Accounting and Finance Questions

In accounting, the Three-way Match refers to a procedure used when processing an invoice received from a vendor or supplier. The three-way match is an important step in safeguarding an organization's assets. The purpose of the three-way match is to avoid paying incorrect and perhaps fraudulent invoices.

Here Three-way refers to the three documents involved :

* Vendor's invoice which was received and will become part of an organization's accounts        payable if approved.

* Purchase order that was prepared by the organization.

* Receiving report that was prepared by the organization.

And Match refers to the comparison of the quantities, price per unit, terms, etc. appearing on the vendor's invoice to the information on the purchase order and to the quantities actually received.

After the vendor's invoice has been validated by the three-way match, it can be further processed for payment.

Foreign draft is an alternative to foreign currency; it is generally used to send money to a foreign country. It can be purchased from the commercial banks, and they will charge according to their banks rules and norms. People opt for ‘foreign draft’ for sending money as this method of sending money is cheaper and safer. It also enables receiver to access the funds quicker than a cheque or cash transfer.

The Accountant typically prepares the Bank Reconciliation Statement using all transactions.

Bank Reconciliation Statement :

Bank reconciliation is a process which prepares a statement accounting for the difference between the cash balance in the cash account of a company and the cash balance according to its bank statement. This statement can help a company to verify that its bank account ending balance per the bank matches the balance on hand per the company's general ledger.

Value is the monetary worth of something, in this case, it is an item.

In option A, since it is talking about capital which is measured in monetary terms.

The value of an item is determined by its quality and its age. Often antiques with good quality are sold in the market with a high value and are sometimes auctioned.

The Debit balance recovery is usually made by raising a credit memo for the regular vendors. However if there are no future transactions from the supplier, we ask the vendor to send the check / make an EFT for the amount due from him. When payment is made to the wrong vendor or payment made in excess, in that case overpayment has gone to the vendor, so for us it is vendor debit balance. For debit balance recovery, we can either follow- up with the vendor to send us the excess amount / refund back, or we can adjust that extra amount in future invoices submitted by that vendor. In case no future transactions, we have to follow-up with the vendor, failing which we have to write off this amount. 

A bad debt provision is a reserve that you build up over time against the future recognition of specific accounts receivable as being uncollectible. Thus, if a company has issued invoices for a total of $1 million to its customers in a given month, and has a historical experience of 5% bad debts on its billings, it would be justified in creating a bad debt provision for $50,000 (which is 5% of $1 million).

It is impossible to know the exact amount of bad debts that will occur at some point in the future from the current account receivable, so it is entirely normal to continually readjust the bad debt provision, as you gain a greater understanding of how collectible the accounts receivable really are. These adjustments may lead to future increases or decreases in the bad debt expense. Since these adjustments can be viewed as a means of manipulating a company's reported profits, you should fully document your reasons for making the adjustments.

You would create a bad debt provision with a debit to the bad debt expense account, and a credit to the bad debt provision account. The bad debt provision account is an accounts receivable contra account, which means that it contains a balance that is the reverse of the normal debit balance found in the associated accounts receivable account. Later, when a specific invoice is found to be uncollectible, you create a credit memo in the accounting software for the amount of the invoice that is uncollectible. The credit memo reduces the bad debt provision account with a debit, and reduces the accounts receivable account with a credit. Thus, the initial creation of the bad debt provision creates an expense, while the later reduction of the bad debt provision against the accounts receivable balance is merely a reduction in offsetting accounts on the balance sheet, with no further impact on the income statement.

The reason for a bad debt provision is that, under the matching principle, you should match revenues with related expenses in the same accounting period. Doing so shows the full effect of a billed sale transaction in a single accounting period. If you were to not use a bad debt provision, and instead used the direct write off method to only charge bad debts to expense when you were certain that a specific invoice was not collectible, then the charge to expense might be many months later than the initial revenue recognition associated with the billing. Thus, under the direct write off method, profits will be too high in the period of the billing to the customer, and too low in the later period when you finally charge some portion or all of an invoice to the bad debt expense.

In international accounting LIFO and extraordinary items are prohibited

In international accounting, proposed dividend entry is made in the Year in which it is declared, but in Indian Accounting Standards Proposed Divided entry is passed in the year for which dividend is declared. e.g. Dividend for 09-10 declared in AGM on 14 Sept 2010, Financial (Accounting) Year = 2009-10

In Indian Accounting entry would be passed in 2009-10 Accounts books, but in International Accounting entry would be passed in the year 2010-11 Accounts books.

An accrued receivable is either a trade receivable or a non trade receivable for which a business has earned revenue, but for which it has not yet issued an invoice to the customer. You normally create an accrued receivable in either of the following scenarios:

* Milestone. A milestone has been reached in a contract with a customer, where you are clearly entitled to a specific, pre-defined amount, but the contract does not yet allow you to issue an invoice; or
* Services. The contract with the customer states that the customer will pay you for hours worked, rather than for a specific work product. For example, there may be 10 hours of work that will eventually be billed at a rate of $80 per hour, so you accrue the receivable for $800.

The journal entry to create an accrued receivable is a debit to an accounts receivable account, and a credit to the revenue account. It may be useful to create a unique general ledger account for accrued receivables, rather than using the main trade receivables account, in order to clearly show these transactions. In addition, you should set these journal entries to automatically reverse themselves in the next accounting period; you would then replace the accrual in the next period with the actual invoice (assuming that there is a billing event in the next period). If you are unable to create an invoice in the next period, then you should continue to accrue and reverse the revenue and accrued receivable in every period on a cumulative basis until you can eventually issue an invoice.

For example, ABC International has completed a milestone in a project to install a dam, though it is not allowed under the contract to issue an invoice more frequently than once a quarter. It therefore accrues revenue and a receivable of $50,000 at the end of January. The journal entry automatically reverses at the beginning of February. ABC then earns another $30,000 on the next project milestone in February, but is still contractually unable to issue an invoice. It therefore accrues revenue and a receivable of $80,000 in February. The journal entry automatically reverses at the beginning of March. ABC then earns another $70,000 on the next project milestone in March. It is allowed to issue a quarterly invoice at the end of March, so it issues an invoice for $150,000. By using accruals, ABC has recognized $50,000 of revenue and receivables in January, $30,000 in February, and $70,000 in March, rather than recognizing all $150,000 in March, when it issues an invoice to the customer.

You should not use accrued receivables if you cannot justify to an auditor that there is a clear obligation by the customer to pay the company for the amount of the accrued receivable. Otherwise, there is a presumption that the business has not yet reached the point where the customer has a clear obligation to pay. If you use accrued receivables, expect auditors to pay particular attention to their justification. For example, you should not accrue receivables in a case where a business is providing services under a fixed fee contract, and it earns revenue only when the entire project is complete and approved by the customer. Revenue has not really been earned prior to completion, so there should be no accrual prior to that point.