Review Reconciliation and Non-Reconciliation AP Accounts
Order ID:89JHGSJE83839 Style:APA/MLA/Harvard/Chicago Pages:5-10 Instructions:
Review Reconciliation and Non-Reconciliation AP Accounts
Demo 3.5: Review reconciliation and non-reconciliation AP accounts.
ACCOUNTS RECEIVABLE (AR) ACCOUNTING
Whereas accounts payable accounting is concerned with vendors, accounts receivable accounting is concerned with customers. When businesses need to track money owed by each customer separately, they create an account in the accounts receivable subledger for each customer with a corresponding des- ignated general ledger account (the reconciliation account). The customer subledger account is created when the customer master record is created, and they share the same account number. The association between the cus- tomer account and the reconciliation account is established in the defi nition of the customer master record. We discuss this procedure in the context of
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64 CHAPTER 3 Introduction to Accounting
Figure 3-15: Accounts payable accounting
the fulfi llment process in Chapter 5. For GBI, the designated reconciliation account is accounts receivable reconciliation (#110100).
Let’s consider a scenario in which GBI sells bicycles to two customers on credit for $5,000 and $3,000, respectively, and then receives payment at a later date. These purchases are Steps 1 and 2 in Figure 3-16. The relevant accounts are sales revenue and the individual customer accounts. Sales revenue is cred- ited by the amount of the sale, and a corresponding debit is made to the appro- priate customer account. This debit is also automatically posted to the accounts receivable reconciliation account as indicated by the arrows in Figure 3-16.
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As in the case of the AP reconciliation account, the AR reconciliation account does not track the details of the transactions. When payment is made (Steps 3–4), the bank account is debited, and the appropriate customer account is credited. At the same time, a corresponding automatic credit is posted to the reconciliation account, accounts receivable reconciliation.
Figure 3-16: Accounts receivable accounting
Demo 3.6: Review reconciliation and non-reconciliation AR accounts
ASSET ACCOUNTING
An organization may possess a variety of assets, including tangible, intan- gible, and fi nancial assets. Tangible assets have a physical form, whereas intangible assets are nonphysical. Examples of tangible assets are computers, machinery, and buildings. Examples of intangible assets are intellectual prop- erty, patents, and trademarks. Financial assets include a variety of fi nancial instruments such as securities, long-term notes (debts), and mortgages.
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Companies use asset accounting to track the fi nancial consequences asso- ciated with the entire lifecycle of an asset, from acquisition to disposal. In this section we discuss asset accounting as it relates to tangible assets, which can be further categorized as fi xed assets, leased assets, and assets under construc- tion. A discussion of how the other types of assets are accounted for is beyond the scope of this book.
Asset accounting is complex, and a thorough discussion is beyond the scope of this book. However, we discuss some key concepts next. Assets are assigned to a company code and, by virtue of this assignment, all asset-related transactions are posted to the general ledger associated with the company code. This arrangement ensures that asset transactions are properly refl ected in the company’s fi nancial statements. Recall from our previous discussion that fi nancial statements can be created for business areas as well as company codes. Therefore, assets are also assigned to a business area. Finally, assets are associated with cost centers. We explained earlier that companies employ cost centers to accumulate the costs incurred in various processes. In asset account- ing, the primary cost is depreciation expense, which is the loss in value of an asset over time. When a company incurs a depreciation expense, it must allo- cate that expense to a cost center.
Accounting data about each asset are maintained in asset subledger accounts. These data include acquisition costs and depreciation. Like other subledger accounts (such as customer and vendor accounts), asset subledger accounts are created when the asset master record is created. The subledger account and the master record share the same account number. As in the case of customer and vendor accounts, asset accounts are associated with a reconciliation account in the general ledger. However, in contrast with customer and vendor accounts, the association between an asset account and a reconciliation account is not straightforward. Rather, it depends on which asset class the asset belongs to. An asset class is a grouping of assets that possess similar characteristics. For example, all computing equipment such as computers, printers, and monitors can be included in one asset class. Each asset class is associated with a specifi c reconciliation account in the general ledger account. The fi ve reconciliation accounts related to assets that are included in GBI’s general ledger are listed in Figure 3-17. Finally, each asset class includes
Figure 3-17: GBI reconciliation accounts for assets
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Processes 67
a variety of parameters that determine how an asset belonging to that class is treated. The two most important parameters are account determination and depreciation. We discuss account determination in the next paragraph, and we consider depreciation a bit later in the chapter.
The reconciliation account for each asset in the asset subledger account is determined by its association with an asset class. This association, referred to as account determination, is illustrated in Figure 3-18. The fi gure shows three of the fi ve reconciliation accounts included in GBI’s general ledger as well as four of GBI’s asset classes. Note that offi ce equipment and offi ce com- puters are associated with the same reconciliation account. Thus, two or more asset classes can be associated with the same reconciliation account. Going fur- ther, asset class vehicles and asset class offi ce computers both have two assets, which in turn have individual subledger accounts associated with them.
GL Account
Figure 3-18: Asset accounts and account determination
Demo 3.7: Review asset classes and asset-related accounts
A company typically acquires an asset and keeps it for a certain amount of time, after which it is no longer useful. A variety of activities or transactions are associated with the asset during its lifecycle. The most common transac- tions types are acquisition, depreciation, and retirement. We discuss these top- ics next.
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68 CHAPTER 3 Introduction to Accounting
Acquisition
An asset can be acquired either externally or through internal processes (e.g., the production process). For assets produced internally, a special asset class, assets under construction, is used during production, and the costs (materi- als, labor, etc.) are tracked in a corresponding general ledger reconcilia- tion account. For assets obtained externally, three options are available: (1) purchase from an established vendor without using the purchasing process; (2) purchase from an established vendor using the purchasing process; and (3) purchase from a one-time vendor, or a vendor for whom master data (and therefore a subledger account) are not maintained.
In the fi rst scenario, a company purchases an asset from an established vendor but does not employ the full purchasing process. That is, a purchase order is not created. Instead, the accounting impact of the acquisition is manu- ally recorded in relevant general ledger and subledger accounts. The process is similar to the one described in the accounts payable accounting process dis- cussed earlier in the chapter. In this scenario, however, the company uses the vendor subledger account and a corresponding accounts payable reconcilia- tion account instead of the supplies expense account.
In the second scenario, a company purchases from an established vendor using the entire purchasing process, which involves a purchase order, a goods receipt, an invoice receipt, and payment. The accounting impact is very similar to the fi rst scenario, but the impacts are automatically recorded by the steps in the purchasing process. We examine this process more closely in Chapter 4.
In the fi nal scenario, the asset is purchased from a one-time vendor or a vendor for whom the company does not maintain master data. In this case, a vendor subledger account does not exist. The accounting impact of the acquisition is manually recorded using the asset account (subledger), the cor- responding reconciliation account, and a specially designated clearing account. Recall that clearing accounts are used to hold data temporarily until the data are moved to another account.
Figure 3-19 illustrates the acquisition of an asset from a one-time vendor. In this illustration, a company purchases a new desktop computer from the vendor for $5,000, with payment to be made at a later date. As a result of this purchase, asset master data for the new computer (Desktop Computer #14) are created. This is a subledger account that is associated with the offi ce equipment and computers account in the general ledger.
When the purchase is completed (Step 1), the asset subledger account is debited by $5,000, and the asset acquisition clearing account is credited by the same amount. At the same time, the offi ce equipment and computers account in the general ledger, the reconciliation account, is debited. When the com- pany receives an invoice (Step 2), the clearing account is “cleared” with a debit posting, and a corresponding credit is posted to the payables–miscellaneous account. Note that this is not the same account as the one used in the accounts payable process. In that process the accounts payable reconciliation account was used. In this case payables–miscellaneous is not a reconciliation account and therefore can be posted to directly. Finally, when the company pays for the computer via a check (Step 3), the payables–miscellaneous account is debited, and the bank account is credited.
An alternative scenario may involve a loan, in which case there is no accounts payable account or bank account. Rather, a notes payable account is used to clear the asset acquisition clearing account.
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Figure 3-19: Asset acquisition with a clearing account
Demo 3.8: Acquire an asset
Depreciation
The second transaction type is depreciation. Over time, an asset’s value dimin- ishes due to wear and tear. This decrease in value is recorded as depreciation. Thus, the value of an asset is equal to its acquisition value less accumulated depreciation. Depreciation can be ordinary or unplanned. Ordinary depreciation refers to the planned, periodic, and recurring decrease in the value of an asset due to normal usage. In contrast, unplanned depreciation occurs when extraordinary or unforeseen circumstances cause the asset to lose value faster than normal.
The actual amount of asset depreciation depends on several factors, pri- marily the type of depreciation method the company employs, the asset’s useful life, and its residual value. Companies can select from a variety of depreciation methods, for example, straight-line and double-declining balance. In straight- line depreciation, the asset is depreciated by the same amount every year. In declining balance, the asset is depreciated at a fi xed percentage rate each year. In contrast to the straight-line method, then, in this method the amount of the depreciation decreases each year because the value of the asset decreases each year.
Going further, every asset has a useful life, which specifi es how long the company anticipates using the asset. At the end of its useful life, an asset has a scrap or residual value. This is the amount the company expects to receive when it disposes of the asset. Finally, an asset has a book value, which is the value of the asset after it is depreciated.
In the previous section we presented an example in which a company purchases a desktop computer. Let’s use this same example to illustrate depreciation. We will assume that the asset was purchased at the beginning of the year, has a useful life of four years, and a residual value of $1,000. Using the straight-line depreciation method, the amount to be depreciated is the
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70 CHAPTER 3 Introduction to Accounting
asset purchase price ($5,000) less the residual value ($1,000), which is $4,000. This amount is to be depreciated over four years, resulting in an annual depre- ciation expense of $1,000. This process is outlined in Figure 3-20. The last col- umn in the fi gure is the book value following the depreciation.
Figure 3-20: Straight-line depreciation
Review Reconciliation and Non-Reconciliation AP Accounts
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