There are two methods to ascertain Inventory: FIFO (First In First Out) and Weighted
Average Method. FIFO presumes that the inventory received first is issued first. Thus,
the Inventory-in-hand and its cost would reflect latest purchased quantity at latest
purchase price. Weighted Average Method assigns average cost to issue of Inventory
and Inventory-in-hand.

Inventory is valued at cost price or Net Realizable Value, whichever is less.

In this category, IBPO records purchase of Inventory (mainly, Raw Materials) and Issue
of the same for production for various locations of Freedom.

Account Summary

This is an Asset A/c and has a Dr. Balance

End-to-end (Situation 1 – Received before period-end)

(Situation 2 – Received after period-end)

JE Flow

* Look for the nomenclature used by business for this account

e.g. Newsprint A/c (with

specific Paper Quality);
Black Ink Usage etc.

Name of type of
Inventory e.g. Black Ink
Points to be noted

1. Be careful while expensing Inventory. It should go to correct department or Cost

Center else the Cost calculation may be wrong.
2. Ideally, In-transit accounts should get closed in the next period. If not, questions
should be raised as to receipt of material.
3. Carefully check the calculation sheet wherein they follow either FIFO or
Weighted Average Method. Wrong calculation will lead to over-statement or
under-statement of Inventory.
4. Any inventory given away for free i.e. without charging anything should be
expensed out to P&L account without charging to any particular department
(unless it specifically belongs thereto). For example, magazines given as
Complementary Copies should be charged to P&L directly.
5. Carefully note the limits assigned to Normal Wastage and Abnormal Wastage.
Normal waste is a part of Cost of Production while Abnormal Waste is charged to
P&L Account as a Loss. In newspaper industry, normal waste is bound to happen
in Newsprint, Ink, and Plates etc.
6. Difference between Actual Inventory (ascertained by Physical Verification) and
Inventory as per books of account should be investigated and moved to P&L A/c,
if warranted by situation. Consult your client for any such item.

Live Example of JE from Freedom (with brief procedure)

Acquisition of Inventory

At Freedom, this entry is passed by Corporate. Hence, at IBPO, most of the locations
do not make this JE.

Expensing of Inventory

When an item of inventory is consumed for production by Production department, it has

to be expensed out i.e. it should be moved out of Inventory balance and added to the
cost of goods produced. In other words, Black Ink purchased which was lying in
Inventory account remains there until consumed by Production Department for printing.
On consumption, it will be moved to Black Ink Usage account from Black Ink Inventory
Account. For this, we receive a report of consumption from Production Department on
monthly basis which lists all varieties of inventory consumed (Black Ink, Color Ink,
26MM Newsprint etc.) and we make the following JE for it:
 Dr. Newsprint A/c

Cr. Newsprint Inventory A/c

(Source: Yuma, McAllen, Colorado, Florida)

PREPAID

MEANING & CONCEPT

It is an advance payment for an expense. Thus, a lump sum amount is paid in a period
for which the benefit is received in the next period or periods. Based on Matching
Concept, the amount which pertains to next period(s) is deferred and charged to P&L in
those respective period(s). In Freedom, historically we have booked Rent, Insurance,
Postage and Maintenance kind of expense to Prepaid.

Account Summary

This is an Asset A/c with Dr. Balance

End-to-end
JE Flow

Points to be noted

1. Check the calculation of Prepaid. Look for the invoice or the agreement which
gives rise to Advance Payment. Find out the period for which the advance
payment is made.
2. Sometimes, the date of payment may not coincide with commencement of the
period for which advance payment is made. For example, an Insurance Premium
is due on 15th May 2010 for policy period commencing from 15 th May 2010 to 14 th
May 2011. If here, the premium is paid well ahead of due date, say on 26 th April
2010, the calculation of Prepaid will start only from 15 th May 2010 and not earlier.
Such instances should be carefully noted.
3. Generally, the amortization of prepaid expense is uniform over several months.
Hence, the teams can always prepare the JE in advance rather than waiting for
the month-end close to start.
4. The period and the amount to be amortized should be approved/authorized by a
proper office. Find out whether this is happening or not.
5. There cannot be a balance in Prepaid Expense Account which continues as-it-is
for long. Ideally, either it should be amortized or it should get adjusted in next
period(s). If you see unchanged Opening Balance or stagnant balance, be alert.
Live Example of JE from Freedom (with brief procedure)

Expenses paid in advance are transferred to Prepaid Expense Account. From there, it is
amortized over the period for which it is paid in advance. For this, the team looks for
Invoice in Webextender on which the period is mentioned. Since Corporate makes the
payment, they book it to Inter-company; our team just posts the entry to GP.

Few examples of Prepaid Expenses are: Software Development Fees, Classified

Support Systems, Software Maintenance Agreement, Newspaper Association of
America etc. Thus, they make the amortization JE as follows:

Dr. Concerned Expense

Cr. Prepaid Expense A/c

(Source: OCR, Yuma)

REVENUE

MEANING & CONCEPT

Revenue is the income of an entity which arises from core or central operations.
Revenue arises from sale of goods and from rendering of services. For Freedom, the
core operation is printing and publication and the main source of income is circulation
and advertising.

Sale of Goods: Circulation Revenue and Sale of Space for Advertisement

Revenue is recognized (i.e. recorded as Income in P&L A/c) when:

(a) It is earned; and

(b) It is realized (Cash Sale) or realizable (Credit Sale)

It is said to be ‘earned’ when the ownership of goods passes from seller to buyer. Until
that happens, revenue cannot be recognized. Hence, in a ‘Single Copy Sale’, the
revenue can be recognized immediately on sale to customer. However, in a contract to
supply newspaper over a period of 12 months, it is recognized as and when sale
happens. Therefore, even if subscription is received in advance, it will be recognized
over 12 months on suitable basis (in this case, on straight-line basis).

Rendering of Services: Advertising Designing Revenue

Revenue is recognized (i.e. recorded as Income in P&L A/c) when:

(a) The service is performed and accepted by customer; and

(b) It is realized (Cash Sale) or realizable (Credit Sale)

Generally, revenue will be recognized when the advertisement appears in the

newspaper and is accepted by the customer (e.g. where there is no mistake in printing
advertisement).

Account Summary

This account is a Nominal A/c (Income) and has a Credit Balance

End-to-End Flow

For Credit Sale

 For Cash Sale

For Advance received

JE Flow
Points to be noticed

1. Barter System: Advertisements can be exchanged with other publications. In this

case, since no movement of cash is involved, revenue is recognized at Fair
Value i.e. the value for advertisement which would have been charged if the
contract was entered into against consideration (viz. cash). Generally, we at
IBPO will not have access to this information.
2. Understand the process of capturing the revenue numbers. It must be coming
from some sub-system (e.g. Mactive). Make sure that the numbers pertain to the
period for which the JE is prepared.
3. Carefully note the classification of JE – Circ, Advt. Again, within Advt, whether
Display or Classified or others. The source report should match with the type of
JE.
4. Wrong numbers of Revenue can have P&L move up or down significantly. Check
carefully the calculation.
5. The sub-system report may be the most important back-up for these JEs.
6. Net: Look for following three major aspects –
(a) Timing of recognition is right (i.e. it can be taken to P&L)
(b) Amount is correctly calculated
(c) Right accounts are used to prepare JE
(d) Presentation of JE is as per requirements of business
7. Understand the concept of “Unearned Revenue” which is very common in
Newspaper Industry. It means, ‘revenue received in advance’ against which
services are yet to be rendered. Since, it does not meet the criteria for
recognition; it is treated as ‘Liability’ until performance of contract. Once the
goods are supplied or service rendered against the advance received, it can be
transferred to Revenue.
 TAXES

Meaning & Concept

At IBPO, currently we do Property Tax (Real) and Sales Tax JEs for Freedom.

Property Tax: In USA, there are two types of taxes – Real Property Tax and Personal
Property Tax. The former is a tax on Real Estate and the latter on Personal assets. (We
make JEs for Real Property only). Property Tax is calculated for whole year and
monthly JE is passed for the accrual and payment.

Sales Tax: It is levied on sale of goods. It is an indirect tax wherein the amount of tax is
collected from the buyer and paid to the Government.

Account Summary

It is a Nominal A/c (Expense) and has a Dr. Balance. Indirect Taxes are Liabilities and
have a Cr. Balance.

End-to-end

Property Tax
 Sales Tax

JE FLOW

Property Tax
 Sales Tax

Points to be noted

1. Ideally, Property Tax accrual and payment figure would be same every month. If
it is different, it may be because of change in rate of tax, adjustment of tax
refund/discount, property acquisition/disposal. Look for these changes and
ascertain the reason.
2. Back-up for the JE would be the tax bill received from County or the Self-
Assessment sheet prepared by business.
3. Look for this equation: Accrual = Payment + Refunds + Discounts. This equation
should necessarily hold good for each accrual. If Accrual > Payment + Refunds +
Discounts; it is a case of Over-Accrual and should be either adjusted against
accruals of next period or written back in P&L. Over-accrual is never good for
bottom line.

Live Example of JE from Freedom (with brief procedure)

Property Tax is accrued monthly on the basis of budgeted amount. The Bill for it is
generally received in September. The accrual is trued-up with the Bill. It is ensured that
the accrual does not fall short of Bill. The payment of tax is made by Corporate. The
entries are as follows:

Dr. Property Tax

Cr. O/s Property Tax

(Property Tax accrued every month by passing this JE)

 On receipt of Bill, if the accrual is short; same entry is passed for making good
the difference. If the accrual is more, the aforesaid entry is reversed by the excess
amount.

For payment of Property Tax:

Dr. O/s Property Tax

Cr. Bank A/c

(Source: OCR, Victorville, Yuma)

ALLOCATION

Meaning & Concept

Allocation implies bifurcating a global amount to two or more heads so as to ascertain

true profitability of each unit, product, division, etc. For the ease of accounting or
control, an amount is originally recorded under a single head. Later, it is bifurcated into
respective heads to which it belongs.

For example, initially rent paid for the whole office building may be recorded as one
amount in Corporate Books. Later, based on Floor Space occupied by each
department, it is allocated to them. This assists in determining the true profit/loss of
each department. Similarly, an Advertisement may have been booked where a part of it
is hosted on website also, besides being published in the newspaper. In this case, if
initially the advertisement revenue was booked as single amount; it would be allocated
to Print Revenue and Online Revenue.

Allocation is mainly an internal accounting practice. Allocation is a management tool

and is used for decision making. It is used for Revenue and Expenses. The
management decides on certain parameters on the basis of which an amount is
allocated. For example:

Design Payroll: On the basis of Lineage

Classified Payroll: On the basis of Classified revenue

Interactive Revenue: On the basis of % decided by management

Account Summary

Since this is not an account by itself, it will not have a Dr. or Cr. Balance.

End-to-end

JE Flow
Points to be noted

1. Parameters may change over a period of time owing to changes in management

policies, business circumstances, acquisition or disposal of assets, manpower
added or reduced and numerous other factors. As an Accountant, be vigilant for
such changes. See that they are given timely effect.

Live example of JE from Freedom

All internet revenue is booked to the main Internet Revenue Account. Then, it is
allocated to various internet categories on the basis of a report generated from a sub-
system called GEAC which details each internet Advertisement. The individual amount
are mentioned in that report based on which JE is passed to allocate the amount
originally recorded.

(Source: Yuma)

RECLASS

Meaning & Concept

Reclass means transferring an amount from one account to another account. This is
done to either rectify a mistake committed or to allocate the amount to correct
department, location, account heads etc.

Reclass is a broader term and in some cases, includes Allocation.

Account Summary

Since this is not an account by itself, it will not have a Dr. or Cr. Balance.
End-to-end

JE Flow

Live example of JE from Freedom

JE for Reclass of Severance Pay

Payroll department books the amount of severance expense in the severance accrual
account and the tax on severance in P&L account. Ideally, it should have been booked
to the severance expense account. Hence, a reclass is done to transfer the severance
amount to the particular severance expense account and to the severance tax account
related to severance.

Dr. Severance expense account (P&L Account)

Dr. Severance tax expense account (P&L Account)

Cr. Severance accrual account (Balance Sheet)

Cr. Expense account (P&L Account)

(Source: OCR)