There are two main methods of accounting (or bookkeeping):
Accrual method
Cash method
The accrual method of accounting is the preferred method because it provides:
a more complete reporting of the company’s assets, liabilities, and stockholders’ equity at the end of an accounting period, and
a more realistic reporting of a company’s revenues, expenses, and net income for a specific time interval such as a month, quarter or year.
As a result, US GAAP requires most corporations to use the accrual method of accounting.
The following table compares the accrual and cash methods of accounting:
Note: Some small companies may be allowed to use the cash method of accounting and in turn may experience an income tax benefit. Since our website does not provide income tax information, you should seek tax advice from a tax professional or from IRS.gov.
Revenues and Receivables
Under the accrual method, revenues are to be reported in the accounting period in which they are earned (which may be different from the period in which the money is received).
To illustrate the reporting of revenues under the accrual method, let’s assume that the hypothetical business Servco provides a service to a customer on December 27. Servco prepares a sales invoice for the agreed upon amount of $1,000. The invoice is dated December 27 and states that the amount is due in 30 days.
Under the accrual method, on December 27 Servco:
has earned revenue of $1,000, and
has earned a receivable of $1,000.
If Servco uses accounting software to prepare the invoice, the following will be recorded automatically as of December 27:
the income statement account Service Revenues will be increased by $1,000, and
the asset Accounts Receivable will be increased by $1,000
In addition to updating the general ledger accounts (which are used in preparing the financial statements), the software will update and store the customer’s information for generating an aging of accounts receivable and a statement of each customer’s activity.
Expenses and Payables
Under the accrual method, expenses should be reported on the income statement in the period in which they best match with the revenues. If a cause and effect relationship is not obvious, the expense should be reported on the income statement when the cost is used up or expires. In any event, the payment of cash is not the primary factor for determining the accounting period in which an expense is reported on the income statement.
To illustrate, let’s assume that Servco uses a temporary help agency at a cost of $200 in order to assist in earning revenues on December 27. The invoice from the temp agency is received on December 27, but it will not be paid until January 4.
Under the accrual method, on December 27 Servco:
has incurred an expense of $200, and
has incurred a liability of $200.
If accounting software is used to record the temp agency invoice, the following will occur automatically as of December 27:
the income statement account Temporary Help Expense will be increased by $200, and
the liability Accounts Payable will be increased by $200.
When Servco issues its check on January 4:
the asset Cash will be decreased by $200, and
the liability Accounts Payable will be decreased by $200.
Net Income
If Servco had only the two transactions described above, its net income under the accrual method for the day of December 27 will consist of the following:
Earned revenue of $1,000
Incurred an expense of $200
Earned a net income of $800 ($1,000 of revenues minus $200 of expenses).[The cash method of accounting would have reported a much different picture:
No revenue, expense or net income would have been reported on the December income statement.
The revenues of $1,000 might be reported in February if the customer paid in 35 days.
The expense of $200 will be reported in January when Servco pays the temp agency.]
Obviously, the accrual method does a better job of reporting what occurred on December 27, the date that Servco actually provided the services and incurred the expense.
The term bookkeeping means different things to different people:
Some people think that bookkeeping is the same as accounting. They assume that keeping a company’s books and preparing its financial statements and tax reports are all part of bookkeeping. Accountants do not share their view.
Others see bookkeeping as limited to recording transactions in journals or daybooks and then posting the amounts into accounts in ledgers. After the amounts are posted, the bookkeeping has ended and an accountant with a college degree takes over. The accountant will make adjusting entries and then prepare the financial statements and other reports.
The past distinctions between bookkeeping and accounting have become blurred with the use of computers and accounting software. For example, a person with little bookkeeping training can use the accounting software to record vendor invoices, prepare sales invoices, etc. and the software will update the accounts in the general ledger automatically. Once the format of the financial statements has been established, the software will be able to generate the financial statements with the click of a button.
At mid-size and larger corporations the term bookkeeping might be absent. Often corporations have accounting departments staffed with accounting clerks who process accounts payable, accounts receivable, payroll, etc. The accounting clerks will be supervised by one or more accountants.
Our explanation of bookkeeping attempts to provide you with an understanding of bookkeeping and its relationship with accounting. Our goal is to increase your knowledge and confidence in bookkeeping, accounting and business. In turn, we hope that you will become more valuable in your current and future roles.
Bookkeeping: Past and Present
Bookkeeping in the Old Days
Prior to computers and software, the bookkeeping for small businesses usually began by writing entries into journals. Journals were defined as the books of original entry. In order to reduce the amount of writing in a general journal, special journals or daybooks were introduced. The special or specialized journals consisted of a sales journal, purchases journal, cash receipts journal, and cash payments journal.
The company’s transactions were written in the journals in date order. Later, the amounts in the journals would be posted to the designated accounts located in the general ledger. Examples of accounts include Sales, Rent Expense, Wages Expense, Cash, Loans Payable, etc. Each account’s balance had to be calculated and the account balances were used in the company’s financial statements. In addition to the general ledger, a company may have had subsidiary ledgers for accounts such as Accounts Receivable.
Handwriting the many transactions into journals, rewriting the amounts in the accounts, and manually calculating the account balances would likely result in some incorrect amounts. To determine whether errors had occurred, the bookkeeper prepared a trial balance. A trial balance is an internal report that lists 1) each account name, and 2) each account’s balance in the appropriate debit column or credit column. If the total of the debit column did not equal the total of the credit column, there was at least one error occurring somewhere between the journal entry and the trial balance. Finding the one or more errors often meant spending hours retracing the entries and postings.
After locating and correcting the errors the bookkeeping phase was completed and the accounting phase began. It began with an accountant preparing adjusting entries so that the accounts reflected the accrual basis of accounting. Adjusting entries were necessary for the following reasons:
additional revenues and assets may have been earned but were not recorded
additional expenses and liabilities may have been incurred but were not recorded
some of the amounts that had been recorded by the bookkeeper may have been prepayments which are no longer prepaid
depreciation and other non-routine adjustments needed to be computed and recorded
After all of the adjustments were made, the accountant presented the adjusted account balances in the form of financial statements.
After each year’s financial statements were completed, closing entries were needed. The purpose of closing entries is to get the balances in all of the income statement accounts (revenues, expenses) to be zero before the start of the new accounting year. The net amount of the income statement account balances would ultimately be transferred to the proprietor’s capital account or to the stockholders’ retained earnings account.
Bookkeeping Today
The electronic speed of computers and accounting software gives the appearance that many of the bookkeeping and accounting tasks have been eliminated or are occurring simultaneously. For example, the preparation of a sales invoice will automatically update the relevant general ledger accounts (Sales, Accounts Receivable, Inventory, Cost of Goods Sold), update the customer’s detailed information, and store the information for the financial statements as well as other reports.
The accounting software has been written so that every transaction must have the debit amounts equal to the credit amounts. The electronic accuracy also eliminates the errors that had occurred when amounts were manually written, rewritten and calculated. As a result, the debits will always equal the credits and the trial balance will always be in balance. No longer will hours be spent looking for errors that occurred in a manual system.
CAUTION: While the accounting software is amazingly fast and accurate in processing the information that is entered, the software is unable to detect whether some transactions have been omitted, have been entered twice, or if incorrect accounts were used. Fraudulent transactions and amounts could also be entered if a company fails to have internal controls.
After the sales invoices, vendor invoices, payroll and other transactions have been processed for each accounting period, some adjusting entries are still required. The adjusting entries will involve:
revenues and assets that were earned, but not yet entered into the software
expenses and liabilities that were incurred, but not yet entered into the software
prepayments that are no longer prepaid
recording depreciation expense, bad debts expense, etc.
The adjusting entries will require a person to determine the amounts and the accounts. Without adjusting entries the accounting software will be producing incomplete, inaccurate, and perhaps misleading financial statements.
After the financial statements for the year are released, the software will transfer the balances from the income statement accounts to the sole proprietor’s capital account or to the stockholders’ retained earnings account. This allows for the following year’s income statement accounts to begin with zero balances. (The balance sheet accounts are not closed as their balances are carried forward to the next accounting year.)
Recording Transactions
Bookkeeping (and accounting) involves the recording of a company’s financial transactions. The transactions will have to be identified, approved, sorted and stored in a manner so they can be retrieved and presented in the company’s financial statements and other reports.
Here are a few examples of some of a company’s financial transactions:
The purchase of supplies with cash.
The purchase of merchandise on credit.
The sale of merchandise on credit.
Rent for the business office.
Salaries and wages earned by employees.
Buying equipment for the office.
Borrowing money from a bank.
The transactions will be sorted into perhaps hundreds of accounts including Cash, Accounts Receivable, Loans Payable, Accounts Payable, Sales, Rent Expense, Salaries Expense, Wages Expense Dept 1, Wages Expense Dept 2, etc. The amounts in each of the accounts will be reported on the company’s financial statements in detail or in summary form.
With hundreds of accounts and perhaps thousands of transactions, it is clear that once a person learns the accounting software there will be efficiencies and better information available for managing a business.
The word consolidated financial statement is common in accounting, business, and finance world industry but not on the layman or common person. So, what is consolidated financial statement? But before we will answer that question let us understand first what is financial statements? We can’t understand, talk and discuss consolidated financial statements without first talking and knowing the word financial statement because naturally and generally they are similar only the scope, purpose or form differs but you should not confuse and mixed the two.
Financial statements are an official record of the financial activities and positions of the business, companies, entity, individual, and even the government institutions. Relevant financial data and information is presented in a well-structured manner and in a form easy to understand even by the ordinary readers of the financial statements. The users and beneficiaries of the financial statements are not only limited to owners, investors, and stockholders but also includes the government, employees, unions, creditors, debtors, banks, and credit institutions. They use the information’s written in the financial statements to assess how the company are performing in terms of managing the business whether it losing or gaining profit and can continue its operations. The three basic financial statements are balance sheet (statement of financial position), income statement (statement of financial performance or profit and loss, cash flows (statement of cash flows), and statement of retained earnings. The usual information that can be seen in financial statements are cash, accounts receivables, accounts payable, retained earnings, share capital, sales revenue, expenses, cost of sales, net income, and tax expense. It is very important that any companies or business should have financial statements as it is a minimum requirement, this is where the vital information of the financial activities of the company shown, and it is the documents that banks ask if the companies files for bank loan.
Below three image illustrations are the sample of Consolidated Financial Statements. These three images below are the three major example of Consolidated Financial Statements. Credit to Al Jaeera Steel Products Company SAOG.
What is Consolidated Financial Statement and How it is Related to Financial Statement?
Consolidated financial statements are the financial statements of a group of companies in which their assets, liabilities, equities, sales, expenses, incomes, and cash flow activities of the parent company and its multiple subsidiary are presented as those of a one single economic entity per IAS 27 (International Accounting Standard 27) and IFRS 10 (International Financial Reporting Standard 10) requirements. Simply to say consolidated of financial statement is a combination of different financial statements of the parent company and its subsidiaries inputted as one with doing some eliminations as necessary to avoid double recognition of same inter-company transactions. In preparing consolidated financial statement there are two basic procedures to be followed. First, you need to cancel out all the entered items that are accounted as assets in one company and liabilities in another company then add together all uncancelled items this activity called inter-company reconciling items.
The relationship and similarities of financial statements and consolidated financial statements were they have both balance sheet (statement of financial position), income statement (statement of financial performance or profit and loss), cash flows (statement of cash flows), and statement of retained earnings. They presented almost the same with the financial statements but will differ naturally the figures because consolidated financial statement is the combination of all financial statements of parent company and its subsidiaries while financial statements may either just a financial statement of one subsidiary or the parent company without yet the input of the other. Simply to say financial statements is financial information activities of one company while consolidated financial statement is the combined financial information activities of multiple companies combined as one single entity.
The process of translating an idea or invention into a good or service that creates value or for which customers will pay.
To be called an innovation, an idea must be replicable at an economical cost and must satisfy a specific need. Innovation involves deliberate application of information, imagination and initiative in deriving greater or different values from resources, and includes all processes by which new ideas are generated and converted into useful products. In business, innovation often results when ideas are applied by the company in order to further satisfy the needs and expectations of the customers.
In a social context, innovation helps create new methods for alliance creation, joint venturing, flexible work hours, and creation of buyers’ purchasing power. Innovations are divided into two broad categories:
Evolutionary innovations (continuous or dynamic evolutionary innovation) that are brought about by many incremental advances in technology or processes and
revolutionary innovations (also called discontinuous innovations) which are often disruptive and new.
Innovation is synonymous with risk-taking and organizations that create revolutionary products or technologies take on the greatest risk because they create new markets.
Imitators take less risk because they will start with an innovator’s product and take a more effective approach. Examples are IBM with its PC against Apple Computer, Compaq with its cheaper PC’s against IBM, and Dell with its still-cheaper clones against Compaq.
In 2010, Thomas Thwaites decided he wanted to build a toaster from scratch. He walked into a shop, purchased the cheapest toaster he could find, and promptly went home and broke it down piece by piece.
Thwaites had assumed the toaster would be a relatively simple machine. By the time he was finished deconstructing it, however, there were more than 400 components laid out on his floor. The toaster contained over 100 different materials with three of the primary ones being plastic, nickel, and steel.
He decided to create the steel components first. After discovering that iron ore was required to make steel, Thwaites called up an iron mine in his region and asked if they would let him use some for the project.
Surprisingly, they agreed.
The Toaster Project
The victory was short-lived.
When it came time to create the plastic case for his toaster, Thwaites realized he would need crude oil to make the plastic. This time, he called up BP and asked if they would fly him out to an oil rig and lend him some oil for the project. They immediately refused. It seems oil companies aren’t nearly as generous as iron mines.
Thwaites had to settle for collecting plastic scraps and melting them into the shape of his toaster case. This is not as easy as it sounds. The homemade toaster ended up looking more like a melted cake than a kitchen appliance.
This pattern continued for the entire span of The Toaster Project. It was nearly impossible to move forward without the help of some previous process. To create the nickel components, for example, he had to resort to melting old coins. He would later say, “I realized that if you started absolutely from scratch you could easily spend your life making a toaster.”
Thomas Thwaites set out to build a toaster from scratch. The Toaster Project, as it came to be known, ended up looking more like a melted cake. (Photo Credit: Daniel Alexander.)
Don’t Start From Scratch
Starting from scratch is usually a bad idea.
Too often, we assume innovative ideas and meaningful changes require a blank slate. When business projects fail, we say things like, “Let’s go back to the drawing board.” When we consider the habits we would like to change, we think, “I just need a fresh start.” However, creative progress is rarely the result of throwing out all previous ideas and innovations and completely re-imagining of the world.
Consider an example from nature:
Some experts believe the feathers of birds evolved from reptilian scales. Through the forces of evolution, scales gradually became small feathers, which were used for warmth and insulation at first. Eventually, these small fluffs developed into larger feathers capable of flight.
There wasn’t a magical moment when the animal kingdom said, “Let’s start from scratch and create an animal that can fly.” The development of flying birds was a gradual process of iterating and expanding upon ideas that already worked.
The process of human flight followed a similar path. We typically credit Orville and Wilbur Wright as the inventors of modern flight. However, we seldom discuss the aviation pioneers who preceded them like Otto Lilienthal, Samuel Langley, and Octave Chanute. The Wright brothers learned from and built upon the work of these people during their quest to create the world’s first flying machine.
The most creative innovations are often new combinations of old ideas. Innovative thinkers don’t create, they connect. Furthermore, the most effective way to make progress is usually by making 1 percent improvements to what already worksrather than breaking down the whole system and starting over.
Iterate, Don’t Originate
The Toaster Project is an example of how we often fail to notice the complexity of our modern world. When you buy a toaster, you don’t think about everything that has to happen before it appears in the store. You aren’t aware of the iron being carved out of the mountain or the oil being drawn up from the earth.
We are mostly blind to the remarkable interconnectedness of things. This is important to understand because in a complex world it is hard to see which forces are working for you as well as which forces are working against you. Similar to buying a toaster, we tend to focus on the final product and fail to recognize the many processes leading up to it.
When you are dealing with a complex problem, it is usually better to build upon what already works. Any idea that is currently working has passed a lot of tests. Old ideas are a secret weapon because they have already managed to survive in a complex world.
In this special report we focus on the top innovations that will fuel some of the key trends in 2018 and offer plenty of opportunities for businesses across retail, travel, publishing, property management and the healthcare sector. From tackling ‘fake news’ to reviving bricks-and-mortar as well as embracing the circular economy and the power of data, these innovations aim to inspire you and support you in your mission to drive product and business transformation.
Top 5 innovation ideas for 2018
1 Smart box wants users to take control of their health
The health industry has boomed in the past five years, with the desire to achieve peak fitness levels and track progress along the way proving popular with both fitness junkies and those simply wanting to look after themselves. Technology has allowed people to access their personal data from their own homes, with smart devices, apps, wearables and personalised services meaning it has never been easier to know how fast you run, what your blood pressure is and how many calories you are consuming.
UK-based Vie’s creation of a smart box that provides readings on heart rate, blood pressure, glucose and cholesterol levels, and blood oxygen can help the user detect the early signs of chronic diseases. The simplicity of having such a device in your home provides a preliminary step when tracking health that can be used before consulting a professional. Another notable device is the low-cost product that uses temperature to detect skin cancer. We predict the continuation of steady growth in this field as the public’s desire to be healthy proceeds to grow worldwide.
2 Digital publishing platform connects artists with audiences
Cryptocurrencies came to the forefront of news in 2017 thanks to their value multiplying at unprecedented rates. While many are still sceptical of its reliability as a form of currency, it is undeniable that such forms of payments are to become more prominent in coming years, especially now investors have had an insight in how their money can grow. The Lightstreams digital publishing platform uses an Ethereum-based blockchain network to connect music artists with audiences. The network will provide transparency for artists and help avoid misallocation of royalty fees and the damage caused by fake reviews.
Polish startup Userfeeds is also utilising the power of cryptocurrencies by using it as a means to provide transparency in news, thereby thwarting the spread of so-called ‘fake news’. This unique approach to using cryptocurrency is just one way it can be manipulated for differing industries. In 2018 we will see increased transparency across all sectors through the use of blockchain technology and streamlined transactions with the spread of smart contracts.
3 Interactive and practical retail space pilots new emerging brands
Retail spaces are no longer just places to browse shelves and make purchases. Technology has revolutionised the shopping experience by replacing store assistants with robots, boosting sales opportunities with digital walls and more. A new store developed by Simon Property Group is acting as a micro-retail space for emerging brands, eliminating the high cost of renting a permanent bricks and mortar shop. The spaces provide a multitude of technology-based offerings like staffing solutions and temporary displays.
Such leasing models will help small and new companies entering their respective fields gain the publicity they need to evolve. The flexibility that comes with innovative store concepts makes it a mutually beneficial business model, with new companies keen to take advantage of such opportunities and the brains behind the models having plenty of customers. E-commerce fashion business Farfetch has taken its own approach, combining the luxury retail experience with technology. Its store creates an augmented retail environment that brings the advantages of online commerce into the physical space. 2018 will see retailers embrace the concept of ‘experiential store’ making use of new technology to gain competitive edge.
4 Virtual aquarium tunnel speeds up security checks
With security measures at transport hubs tighter than ever before, technology has an integral role to plays in providing a simple, smooth and fast solution that is reliable for both passengers and security. Biometric security systems are a popular method adopted by airports such as Dubai International, which introduced a facial recognition system within a virtual aquarium. Passengers simply walk through the tunnel-shaped aquarium and when focused on a fish, 80 built-in cameras scan the face.
In addition to this unique take on the technology, NEC Corporation has created an earphone prototype that assists secure computing thanks to authentication. The device recognizes the characteristics of a user’s ear in order to enable hands-free authentication, providing an even faster way of logging into your computer. Biometrics is gradually integrating into everything we do, and businesses adopting the technology into its own product prototypes will give a nod to the future ‘normal’.
5 AI property management saves time and money
Once featuring only in Hollywood films, artificial intelligence is now expanding the way companies approach data that can hugely impact their business action.
Manual collation or even use of basic systems can be laborious, hard to analyse and mistakes can be easily made. By using an AI system, companies can access the widest range of information possible with minimal effort.
One example is AskPorter, an AI property management platform that aims to reduce inefficiencies in workflows and change the role of property manager into that of a supervisor or concierge. By acting as the first point of contact for queries, simple questions and requests from tenants can be managed quickly and easily.
In a different industry, DemandJump has created an AI-enabled marketing platform named TrafficCloud that guides marketers on what action to take next with campaigns. Unlike traditional data collation tools that would look into page hits, for example, this new tool is able to link customer activity across devices and present a much more detailed analysis of traffic between sources. Such innovation could revolutionise the way businesses look at their data.
Al Jazeera Steel Products Company SAOG was established on Jun 27, 1996 which mostly deal in manufacturing business of different types of structural and steel tube products in the middle east countries. They also exported their manufactured products to twenty-five major western countries, including USA, Canada, Mexico, Australia, Germany, and other EU countries. The company also imported their products on major Asian countries like Indonesia, China, and Malaysia. The company also sold and manufactures like electric resistance welded products, angle bars, rounds bars, and deformed bars, bar mill products for the constructions of buildings. Al Jazeera Steel manufactured products are used in various application like building constructions, building housing projects, bridges, canal irrigation, agricultural infrastructures, engineering, public health, public highways, toll bridges and public roads, scaffolding tubes, fencing and boring, steams and gas, firefighting equipment, water and sanitation pipes, civil and industrial engineering, mechanical engineering, and building structures.
In the past several years the mills manufacturing plant has become one of the leading tubing manufacturer plants in the Middle East region and also made the company Al Jazeera Steel Products Company SAOG one of the leading players on steel manufacturing. Al Jazeera company also offers tubulars products in both black and galvanized conforming to major International specifications industry standards. Al Jazeera Steel Product is primarily based in Sultanate of Oman. Al Jazeera Steel Products Company SAOG is one of the subsidiaries of Global Buyout Fund LP a Kuwait base pipe manufacturing company. Al Jazeera Steel Products Company SAOG is listed at Muscat Securities Market at Muscat, Oman, Sultanate of Oman on January 6, 2003 which they belong on as Industrial Index industry sector category.
As shown in the illustration table above for Z-score of Al Jazeera Steel Products Company SAOG from year 2013-2017 it is very evident and clear that Al Jazeera Steel Products Company SAOG have a very good credit worthiness outstanding from year 2015-2017. Year 2015-2017 Al Jazeera Steel Products Company SAOG have above 3-point Z-score which means the company will be less likely enter bankruptcy and in good financial condition while for year 2013-2014 the same have good Z-score of above 2 which lie on safe range because Z-score of below 1.8 are in bad financial condition. Al Jazeera Steel Products Company SAOG have best financial health status, good credit worthiness status, high revenue, good net income earned per year, paid dividends well, the stock market price are very fair and good. Al Jazeera Steel Products is a good company for the investors to make their investment buy its stocks traded on Muscat Securities Market and will get a good return on investments. Their Z-score have gradually increase per year to year basis from 2013 to 2017.
Yes Z-score is the appropriate tool or useful data for the investors to determine the company credit worthiness and if it is good to invest in the company. The Z-Score that computed on the combination of five very important financial ratios in financial statement analysis that can help the investors to determine if their investment made to the company are right. The important message from the study computation made on Z-score analysis is to mainly avoid companies with Z-score of less than 1 point unless the investors have a very good reason to buy it like making the company more competitive by heavy investing and complete overtures. There are many bankrupt companies that are been bought even though their Z-score is very small way below 1 point because of market share or the technology and management value. The investor can use the Z-score results in investment analysis as an early warning signal. Should the Z-score computation results be less than three points it needs further analysis using other financial ratios and other important data thus need more investigations. A Z-score of lower than 1.8 point, in particular, indicates that the company is heading for bankruptcy or have financial difficulties. Company with scores more than 3 points are unlikely to enter into bankruptcy and have a very good financial health status. Scores within range of 1.8 and 3 points lie in a gray area which indicate they are not in bad shape nor in good shape this need further assessments. This Z-score ratio is a good test for corporate distress and corporate performance. So, this Z-score will be one of the basis or indication for investors to determine if the company is on the road of bankruptcy and whether the investors will invest their funds to the company.
