Your success in business does not just depend only on your ability to make sales profits. You have to also learn how to properly manage and safeguard your company assets; they are what makes the profits for you.
Company assets are the valuable properties that your company owns. They include tangible physical business properties like lands and buildings, vehicles, office equipment, inventory, etc.
Also, intangible valuables such as brand, trademarks, patents, and intellectual properties all count as intangible business assets.
Your assets determine your business value. So, it is only wise that you learn how to maintain these assets for maximum business output.
Why Do You Need to Safeguard Your Assets
Your business assets help your company to generate revenue and add to your business value. You also need them for the efficient running of your day-to-day activities.
Damages to or loss of these business assets can affect the general health of your business. Resources spent on replacements and repairs increase business expenses and reduces net profit.
So, if you don’t take proper care of your business assets, you are risking huge business losses.
How to Safeguard Your Assets
Different assets have different kinds of risks associated with them. Since the goal is to prevent or at least minimize those risks, different measures can help safeguard your assets.
Proper Documentation and Monitoring
You must keep records of all your assets and track the activities associated with them.
For example, maintaining accurate inventory records can help you trace any missing or stolen goods. Regular machinery checks can also help you notice faults or potential damage risks more easily and fix them before they result in any serious harm.
Physical assets are susceptible to dangers such as robbery, fire outbreaks, and other environmental hazards.
So you might need to get good insurance coverage for your vehicles, buildings, and other tangible assets. That way, you don’t have to worry much about repairing or replacing them.
Machinery can wear and tear with time and consistent usage. You need to have a regular maintenance schedule to keep them in steady proper working conditions.
Even your employees might need vacations, annual assessments, and other routines to maintain high productivity and efficiency.
Intellectual Property Protection
Brand recognition and reputation, for instance, go a long way in determining your competitive edge and even volume of sales.
You can employ professional legal services to help guard against intellectual thefts or copyright infringements.
Physical, Digital, and Data Security
You can employ a viable security team or contract a security company to help protect your physical properties.
The use of security cameras can also help you monitor activities around your company environment right from the comfort of your office. You can also use vehicle tracking systems to monitor your company vehicles or even recover stolen machinery.
Cyber Security should also be given maximum attention. Ensure that sensitive information such as customer passwords, account statements, etc are fully guarded against unauthorized access. You can hire a cybersecurity expert for professional security services.
If you keep incurring unnecessary expenses due to poor assets management, it will eventually tell on your business’ general performance.
So you need to do everything possible to take care of your assets and safeguard them against possible risks.
There are a lot of risks associated with running a business and managing its assets. Learning how to safeguard your company’s cash is one of the viable ways to minimize those risks.
Cash is a very important asset for every business. It provides a quick and reliable means of making and receiving payments without much hurdles. Cash transactions are also less complicated to evaluate and document.
Whether it is cash-in-hand or cash equivalents, it is important you implement useful strategies in guarding against possible cash risks affecting your business.
1) Get a Company Account
As a business owner, it is sometimes hard to separate your business money from your personal finances. This is particularly difficult if your personal money is your major source of business capital.
If you’re running a sole proprietorship where you are in charge of everything, there is a higher tendency for inadequate business records. Maybe because there’s no one else to possibly check and balance your financial activities.
This is where a company account comes in very handy. With that, it is easier for you to accurately monitor your transactions through your company account’s financial statement.
For larger companies, a corporate account offers better restrictions to cash flow and improves account transparency.
2) Reduce Cash Redundancy
Having too much extra cash around your offices can be very tempting. You can be lured into unnecessary spending and can easily misplace money. Your employees can easily be tempted to “borrow”from company cash (and sometimes never return) or even steal them.
To avoid this, always deposit surplus cash into the bank on a regular basis, probably daily or at least once a week.
3) Restrict Access to Cash
The lesser the number of people with access to company cash, the easier it becomes to collate accurate accounts. If anything goes wrong, you would know who exactly should be held accountable.
Also, you can ensure that there are more than one signatory to your corporate account. That way, one person cannot just make transactions anyhow s/he wants. It improves the integrity of the transactions on the account.
4) Establish a Transaction Approval System
Transactions on the company account, especially withdrawals, should always be endorsed by appropriate authorities.
You can set up a system that verifies every transaction for approval before effecting them. The reasons for payments must be authentic and reasonable too.
5) Use Other Means of Payment
One downside of using liquid physical cash is that it is not recorded real-time into the bank statement. This can cause issues in a case where a transaction is recorded but the money was not eventually sent into the account.
You can use other payment methods that can reflect directly on the bank statement, such as bank transfers, cheques etc.
6) Issue / Collect Receipts
A transaction without proof can easily be denied or altered. Whether you’re receiving or giving out cash, always document the receipts.
Proper management and security of cash assets is very instrumental to the general safety of your business.
Loss or misplacement of cash can reduce both your business value and your purchasing power. So it is only wise that you safeguard your company cash as much as you can.
Reserves refer to a component of shareholders’ equity, the amount kept apart for estimated claims or creation of contra asset accounts for bad debts. Reserves always have a credit balance. The reserve which belongs to equity shareholders or where it is marked for any purpose is equity reserves.
The reserves appear in shareholders’ equity except in the computation of contributed share capital. Inequity section of the balance sheet, stocks are issued at a discount, par, or premium. The latter options are widely used.
When shares are issued at premium, the par value goes towards the basic share capital. Any amount above par will be considered as share premium and will be added to Paid up capital-share premium account. This is just one such example of equity reserves to give nuance of the concept.
The company operates in a business environment and strives to obtain higher and higher profits each year. The net profit is obtained by deducting the expenses from the revenues. The net profits are appropriated to reserves and surplus.
The profits are transferred to reserves and surplus after paying off the dividend to equity and preference shareholders which forms part of equity reserves. Many more such equity reserves form the balance sheet.
Types of equity reserves and their accounting treatment
Equity reserves form part of the Equity Section of the Balance sheet. It is a part of stockholders’ equity which is unmarked for any purpose and is residual in nature. The general presentation of equity reserves in the balance sheet is given below:
Liabilities and Capital Section
Equity share capital, at par
Preference Share capital, at par
Reserves and surplus
Securities Premium – Equity
Securities Premium – Preference
Total Liabilities and Capital
The Bolded portion is all part of Equity reserves. By equity, we mean the common shareholders. The equity reserves are distributable to equity shareholders.
Now, we move ahead to discuss varieties of equity reserves and their accounting treatment:
a. Foreign Currency Translation Reserve
We are almost living in a borderless society in terms of business transactions being done. Hence, the company is likely to get exposure to foreign currency as a result of business transactions or as a result of a corporation set up with associates or subsidiary. These transactions have to be converted into home currency in order to prepare financial statements.
Any losses or gains would depend on the exchange rates and would directly come out of equity pocket and benefits to be only given to them. Various methods of translation such as the current rate method, temporal rate method, and monetary-nonmonetary translation method shall be used.
The GAAP provisions state that items in the balance sheet should be converted in accordance with the rate of exchange on the date of the balance sheet while the income statement items shall be converted according to the weighted average rate of exchange. Any gains or losses arising from foreign currency transactions are recorded in the equity section of the balance sheet.
b. Revaluation Reserve
When the fixed assets are purchased, they are recorded using cost method or revaluation model. In case of revaluation model, all fixed assets would be revaluated on reporting date.
There would be a difference in the balances of these fixed assets on each such date. These revaluations would be recorded as revaluation reserves, part of equity reserves.
The changes due to revaluation would not be reflected in income statement until the fixed assets are disposed of. These will only be shown in the equity section of the balance sheet.
c. General reserved/ Retained Earnings
The businesses earn revenues throughout the year. With successful planning, they are able to churn out the net profit for the company.
After payment of dividends, the net profit is transferred to general reserves or retained earnings which is shown in the reserves and surplus side of the balance sheet.
d. fair value through other comprehensive income.
The fair value approach lays down various criteria. The financial assets and liabilities which meet such criteria impact the equity reserve. The value of financial instruments’ value is dynamic in nature. Before the disposal of such financial instruments, they should be reported in the balance sheet.
Any gain or loss realized from the sale will be recognized only after they are settled. Such gain would impact the Other comprehensive income i.e. through FV-OCI as per GAAP provisions.
Unearned revenue is amount of money that is received by the business for goods and services that is yet to be delivered or rendered. Unearned revenue can also be interpreted as revenue received in advance from customers but the performance of service or delivery of goods would be done later on.
Hence, the business creates the liability in its balance sheet till goods or services are delivered or performed. Popularly, unearned revenues are also known as deferred revenue or advance payments.
Some business models regularly thrive on the basis of unearned revenue. These are businesses selling subscription-based products and which would require advance payments. Popular examples include, rent payments are made in advance, prepaid insurance, airline tickets payments, newspaper subscriptions and payments for the use of software.
Receiving money in advance is very beneficial for the business to thrive. The revenue received early can be used in various ways like prepayment of debt or making requisitions of more inventory.
Recognition of unearned revenue
Unearned revenues provide various clues into how the company would be able to generate revenue in the coming quarters of reporting. The figure of unearned revenue becomes great importance to investors. Netflix is based on subscription model. The coronavirus although resulted in spurge of demand for Netflix.
Not every business has been spared. Take for example football sports club. They usually allow for annual subscription to fans to watch all the games. Manchester United for example would have to refund all the yearly fees it received from football fans for annual ticket membership fees.
This is meant to say things can go both ways in case of unearned revenue. The business may have to refund the unearned revenue in case of adverse circumstances.
There are three ways to record revenue. In case of accrual revenue, revenues are recognized at the time of performance of work. This is the general approach to record revenue and is in line with accounting principles. In case of deferred revenue, which equates to unearned revenue, the cash is received before the revenue has to be recognized as per accrual system of book keeping. T
his approach considers unearned revenue as a liability until the goods or services are delivered or rendered as the case may and then the revenue shall be identified. Another common transaction is when the business receives cash at the same time the goods or services are provided. In that case, revenue will be recorded impromptu.
How Unearned Revenue is Reported?
Unearned revenue is promised service that has not been performed. Hence, such revenue which is technically not a revenue has to be reported. There are two methods to report unearned revenue. These are liability method and income method.
In case of liability method, the unearned revenue is considered as liability. The appropriate reason for this would be that company has not performed the service and hence, the work seems to be pending even though the cash seems to have been received.
Hence, the unearned revenue has to be reported as a liability. At the end of March, the company will make adjusting entry which looks as
Unearned Revenue and How It Is Accounted for in Business
The journal entries would look as :
(To record cash received in advance from customer)
(To record revenue for the services performed)
The same payment of unearned revenue would be treated differently if the company uses income method. The income method approaches towards the unearned revenue as advanced payment as income. The general trade practice is however liability method.
Unearned Revenue in Balance Sheet
The customers do advance payments for the services they expect to be performed within a few months or a year at stretch. Hence, unearned revenue would be recorded under short term liabilities alongside trade payables. This would be reported under the Liabilities side of Balance sheet. Let’s take a short example.
Sinra Inc has received internet subscription for 3-month package from 200 customers at $ 30 dollar per customer per month in the first week of April for April to June package.
Now, in the first week, Sinra Inc has to recognize all of 200 customers as unearned revenue. This would be 200*30*3 = $ 18000
If the balance sheet is made at the end of April month i.e. at April 30, it would look as the following :
Other current liabilities are type of categorization of liabilities. These are residual current liabilities that have not been specified by the company or regulations or do not meet the criteria of being classified separately.
They are referred to as they are uncommon and insignificant like the major accounts of current liabilities as trade payables, accounts payable, income taxes payable. Other current liabilities are listed under the liabilities side of a firm’s balance sheet.
Other current liabilities are characterized as uncommon or insignificant. Other current liabilities are rarely recorded in the financial statements, hence, the net balance in other current liabilities account is typically small.
Understanding Other current liabilities (OCL)
Depending on the industry and industry practices, the explanations on other current liabilities can be found on the quarterly and annual filings by the company. To simplify miscellaneous current liabilities of the big companies, the term “other current liabilities” has been established to represent all the small items of current liabilities.
The major components of liabilities are either long term liabilities or current liabilities. Long term liabilities are non-current liabilities such as bank loans, debentures and long term notes payable. These liabilities have a span of more than 1 year and are payable in more than 1 year.
On the other hand, current liabilities are short term liabilities which have to be paid within 12 months. They are the liabilities that can be easily paid with liquidating current assets in the process of daily operations. Current liabilities include trade payables, accounts payable, income taxes payable.
Current liabilities that are not specified or uncommon won’t be categorized under current liabilities. Instead, they will be thrown into the residual heading of other current liabilities. Instead, these liabilities will be taken to a generic “other” category and would be recognized as other current liabilities (OCL) on the balance sheet.
Examples of other current liabilities shall include:
advances from customers
unpaid services and materials for previously invoiced projects
Special Considerations in case of other current liabilities
For publicly listed companies, they have to give clear breakdown of other current liabilities in their quarterly and annual filings. However, they represent no so significant amount of money. Hence, the companies may choose to ignore showing other current liabilities separately.
However, OCL would be placed under footnotes to financial statements. Rarely explanations are needed for OCL.
However, when needed, the company shall offer the explanations in notes to accounts. Other current liabilities are generally assumed to be disposed of within an accounting cycle that would be 12 months.
The nature of each OCL needs to be determined. It is important for the management to know about the liquidity of OCL.
If accounts in other current liabilities in the past year become material in the current year, it may need to be disclosed into major defined current liabilities accounts. This would slowly create insightful information in the minds of investors.
The simple calculation for OCL would be by subtracting from current liabilities, the current asset accounts as cash & cash equivalents, accounts receivable, marketable securities, inventory, and prepaid expenses.
it is represented as,
OCL = Total Current Liabilities – Accounts Payable – Short term debt – Income taxes payable – current maturities of long-term debt
Let’s take the example of Sinra Ltd that had recently filed its annual financial statements. The following details about current liabilities were available
Accounts Payable – $ 100,000
Short term debt – $ 200,000
Income taxes payable – $ 30,000
current maturities of long term debt – $ 160,000
Total Current Liabilities – $ 600,000
The Calculation of OCL can be done as :
Total current liabilities
Short term debt
Income taxes payable
current maturities of long-term debt
Other current liabilities
When to disclose other current liabilities separately?
Management must evaluate this question carefully before any disclosure is being made. Most of the times company regulations are clear on what amount of threshold based on percentages, account needs to cross in order to be separately disclosed on the balance sheet.
It is industry practise however that if other current liabilities are more than 10% of current liabilities, they need to be shown separately. Note to financial statements needs to be attached to the balance sheet explaining the breakup of other current liabilities if possible. Hence, management has to be careful in doing so.
Further, the audit concept of materiality may be imposed in this scenario whether they need to be identifiable. This would depend on the nature and size of liabilities under other current liabilities.
Other current assets are type of categorization of assets. These are residual current assets that have not been specified by the company or regulations or do not meet the criteria of being classified separately.
They are referred to as they are uncommon and insignificant like the current assets as cash, accounts receivables and prepaid expenses. Other current assets are listed under the assets side of firm’s balance sheet. Other current assets are characterized as uncommon or insignificant.
Other current assets are rarely recorded in the financial statements, hence, the net balance in other current assets account is typically small.
Understanding Other Current Assets (OCA)
The major components of assets are either fixed assets or current assets. Fixed assets are non-current assets such as buildings, printers, plant and machinery. These assets have span of more than 1 year and are beneficial in the long run.
On the other hand, current assets are short term assets whose benefits will accrue within 12 months. They are the assets that can be easily sold, utilized, consumed or exhausted in the process of daily operations. Current assets include cash, marketable securities, inventory and prepaid expenses.
Current assets that are not specified or uncommon won’t be categorized under current assets. Instead they will be thrown into residual heading of other current assets. Instead, these assets will be taken to a generic “other” category and would be recognized as other current assets (OCA) on the balance sheet.
Examples of other current assets shall include:
Restricted cash or investments
Advances paid to employees or suppliers
Cash surrender value of life insurance policies
Property that is being readied for sale
Marketable securities in negligible balance
Special Considerations in case of other current assets
For publicly listed companies, they have to give clear breakdown of other current assets in their quarterly and annual filings. However, they represent no so significant amount of expense. Hence, the companies may chose to ignore showing other current assets separately.
However, OCA would be placed under footnotes to financial statements. Rarely explanations are needed for OCA. However, when needed, the company shall offer the explanations in notes to accounts.
Other current assets are generally assumed to be disposed off within a accounting cycle that would be 12 months. The nature of each OCA needs to be determined. It is important for the management to know about the liquidity of OCA.
If accounts in other current assets in the past year become material in the current year, it may need to be disclosed into major defined current assets accounts. This would slowly create insightful information in the minds of investors.
The simple calculation for OCA would be by subtracting from current assets, the current asset accounts as cash & cash equivalents, accounts receivable, marketable securities, inventory, and prepaid expenses.
it is represented as,
OCA = Total Current Assets – Cash & Cash Equivalents – Accounts Receivable – Marketable Securities – Inventory – Prepaid Expenses
Let’s take the example of Sinra Ltd that had recently filed its annual financial statements. The following details about current assets were available
Cash & Cash Equivalents – $ 100,000
Accounts Receivable – $ 200,000
Marketable Securities – $ 30,000
Inventory – $ 160,000
Prepaid Expenses – $ 50,000
Total Current Assets – $ 600,000
The Calculation of OCA can be done as:
Total current assets
Cash and cash equivalents
Other current assets
When to disclose other current assets separately?
This is tricky thing for the management as well. Most of the times company regulations are clear on what amount of threshold based on percentages, account needs to cross in order to be separately disclosed on the balance sheet.
It is industry practice however that if other current assets are more than 10% of current assets, they need to be shown separately.
A note to financial statements needs to be attached to balance sheet explaining the breakup of other current assets if possible. Hence, management has to be careful in doing so.
Further, the audit concept of materiality may be imposed in this scenario whether they need to be identifiable. This would depend on the nature and size of assets under other current assets.