5 Accounting Practises To Keep When Preparing Income Statements

When it comes to preparing income statements on behalf of your corporation, great care must be exercised in order to keep information accuracy and minimise the potential risk of errors. To successfully prepare income statements, there are 5 accounting practises every accountant should bear in mind:

1. Revenues and Gains

A corporation can achieve revenue from primary and secondary activities. Revenue earned from primary activities are mostly known as operating revenues (sales revenue or service revenue) whereas revenue earned from secondary activities are known as non operating activities. This accounting practise is one of the most essential to note since beginner accountants often confuse revenues earned with receipts. These revenues are usually displayed around the top of income statements, usually in the period they are either earned or delivered- not when payment is collected. So make sure to report both operating and non operating revenues in the profit and loss statement only when the sale is made and earned.

Gains, on the other hand, is an accounting practise that is reported in income statements as the net of proceeds received from long term asset sales with the subtraction of the book value. When proceeds are more than book value, that is when the gain occurs.

2. Expenses and Losses

Much like revenues, expenses can be categorised under primary and secondary activities as well. Expenses that are incurred to earn operating revenues are considered primary activities and should show up under the same income statement where the related sales was reported, regardless of if payment has been made or not. Costs that are used up or expiring in the accounting period displayed under the income statement will also be considered to be a part of the expenses of that particular accounting period.

Certain expenses can be matched against the sales under the income statement since there is a cause and effect link, whereas others with no direct link to sales are usually matched to the period where they are used/consumed. For example: Advertising expenses are typically not linked to sales or specific accounting periods, so they are usually reported as part of expenses as soon as the advertisements occur.

Losses are often reported when there are situations where the corporation incurs a loss from long term asset sales or lawsuit results from transactions that are outside of primary activities. As part of the general accounting practises, losses are reported typically as the net of two amounts- book value minus proceed received, where the proceeds are less than book value.

3. Single Step Income Statements

One of the two most commonly used accounting practises when it comes to income statement preparation would be the single step income statement format. This particular format relies only on one subtraction to derive the net income. Take care to note that single step income statement formats involve critical information within the heading, time interval reported and precision of the time period data. One can typically expect single subtotals for revenue line items, expense line items, and a report on net gain or loss. This format is usually more suitable for businesses that rely on simple operations.

4. Multi-Step Income Statements

True to it’s name, multi step income statements usually involve multiple subtractions to compute the net income. Another most commonly practised step out of all accounting practises, one can expect details and segregation on operating revenues, operating expenses, nonoperating revenues, non operating expenses, losses, gains and gross profit.

5. Discontinued Operations Reporting

For corporations who have gone through with eliminating significant parts of their business, discontinued operations is something accountants should observe in their accounting practises. Take note that income tax expenses should be included as part of the income statement generated. Gains in discontinued corporation operations should be reduced by income tax expenses that are associated with the gain, whereas losses incurred are reduced by income tax savings associated with it.

Everything To Know About The Accounts Payable Process

As part of accounting basics, all accountants are expected to be able to fully understand and explain what goes on within the accounts payable account. If you are beginning or possess no accounting knowledge, here is a simple guide to understanding what happens:

The Accounts Payable account is an open account that contains liabilities to creditors. If corporations make purchases for good and services in advance (without payment first), the purchases are made on account/credit while the invoices/bills are recorded into the Liability account (Accounts Payable). As a part of Double entry accounting basics, the Accounts Payable should be credited while another account is debited when the vendor invoice requires recording. Once the payment is made, the Accounts Payable should be debited while cash is credited. Basic accounting practise dictates that corporations who are to receive goods/services on credit are required to make reports of the liability no later than the date in which they are received. This same date has to be recorded within the debit entry to asset accounts or an expense when appropriate.

In order to ensure that the accurate amount is entered within accounting systems, there are certain details one should pay attention to: purchase orders and receiving reports issued by the corporation, company vendor’s invoices, contracts and other agreements. As a good recommendation for accounting basics regarding running an accounts payable process, accountants should ensure that- vendor invoices are processed in a timely fashion, general ledger accounts are recorded accurately, and that the accrual of obligations/expenses are not yet completely processed.

The goal of the Accounts payable process is to identify legitimate invoices and bills of the corporation. Before the invoice issued by creditors/vendors are entered into accounting records, the invoices should reflect/include: The corporation’s purchase order, what the corporation has received, unit costs, totals, calculations, additional terms and more.

Another recommended accounting practise for accountants would be to advise and ensure that there are internal controls for the accounts payable process. This ensures that the corporation’s assets and cash are safeguarded. Part of the account basics for internal controls include fraudulent invoice payment prevention, inaccurate invoice payment prevention, double payment prevention, as well as organisation practises to ensure that all vendor invoices have been accounted for.

Purchase orders are highly recommended to be prepared by corporations when there is intent to order from vendors. Relevant people or departments should be able to receive a purchase order copy detailing: a PO number, date of preparation, corporation name, vendor name, contact details, purchase item description, quantity of purchased items, unit prices, date required, shipping methods and other relevant details. Receiving reports should also be generated to document services or goods the corporation has received since they will be used to reconcile with the purchase order information.

Once both purchase orders and receiving reports have been generated and reconciled, they will require comparison with the vendor’s invoice in an accounting practise known as three way match. The three way match involves the comparison of service/product description, quantity, price, terms of the purchase order, description and quantity of the receiving report and description, quantity, cost, and terms of the invoice. The process is done when all three documents are in agreement and the vendor’s invoice will be input into the Accounts Payable account for payment scheduling.