During the normal course of operations, there are numerous financial transactions that are taking place within the company. In this regard, it is often challenging for companies to keep a proper track record of the expenses that they have incurred.
As a result, it might be challenging for companies to keep up to date with the expenses, and ensure that they are able to properly maintain a ledger listing down all individual accounts for the expenses that have been incurred.
Particularly in the case of small transactions, it is often challenging to keep a track record of all the expenses that have been incurred.
As a result, companies keep and maintain a petty cash book, so all such transactions, which are small or insignificant in nature can be recorded under one head.
Petty Cash Book can therefore, be described as a ledger that lists down all the petty cash expenses that the company has incurred over a specific course of time.
It includes balances and transactions which if otherwise individually managed might be harder to keep a track of. Hence, all such transactions are booked under the petty cash account.
Some examples of petty cash expenses include stationery cost, printing costs, as well as regular plumbing works. These expenses might be recurring, or might be one off, but the common denominator is the fact that they are insignificant to be kept under track in a separate account.
Key Features of the Petty Cash Book
As mentioned earlier, it can be seen that the petty cash book entails smaller transactions that take place within the company. However, there are some salient features of petty cash book that are common across all different petty cash books. They are included as follows:
A petty cash book has a debit and a credit side to show the incomings and the outgoings of the cash from the petty cash account.
Just like a normal cash book, a petty cash book is periodically maintained across a month.
It has dates and other relevant columns that are supposed to be included in order for auditors (or accountants) to reconcile the amounts that have been disbursed as petty cash book payments at the end of the subsequent accounting cycle or the month.
Example and Format of Petty Cash Book
Petty Cash Book format, and creation can be illustrated via the example given below:
Graze Inc. is a trading concern. They maintain a petty cash book. As per the company policy, the number of general expenses classified as petty cash is deposited in the petty cash account at the beginning of the month, followed by which due subtractions are made across the month. For the month ended November 30, 2019, Graze Inc. had the following transactions:
On 1st November 2019, Petty Cash had a previous balance of $2400.
As per company protocol, on 1st November 2019, the petty cash account was deposited with an amount of $3000.
During the month, the following expenses were incurred:
Casual labor charges: $250
Stationery charges: $450
Printing Charges:$300
Charitable Donations: $200
Office Cleaning Equipment: $180
AC repair: $320
This is the number of expenses that were incurred under Petty Cash by Graze Co. At the end of the month of November 2019, the Petty Cash Book will look something like this:
Date
Particular
Amount Debited
Date
Particular
Amount Credited
1st November 2019
Balance
2400
31st November 2019
Casual Labor
1250
Cash Deposited
3000
Stationery
450
Printing
300
Charity
200
Cleaning
180
AC Repair
320
30th November 2019
Balance Carried Forward
2700
How to reconcile and review Petty Cash Book?
Reconciling and Reviewing Petty Cash Book is a very integral part of internal control and should be highly prioritized by companies.
It is important for organizations to ensure that they are able to periodically reconcile these differences, in order to ensure that there is no chance of fraud or any financial malpractice within the company.
Therefore, it is a good idea to have a monthly round up of expenses that are paid by the company, so that proper balance is maintained in the company.
The reconciliation and review process help organizations safeguard against any leakages because it is often harder to keep track of these expenses. However, a petty cash book maintains all balances that can be subsequently double checked, if there is a need to do so.
Importance of Maintaining a Petty Cash Book
As mentioned earlier, it can be seen that maintaining a petty cash book is very important for the company in order to ensure that there are proper reconciliation and review, which reduces the chance of error.
In the same manner, maintaining a petty cash book is also important because it helps the decision-makers to have an idea about the expenses that are included in petty cash disbursements, and how can those expenses be minimized, if there is a need to do so.
A transferrable letter of credit can be described as a financial guarantee, that one of the parties, is going to transfer all, or a part of the credit that they have to the other party. Letters of credits are seen as protecting covenants that ensure that payment is made to the supplier of those particular goods and services.
Transferable Letter of Credit includes the buyer (who applies for the Letter of Credit), the middleman (or the First Beneficiary), and the seller (who is the final beneficiary). The Letter of Credit is used between these parties in order to ensure that payment is guaranteed from one party to another.
Key Features of Transferable Letter of Credit
Transferable Letter of Credit normally involves four parties.
The first party is the buyer. The buyer procures raw materials from the supplier, who might be situated abroad. Therefore, the seller of the goods and services might need a guarantee from the middle man (who is facilitating the purchase), that the seller is going to be paid for the goods or services.
Given the fact that the middle man might not always have the resources to pay the seller an amount as a guarantee, so he asks the first beneficiary to create a transferable Letter of Credit. Therefore, using this particular type of letter of credit, they are able to carry out the transaction in a safe and secure manner.
Therefore, the key features of the Transferable Letter of Credit include information about the transaction, and the related parties that might be involved. It might also include covenants in the cases where the buyer lays down some terms and conditions about what is expected from the overall analysis.
How do Transferable Letter of Credits work?
As mentioned earlier, it can be seen that the transferable letter of credit creates an exchangeable provision between the parties involved. This works in the way that the buyer of the goods and services goes to the bank, in order to ask it to be an intermediary in the process.
This means that the bank is taking guarantee to the seller of the goods and services that they are going to be paid by the buyer.
This is important because the seller of goods needs to be ensured that they will eventually be paid for the goods that they sell. They can only process the order once they have the guarantee, and that is why they require the letter of credit.
In the case of transferable letter of credit, the bank that issues the letter of credit includes provision the extension of the credit to the agreed upon second beneficiary.
In this case, the second beneficiary is bound to be entitled to payment of the loan, if it is required that the time of payment. However, it must be noted that the first beneficiary is considered to be liable for the payments in the case where they are disbursed by the bank.
Transferable Letter of Credit vs Back-to-Back Letter of Credit
As far as Back to Back Letter of Credit is concerned, it provides the option to the intermediary, or the first beneficiary to use the Letter of Credit as a security when conducting transaction with any other supplier.
Regardless of the fact that this can be used as a credit document, yet back to back letter of credit involves the first beneficiary requesting the buyer to issue a transferable so that the transaction can be furthered and used for the supplier.
On the contrary, as far as transferable Letter of Credit is concerned, it can be used as a credit document without any further perusal, because the beneficiary can be transferred.
Non-Transferable Letter of Credit
Non-transferable letter of credit is another type of letter of credit, which does not allow the transfer of credit to any other beneficiary except for the first beneficiary. Therefore, as far as non-transferable of letter of credit is concerned, only the first beneficiary can claim credit for it. It cannot be transferred, so it does not give the option to the first beneficiary to transfer the funds to anyone else.
A lot of organizations might prefer to work with non-transferable Letter of Credit because of the fact that they want to make sure that their letter of credit is not transferred without their discretion. Hence, in this case, it can be seen that there is a need to have clear discretion about the letter of credit being transferable, and only being specific to one party, the single beneficiary that the buyer has decided.
During the normal course of the business, there are numerous different transactions that the business carries out. In this regard, it is highly important to ensure that all the transactions are properly recorded, and are able to be retrieved with proper and relative ease.
In the same manner, it is also important to have clear and discrete communication channels established with both, the internal, as well as the external stakeholders of the company.
Purchase Order is one such document that facilitates better communication and record keeping during every day operational practice of the business.
Purchase Order is a document that is sent from the purchaser of the goods, to the seller of the goods, in order to communicate their intention to purchase certain goods and services from the seller.
Purchase Order simply acts as a communication tool between both the parties, and it helps organizations to ensure that they are able to dispatch the items that have been requested by the purchaser.
Key Features of a Purchase Order
Given the fact that the main rational behind the purchase order is to ensure that there are clear directives from the purchaser, to the seller regarding the goods that need to be invoiced. Therefore, it includes a number of components, and key features, that are mentioned below:
Date: Purchase Orders include the date on which the purchase orders are being issued, as well as the date where the company expects to receive the items they want to purchase. This is important because it communicates to the seller regarding the timeline they have to deliver the goods, and make the necessary arrangements.
Particulars: Purchase Orders should include the specifics of the products that are being ordered. This includes the items, as well as the description of those items. These particulars should ideally be mentioned in order to avoid any confusion. Therefore, the purchaser of the goods is expected to include the specifications of the product item in the most detailed format as possible.
Quantity of the goods: In addition to the particulars of the goods that are being purchased, it is also important to include the desired quantity of those particular goods and services.
Pricing: In the same manner, it is also important to mention the agreed upon pricing in the purchase order. This is to show that the company has agreed on those particular prices, and the seller can subsequently generate an invoice based on those prices.
Usages of a Purchase Order
Purchase Orders tend to be extremely crucial for the company because of a number of reasons. Those reasons are mainly vested on the following grounds:
Acting as a communication tool between the seller, and the purchases. This acts as a resource using which the seller of the goods prepares the order.
This acts as a reconciliation tool between the purchasers and the seller. It acts as proof that this was what was ordered, and subsequently, the relevant orders were delivered. This means that in the case where the purchaser makes the claim that the goods that were delivered were not what they had ordered, they can go back to the purchase order, and settle the difference.
During the audit process, purchase orders are important because they can identify if the correct amount was subtracted from the ledgers, and the relevant entries were carried out in a proper manner.
Purchase Order tends to be used as a confirmation from the purchaser that he is interested in purchasing those particular goods. Therefore, it is an order form, which gives a heads up to the seller, that he can start preparing those particular goods. Without a purchase order, there is no proper and formal proof that the order has been placed.
Importance of Purchase Orders
The importance of creating and managing purchase orders is more than just a communication related tool. It is necessary for organizations to keep a proper record of purchase orders, primarily because of the following reasons:
Purchase Orders tend to protect both the parties (the buyer, and the seller), because they provide a contractual, legal protection.
From the seller’s perspective, purchase orders are helpful because they help keeping and maintaining company’s persona, and ensuring that they are able to keep a track of all the incoming orders.
They can also be helpful in invoice creation, and subsequent tracking of payments as well as order protocols.
Purchase Orders are also helpful because they help companies avoid any duplication of orders. It helps them to schedule their processes in accordance with the purchase orders. Therefore, it acts as a very resourceful planning tool for the companies.
Material refers to the raw material, or the inputs that are required by the company to fulfill the production process.
Subsequently, material Control comprises of managerial activities that are undertaken by the decision makers of the company in order to ensure that the quality, as well as the quantity of the materials that are used in the production process are not managed such that there are no bottlenecks in the production process.
It also covers ground to ensure that cost effectiveness pertaining to sourcing, and stocking of materials is taken into consideration.
Objective
There are a few major objectives of material control. These objectives are as follows:
Ensuring smooth and uninterrupted production flow: During the normal course of business, there are certain unprecedented situations because of which demand might increase of decrease. In this regard, it is important for the managers to ensure that they are well prepared for such an event, and they do not suffer consequences in the form of halted production because of material unavailability. If not managed properly, this might result in considerable financial losses to the company.
To have proper knowledge about reordering intervals and lead times: When dealing with materials being sourced from another vendor, managers need to ensure that they are able to have clear idea regarding the lead time (the time taken from when they place the order of materials, till when they receive the materials), so that they are able to subsequently calculate their reordering intervals. It is imperative for managers to plan this properly, so that they are able to avoid any production halts.
Minimizing costs associated with Material Ordering: Material Control also helps companies to ensure that they can identify the Economic Order Quantity, in terms of ensuring that they are able to keep the costs associated with the material ordering at a minimal. They need to incorporate for ordering costs, as well as stocking costs, in order to ensure that material ordering costs is minimized.
Advantages
Material Control is a very important aspect in production planning, and hence, should be taken very seriously. In the case where managers are able to execute material planning properly, they can seek the following benefits:
Minimized Costs and Wastage: This is because they would exactly know the amount that is required to execute the production process, and they would not end up ordering more than they actually need.
To identify areas of improvement: By using ratios like material price variance, and material quantity variance, businesses can identify areas for improvement. This can help them prepare budgets for the coming production cycles, which would help the process to be efficient and effective.
To prevent theft, and loss of inventory: If businesses keep a proper track of material inventory, they are unlikely to face issues, like theft, or any fraudulent practice pertaining to materials.
Disadvantages
Regardless of the fact that material control is considered a good metric for planning, yet it has certain limitations. They include the following:
Material Planning is an important component that needs to be taken seriously. In this regard, it is highly important to ensure that budgets and planning schedules are not made too strict or tight.
Material Planning might not always align with the actual figures. Existing variance might cause unrest between the employees, and might put an unnecessary pressure on the workers.
It is harder to implement material control policies because a number of factors are beyond the control of the company.
5 best practices for material control
Therefore, there is no doubt to the fact that even regardless of the limitations that exist, material planning tends to be an increasingly important metric, which can be really helpful for companies. Here are 5 best practices for material control:
Creation of budgets, and then comparing them with actual figures end of the year, to identify causes for variance. Subsequently, it also includes working to improve variance in the next production cycle.
Implementing policies like Just in Time (JIT), or Kaizen to ensure that companies are able to optimize material handling process.
Having RFIDs installed with material, so that companies can automate tracking of inventory.
Proper warehousing arrangements to stock and store inventory can ensure that the risk of material being damaged as a result of mishandling is minimized.
Weekly audits to ensure that the relevant stocking is undertaken by the company in order to ensure that concurrent feedback is taken from the team on a real time basis, and any issue that might arise is solved on a perpetual basis.
Sales Discount is referred to as a discount that is extended to the customer in order to incentivize him to pay the amount early.
The slight deduction from the total bill depending on timely payment acts as a motivator for the debtors of the company, since they tend to try to utilize the discount, and pay back the amount in time.
In the normal course of business, companies might sell goods or services to their customers on credit. Regardless of the credit terms being mentioned in the contract, there are often circumstances where the buyers are not always able to pay back their debts in time.
In such cases, it is often challenging for the company (the seller of the goods) to manage their finances, because delayed payments might result in an altered cash flow for the company which is not always favorable for them in the long run.
Therefore, companies tend to offer sales discounts to their clients in order to give them an incentive to pay the amount before the agreed-upon date, so that their own liquidity and cash cycle stays uninterrupted, and the customer is also satisfied because he has availed a discount.
Therefore, sale discounts are very common, and companies across the world rely on these discounts to attract early payments from their buyers.
Accounting for sales discount
Since Sales Discounts decrease the total receivable amount from customers, they are categorized as a contra-revenue account.
This is because this particular amount is deducted from the Gross Sales in the Profit and Loss Account, in order to arrive at the Net Sales, as shown below:
Particulars
Amount
Gross Sales
100,000
Less: Sales Discounts
5,000
Net Sales
95,000
As far as Accounting for Sales Discounts is concerned, it can be explained using the categorization of sales discounts into trade discounts, and cash discounts. As far as Trade Discounts are concerned, they are the discounts given to customers to push sales.
They can be in the form of a certain percentage of the price of the product. Trade Discounts are not recorded as sales discounts, because they are the discounts that are offered, and agreed upon before the sale has actually been made.
On the other hand, cash discounts are discounts are discounts that are offered to attract customers for early settlement of their debts.
These are the discounts that are subtracted from the Gross Sales in order to determine the number of Net Sales that have been carried out by the company over the course of time.
Cash Sale Discounts are represented in the Sale Agreement as follows:
10/15,n/30
This particular format is interpreted as such that it means that the buyer of the goods is going to get a 10% discount if he pays within 15 days. Otherwise, the net amount is supposed to be paid in 30 days by the buyer.
Cash Discounts are represented in this manner, and they may, or may not include trade discounts. However, Cash Sales Discounts are represented in the format mentioned above.
Journal entries for sales discount
Journal Entries for Sales Discounts are posted in the following manner:
When a Sale is made on credit, the following journal entries are posted:
Particulars
Debit
Credit
Accounts Receivables
xxx
Sales
xxx
When the customer avails the cash discount offered, the following journal entry is posted:
Particulars
Debit
Credit
Cash
xxx
Cash Discount
xxx
Accounts Receivables
xxx
Example and solution
In order to further explain how Sales Discounts work, the following example is given:
On 1st January, Feliz Inc., sold goods worth $1000 to Jayman Co. The agreed credit terms for the transaction were 10/15, net/30.
Scenario 1:
Jayman Co. settled the amount on 14th Jan.
Scenario 2:
Jayman Co. settled the amount on 20th Jan.
The credit terms that are put forth by Feliz Inc. mean that Jayman Co. is supposed to settle the amount due before 15th January, in order to avail a cash discount of 10%. Otherwise, the net amount would be payable in maximum 30 days (i.e. 30th January).
Scenario 1:
In the case where Jayman Co. settles the amount on 14th Jan, the cash discount is availed. So, the following journal entry is going to be made:
Particulars
Debit
Credit
Cash
$900
Cash Discount
$100
Accounts Receivables
$1000
Scenario 2:
In the case where Jayman Co. settles the amount on 20th Jan, the cash discount is availed. So, the following journal entry is going to be made:
A Stale Check is defined as a check that is presented to the bank after a considerable amount of time from the date that has been mentioned on the check. The date timeline in this regard is mostly of a duration of 6 months or more.
While the bank might not always refuse to accept the stale check, yet it is often a cause of concern for the bank because it tends to be inconsistent because of the delay in the time period from when the check was issued, and when it was presented to the bank to be honored.
In simpler terminology, it can be seen that stale check is a check that is presented to the bank after 6 months of the date when the check was initially issued.
Explanation:
Stale Checks are often a cause of a suspicion when it comes to the bank, and therefore, many countries have the rule that banks are not always obliged to honor such checks, and they can refuse to accept it on grounds of irregularity and suspicion.
In this regard, banks are a holistic term that is used to define commercial banks, as well as other financial institutions that include checking accounts, savings accounts, loans, as well as credit unions.
The concept of stale checks does not only apply to personal banking accounts, but might also apply to business accounts. To further explain this concept, the following example can be used:
A company, Gen X Co. issued checks against inventory purchases from ABC Co. in January 2018. However, due to some reason, ABC Co. did not present these checks at the bank until 30th June 2018.
When the accountant found out that these checks had not been deposited in the bank, he sent them out to the bank to be subsequently filled.
However, to his dismay, the bank refused to deposit them, and declared that those checks as stale. Hence, they were returned back to ABC Co.
Subsequently, ABC Co. requested Gen X Co. to reissue those checks, or have them verified again by their bank in order for the transaction to process in a smooth manner.
Features of Stale Check:
The main underlying feature of a Stale Check is the fact that it has not been presented to the bank after a considerable time has passed.
Regardless of the reason behind the check not being presented, it would be considered stale, and might not be accepted by the receiving bank in the first go.
Moreover, even if the check has other subsequent information presented in a logical manner like signatures, names, etc., it can be seen that the check would still be considered stale because of the delayed deposit procedure.
What is considered as a Stale Check?
A check is considered to be a stale check if it is not presented by the receiver of the check to the bank after a considerable amount of time.
Therefore, banks are reluctant to accept it without proper verification with the bank. In the same manner, it is also imperative to consider that checks are considered stale primarily because of the reason that banks find it harder to rationalize why checks that were dated months back, have not been presented to date.
Therefore, because of the delay involved, checks are considered to be stale.
How many months is a Stale Check?
Different countries have different requirements when it comes to classification of stale checks. However, the general rule of thumb is that any check that has not been presented to the bank up to a period of 6 months is considered to be a stale check.
However, some banks also consider a check to be a stale check if it is not presented for encashment up till three months after when it has been issued.
Can a Stale Check be cashed?
Banks and other financial institutions are often reluctant to process stale checks because of the inherent risk and ambiguity involved.
Therefore, they always ask for verifications, or check reissuance in cases where a stale check has been presented to the bank for encashment.
However, it can be seen that under special circumstances banks can choose to cash stale checks, given that they are well aware of the risks involved, and they have sufficient reasoning to back the claim that it is not a case of fraud, or any sort of impeachment.
Hence, stale checks can generally not be cashed, unless there are measures and verifications taken either by the issuer of the check, or the person who is getting it cashed.
