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Aditi
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  2. Mehak

    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

     

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  2. Mehak

    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

     

     

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  2. Mehak

    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.

     

     

     

     

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Aditi
Aditi
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  2. Mehak

    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:

    1. The electricity bill is due for the month of January but has not yet been paid on 31st January.
    2. 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:

    1. 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.
    2. 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:

     

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  2. Mehak
    This answer was edited.

    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 –

    1. Salaries of employees
    2. Cost of making prototypes
    3. Cost of raw material
    4. 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:

      1. 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.
      2. 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:

    1. Research and development is essential for creating innovative and creative products and services.
    2. Accounting standard IAS-38 governs the accounting for Research and Development.
    3. Research costs are usually shown as an expense in the Income statement of the business.
    4.  Development costs when capitalised can be shown as Intangible assets in the Balance Sheet.
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