The terms outstanding expenses and accrued expenses are two accounting terms which are often used interchangeably. However, these two terms are not the same and have different meanings. The difference between these two terms is given below: What are Outstanding expenses? As the name suggests, outstaRead more
The terms outstanding expenses and accrued expenses are two accounting terms which are often used interchangeably. However, these two terms are not the same and have different meanings. The difference between these two terms is given below:
What are Outstanding expenses?
As the name suggests, outstanding expenses are the expenses that are due but have not been paid yet. It means that the business is supposed to pay the amount due but it has not paid the same at the end of the accounting period.
Outstanding expenses are recognized as a current liability because the business is liable to pay such expenses. These expenses are recorded in the books of accounts but the payment is still pending.
Some examples of outstanding expenses are:
The electricity bill is due for the month of January but has not yet been paid on 31st January.
Salaries of employees of 50,000 is due for the month of March but have not been paid yet by the business.
What are Accrued expenses?
Accrued expenses are the expenses that a business has incurred during the accounting period but they have not yet been recorded in the books of accounts because the bill has not yet been received or the payment is not due yet.
The concept of Accrued expenses helps in complying with the accrual basis of accounting which says that the expense shall be recognised at the time it occurs regardless of the fact that payment is received or not.
Examples of accrued expenses are:
The electricity bill for December is received in the month of January. However, it shall be recognised as an expense in the month of December.
The salaries of the employees for the month of April are paid in May. However, this expense shall be recognized in April.
Key differences between outstanding expenses and accrued expenses
To summarise the above discussion, the key differences between outstanding expenses and accrued expenses are given in the table below:
To understand the difference in Revenue recognition under IFRS and GAAP , it is important to understand what are IFRS and GAAP. Both of these are accounting standards accepted globally. These are discussed below: What is IFRS? IFRS is a set of accounting standards developed by the International AccRead more
To understand the difference in Revenue recognition under IFRS and GAAP , it is important to understand what are IFRS and GAAP. Both of these are accounting standards accepted globally. These are discussed below:
What is IFRS?
IFRS is a set of accounting standards developed by the International Accounting Standards Board. These standards are globally accepted accounting standards.
They were developed and implemented with the objective of providing a consistent, transparent and reliable framework for the presentation and reporting of financial statements.
IFRS ensure uniformity and this helps in comparability of financial statements across the companies of different countries.
Some examples of IFRS Standards are : IFRS 2 – Share based payments, IFRS 9 – Financial Instruments, IFRS 16 – Leases, etc.
What is GAAP?
GAAP stands for Generally Accepted Accounting Principles. GAAP is primarily used in the USA. These are a set of accounting principles, rules and procedures which are crucial for providing consistency and transparency in the presentation and reporting of financial statements.
Some examples of GAAP Standards are: ASC 606: Revenue Recognition, ASC 842: Leases, ASC 740: Income Taxes, etc.
Difference in Revenue Recognition under IFRS and GAAP
Though both of these standards have the main goal of promoting consistency and uniformity, there are certain differences in the Revenue Recognition under IFRS and GAAP.
This is because of the fact that the nature of IFRS and GAAP is different as IFRS is more principle- based and GAAP is rule based.
Revenue and income are two accounting terms that are often used interchangeably. However, it is important to understand that these two terms are different. Let us know the difference between the two through the discussion below: What is Revenue? Revenue is the total amount of a business's sales. ItRead more
Revenue and income are two accounting terms that are often used interchangeably. However, it is important to understand that these two terms are different. Let us know the difference between the two through the discussion below:
What is Revenue?
Revenue is the total amount of a business’s sales. It is the total amount earned by a business before deducting any expenses. Revenue is recognized in accounting as soon as a sale happens, even if the payment hasn’t been received yet.
For example, XYZ Ltd sold 100 pens at a selling price of 10 per pen. The total revenue of the business is hence 1,000.
What is Income?
Income is the amount earned by a business after deducting any direct or indirect expenses. It is the amount that
Inventory Turnover Ratio is the financial ratio that shows how efficiently a business sells and replenishes its inventory. It shows how well a business manages its inventory. Inventory Turnover ratio is calculated as follows: Inventory Turnover Ratio = Cost of goods sold / Average Inventory But whyRead more
Inventory Turnover Ratio is the financial ratio that shows how efficiently a business sells and replenishes its inventory. It shows how well a business manages its inventory.
Inventory Turnover ratio is calculated as follows:
Inventory Turnover Ratio = Cost of goods sold / Average Inventory
But why is the Cost of Goods Sold taken as a numerator instead of revenue while calculating the Inventory Turnover Ratio?
Every business requires research and development to create innovative products for consumers. More innovative and creative products and services are more popular among customers, leading to increased revenue and profits for the business. Creating new products or designing changes and testing existinRead more
Every business requires research and development to create innovative products for consumers. More innovative and creative products and services are more popular among customers, leading to increased revenue and profits for the business.
Creating new products or designing changes and testing existing products also forms a part of research and development.
Examples of Research and Development costs are –
Salaries of employees
Cost of making prototypes
Cost of raw material
Overhead expenses
Let us now understand how research and development costs are treated in Financial Statements.
IAS-38
IAS-38 majorly governs the accounting of research and development costs. There are two phases in R&D:
Research: During this phase, costs are incurred for understanding or designing the product. These costs are expensed as incurred costs as there is an uncertainty of a future benefit.
Development: Economic value can be ascertained during this phase and hence, the costs incurred can be capitalized as Intangible assets. To be recognised as intangible assets, the following conditions shall be satisfied:
1. it is developed with the intention of putting it to use in the future
2. the asset shall hold an economic value
3. the costs can be measured reliably
Treatment of R&D costs in the Financial statements:
Income statement: Research costs are shown as expenses in the income statement. However, development costs if capitalized as intangible assets can be amortised over time.
Balance Sheet: Capitalised development costs are shown as intangible assets under the Assets head of the Balance Sheet.
Conclusion
The above discussion can be summarised as follows:
Research and development is essential for creating innovative and creative products and services.
Accounting standard IAS-38 governs the accounting for Research and Development.
Research costs are usually shown as an expense in the Income statement of the business.
Development costs when capitalised can be shown as Intangible assets in the Balance Sheet.
Biological Assets comes under International Accounting Standard IAS 41 Agriculture. IAS 41 Agriculture is the first standard that specifically covers the primary sector. The scope of IAS 41 is accounting for agricultural activity. Agricultural Activity- It is the management of biological transformatRead more
Biological Assets comes under International Accounting Standard IAS 41 Agriculture.
IAS 41 Agriculture is the first standard that specifically covers the primary sector. The scope of IAS 41 is accounting for agricultural activity.
Agricultural Activity- It is the management of biological transformation by an entity and measuring the change in the quality and quantity of biological assets.
Biological Transformation- It comprises the process of growth, degeneration, production and procreation that cause qualitative or quantitative changes in a biological asset
Biological Asset – They are living plants or animals owned by an entity
Agricultural Produce- It is the harvested / detached product of the entity’s biological asset.
IAS 41 does not apply to
Agricultural land
Intangible assets related to agricultural activity
Products that are the result of processing after the point of harvest, for example, yarn, carpet, rubber, wine, etc
The land on which the biological assets grow, regenerate, degenerate.
Biological Assets
Definition
Biological assets are living plants or animals that go through biological transformation, owned by an entity to prepare agricultural produce for the purpose of agricultural activities only.
Living plants include plants that are consumable within 1 year and are harvested. It also includes plants that are used for lumbering and wood-cutting activities.
Farming: They are key to agriculture and food production.
Income: They generate substantial income for businesses in industries such as vineyards, livestock, silviculture, etc.
Sustainability: Properly managing them helps the environment.
Accounting & Presentation
Recognition
Under IAS 41 biological assets are recognised when
The business must have ownership over them from a past event.
The future economic benefits are expected to flow to the business from their ownership.
The cost or fair value of the asset can be measured reliably.
Agricultural produce is recognised
It is recognised at the point of harvest or detachment.
Agricultural produce is derecognised when
They enter the trading.
Enters the production process.
Measurement
Biological assets are measured on initial recognition and at each balance sheet date at their fair value less costs to sell.
Costs to sell are incremental costs incurred in selling the asset.
Agricultural produce is measured at the point of harvest, at fair value less costs to sell at the point of harvest.
Agricultural produce after the point of harvest/ detachment is transferred and treated under the IAS 2 Inventory
Gains & Losses
Gains and losses arising from the initial recognition of biological assets are reported in the statement of profit and loss.
The change in fair value less costs to sell of a biological asset between balance sheet dates is reported as gain or loss in the statement of profit and loss.
A gain or loss arising on initial recognition of agricultural produce at fair value less selling costs is included in profit or loss for the period in which it arises.
Treatment
The sale of agricultural produce is treated as revenue in the statement of profit and loss.
Agricultural produce to be harvested for more than 12 months, livestock to be held for more than 12 months and trees cultivated for lumber are recorded as Biological assets under the Non-current assets head in the balance sheet.
Agricultural produce to be harvested within 12 months, livestock to be slaughtered within 12 months and annual crops like wheat, and maize are recorded as Biological assets under the head Current assets in the balance sheet.
Inventories produced from agricultural produce are presented as Inventory under the head Current assets in the balance sheet.
To understand the accounting treatment of fixed assets under IFRS let us first understand what fixed assets are. What are Fixed Assets? Fixed assets are the assets that are purchased for long-term use by a business and not for resale. Some examples of fixed assets are land, buildings, machinery, furRead more
To understand the accounting treatment of fixed assets under IFRS let us first understand what fixed assets are.
What are Fixed Assets?
Fixed assets are the assets that are purchased for long-term use by a business and not for resale. Some examples of fixed assets are land, buildings, machinery, furniture and fixtures, etc.
Fixed assets are essential for the smooth operations of the business. It often shows the value of the business. The value of fixed assets usually decreases with time, obsolescence, damage, etc.
As per IAS-16 Property, Plant and Equipment, an asset is identified as a fixed asset if it satisfies the following conditions:
the future economic benefits associated with the asset will probably flow to the entity, and
the cost of the asset can be measured reliably.
What is IFRS?
IFRS stands for International Financial Reporting Standards. It provides a set of standards to be followed globally by all companies to ensure transparency, comparability, and consistency.
What is the accounting treatment of fixed assets under IFRS?
Under IFRS, the first step is to measure the value of the fixed assets on cost. The cost of the fixed assets includes the following:
purchase price
any direct cost related to the asset (such as transportation, installation, etc.)
duties/taxes
After this step, the entity may choose any one of the following two primary methods:
Cost Model: According to this model the value is first recognized on a cost basis. This includes the purchase price and direct costs attributable to the asset. Subsequently, depreciation is calculated on the cost of the asset. Depreciation spreads the cost of an asset over its useful life. Impairment checks are conducted to ensure the asset’s value on the books doesn’t exceed what it’s worth.
For example, a company bought a piece of machinery for 60,000. 5,000 were spent on its installation. It has a useful life of 10 years. The machinery would be depreciated over its useful life of 10 years based on its cost which is 65,000.
2. Revaluation model: As per this model, the fixed assets are valued on their fair value, as on the revaluation date. The amount of depreciation and impairment losses is subtracted from the fair value.
If the value of an asset increases, the gain goes to equity (revaluation surplus) unless it can be set off with a past loss recorded in profit or loss.
On the other hand, if the value decreases, the loss goes to profit or loss unless it offsets a past surplus in equity.
For example, a building was purchased for 100,000. On the revaluation date, the fair value of this building was 150,000. Hence, there is a revaluation surplus of 50,000 which shall be credited to the revaluation surplus account.
Impact on Financial Statements
Fixed assets are shown on the Assets side of the Balance Sheet.
Conclusion
From the above discussion, it may be concluded that:
Fixed assets are the assets that are purchased for long-term use by a business and not for resale.
Some examples of fixed assets are land, buildings, machinery, furniture and fixtures, etc.
IFRS provides a set of standards to be followed globally by all companies to ensure transparency, comparability, and consistency.
Under IFRS, the first step is to measure the value of the fixed assets on cost.
After this step, the entity may choose any one of the two primary methods which are cost model and the revaluation model.
Fixed assets are shown on the Assets side of the Balance Sheet.
What is the difference between outstanding expenses and accrued expenses?
The terms outstanding expenses and accrued expenses are two accounting terms which are often used interchangeably. However, these two terms are not the same and have different meanings. The difference between these two terms is given below: What are Outstanding expenses? As the name suggests, outstaRead more
The terms outstanding expenses and accrued expenses are two accounting terms which are often used interchangeably. However, these two terms are not the same and have different meanings. The difference between these two terms is given below:
What are Outstanding expenses?
As the name suggests, outstanding expenses are the expenses that are due but have not been paid yet. It means that the business is supposed to pay the amount due but it has not paid the same at the end of the accounting period.
Outstanding expenses are recognized as a current liability because the business is liable to pay such expenses. These expenses are recorded in the books of accounts but the payment is still pending.
Some examples of outstanding expenses are:
What are Accrued expenses?
Accrued expenses are the expenses that a business has incurred during the accounting period but they have not yet been recorded in the books of accounts because the bill has not yet been received or the payment is not due yet.
The concept of Accrued expenses helps in complying with the accrual basis of accounting which says that the expense shall be recognised at the time it occurs regardless of the fact that payment is received or not.
Examples of accrued expenses are:
Key differences between outstanding expenses and accrued expenses
To summarise the above discussion, the key differences between outstanding expenses and accrued expenses are given in the table below:
See lessHow does revenue recognition differ under various accounting standards (e.g. , IFRS vs. GAAP)?
To understand the difference in Revenue recognition under IFRS and GAAP , it is important to understand what are IFRS and GAAP. Both of these are accounting standards accepted globally. These are discussed below: What is IFRS? IFRS is a set of accounting standards developed by the International AccRead more
To understand the difference in Revenue recognition under IFRS and GAAP , it is important to understand what are IFRS and GAAP. Both of these are accounting standards accepted globally. These are discussed below:
What is IFRS?
IFRS is a set of accounting standards developed by the International Accounting Standards Board. These standards are globally accepted accounting standards.
They were developed and implemented with the objective of providing a consistent, transparent and reliable framework for the presentation and reporting of financial statements.
IFRS ensure uniformity and this helps in comparability of financial statements across the companies of different countries.
Some examples of IFRS Standards are : IFRS 2 – Share based payments, IFRS 9 – Financial Instruments, IFRS 16 – Leases, etc.
What is GAAP?
GAAP stands for Generally Accepted Accounting Principles. GAAP is primarily used in the USA. These are a set of accounting principles, rules and procedures which are crucial for providing consistency and transparency in the presentation and reporting of financial statements.
Some examples of GAAP Standards are: ASC 606: Revenue Recognition, ASC 842: Leases, ASC 740: Income Taxes, etc.
Difference in Revenue Recognition under IFRS and GAAP
Though both of these standards have the main goal of promoting consistency and uniformity, there are certain differences in the Revenue Recognition under IFRS and GAAP.
This is because of the fact that the nature of IFRS and GAAP is different as IFRS is more principle- based and GAAP is rule based.
See lessWhich is a broader term between the two- Income or Revenue?
Revenue and income are two accounting terms that are often used interchangeably. However, it is important to understand that these two terms are different. Let us know the difference between the two through the discussion below: What is Revenue? Revenue is the total amount of a business's sales. ItRead more
Revenue and income are two accounting terms that are often used interchangeably. However, it is important to understand that these two terms are different. Let us know the difference between the two through the discussion below:
What is Revenue?
Revenue is the total amount of a business’s sales. It is the total amount earned by a business before deducting any expenses. Revenue is recognized in accounting as soon as a sale happens, even if the payment hasn’t been received yet.
For example, XYZ Ltd sold 100 pens at a selling price of 10 per pen. The total revenue of the business is hence 1,000.
What is Income?
Income is the amount earned by a business after deducting any direct or indirect expenses. It is the amount that
See lessWhy is Cost of Goods Sold taken as numerator instead of revenue while calculating the Inventory Turnover Ratio?
Inventory Turnover Ratio is the financial ratio that shows how efficiently a business sells and replenishes its inventory. It shows how well a business manages its inventory. Inventory Turnover ratio is calculated as follows: Inventory Turnover Ratio = Cost of goods sold / Average Inventory But whyRead more
Inventory Turnover Ratio is the financial ratio that shows how efficiently a business sells and replenishes its inventory. It shows how well a business manages its inventory.
Inventory Turnover ratio is calculated as follows:
Inventory Turnover Ratio = Cost of goods sold / Average Inventory
But why is the Cost of Goods Sold taken as a numerator instead of revenue while calculating the Inventory Turnover Ratio?
Inventory
See lessHow are Research & Development costs treated in financial statements?
Every business requires research and development to create innovative products for consumers. More innovative and creative products and services are more popular among customers, leading to increased revenue and profits for the business. Creating new products or designing changes and testing existinRead more
Every business requires research and development to create innovative products for consumers. More innovative and creative products and services are more popular among customers, leading to increased revenue and profits for the business.
Creating new products or designing changes and testing existing products also forms a part of research and development.
Examples of Research and Development costs are –
Let us now understand how research and development costs are treated in Financial Statements.
IAS-38
IAS-38 majorly governs the accounting of research and development costs. There are two phases in R&D:
1. it is developed with the intention of putting it to use in the future
2. the asset shall hold an economic value
3. the costs can be measured reliably
Treatment of R&D costs in the Financial statements:
Conclusion
The above discussion can be summarised as follows:
- Research and development is essential for creating innovative and creative products and services.
- Accounting standard IAS-38 governs the accounting for Research and Development.
- Research costs are usually shown as an expense in the Income statement of the business.
- Development costs when capitalised can be shown as Intangible assets in the Balance Sheet.
See lessWhat are biological assets? What is their accounting treatment?
Biological Assets comes under International Accounting Standard IAS 41 Agriculture. IAS 41 Agriculture is the first standard that specifically covers the primary sector. The scope of IAS 41 is accounting for agricultural activity. Agricultural Activity- It is the management of biological transformatRead more
Biological Assets comes under International Accounting Standard IAS 41 Agriculture.
IAS 41 Agriculture is the first standard that specifically covers the primary sector. The scope of IAS 41 is accounting for agricultural activity.
IAS 41 does not apply to
Biological Assets
Definition
Biological assets are living plants or animals that go through biological transformation, owned by an entity to prepare agricultural produce for the purpose of agricultural activities only.
Living plants include plants that are consumable within 1 year and are harvested. It also includes plants that are used for lumbering and wood-cutting activities.
Examples
Examples of biological assets are:
Sheep, pigs, poultry, beef cattle, fish, dairy cows, plants for harvest etc
Importance
Accounting & Presentation
Recognition
Under IAS 41 biological assets are recognised when
Agricultural produce is recognised
Agricultural produce is derecognised when
Measurement
Gains & Losses
Treatment
- The sale of agricultural produce is treated as revenue in the statement of profit and loss.
- Agricultural produce to be harvested for more than 12 months, livestock to be held for more than 12 months and trees cultivated for lumber are recorded as Biological assets under the Non-current assets head in the balance sheet.
- Agricultural produce to be harvested within 12 months, livestock to be slaughtered within 12 months and annual crops like wheat, and maize are recorded as Biological assets under the head Current assets in the balance sheet.
- Inventories produced from agricultural produce are presented as Inventory under the head Current assets in the balance sheet.
See lessWhat are the different methods of accounting for fixed assets according to IFRS?
To understand the accounting treatment of fixed assets under IFRS let us first understand what fixed assets are. What are Fixed Assets? Fixed assets are the assets that are purchased for long-term use by a business and not for resale. Some examples of fixed assets are land, buildings, machinery, furRead more
To understand the accounting treatment of fixed assets under IFRS let us first understand what fixed assets are.
What are Fixed Assets?
Fixed assets are the assets that are purchased for long-term use by a business and not for resale. Some examples of fixed assets are land, buildings, machinery, furniture and fixtures, etc.
Fixed assets are essential for the smooth operations of the business. It often shows the value of the business. The value of fixed assets usually decreases with time, obsolescence, damage, etc.
As per IAS-16 Property, Plant and Equipment, an asset is identified as a fixed asset if it satisfies the following conditions:
What is IFRS?
IFRS stands for International Financial Reporting Standards. It provides a set of standards to be followed globally by all companies to ensure transparency, comparability, and consistency.
What is the accounting treatment of fixed assets under IFRS?
Under IFRS, the first step is to measure the value of the fixed assets on cost. The cost of the fixed assets includes the following:
After this step, the entity may choose any one of the following two primary methods:
For example, a company bought a piece of machinery for 60,000. 5,000 were spent on its installation. It has a useful life of 10 years. The machinery would be depreciated over its useful life of 10 years based on its cost which is 65,000.
2. Revaluation model: As per this model, the fixed assets are valued on their fair value, as on the revaluation date. The amount of depreciation and impairment losses is subtracted from the fair value.
If the value of an asset increases, the gain goes to equity (revaluation surplus) unless it can be set off with a past loss recorded in profit or loss.
On the other hand, if the value decreases, the loss goes to profit or loss unless it offsets a past surplus in equity.
For example, a building was purchased for 100,000. On the revaluation date, the fair value of this building was 150,000. Hence, there is a revaluation surplus of 50,000 which shall be credited to the revaluation surplus account.
Impact on Financial Statements
Fixed assets are shown on the Assets side of the Balance Sheet.
Conclusion
From the above discussion, it may be concluded that:
See less