Accounting for Expenses
When the accountants are dealing with the accounting tasks (Also see How Do Accountants Carry Out the Accounting Process?) related to expenses, they need to recognise and record the consumed expenditure or any incurred obligations. This is a crucial process to ensure that the company has recognised its expenses accurately in the correct reporting period. If you are a business owner who does the accounting tasks on your own and often gets confused by the correct way of recording expenses, do not hesitate to let the experts from an accounting firm in Singapore help you out.
Listed below are the expenditures that the accountants may need to deal with when they account for the company’s expenses (Also see Accounting – What are Ordinary and Necessary Business Expenses):
Accounting for Consumed Expenditures
This type of expenditure happens when the company receives supplier invoices (Also see How to Differentiate Invoice and Receipt?) and pays for the goods or services it has purchased.
– Firstly, the accountants need to determine whether they should categorise the amount as an asset or an expense. The item is most likely an asset if the company can consume it over several accounting periods.
– If the item is an expense, they should recognise it in the right expense account (Also see An Overview of Deferred Expenses). Some examples of the expense account include utility expense, supplies expense, direct materials, and so on.
– If the item is an asset, they should record it in the prepaid expense account if it is a type of short-term asset, or fixed asset account if it is a type of long-term asset. For prepaid expense, the accountants should track the amount monthly and charge it to expenses as the company consumes it. On the other hand, for a fixed asset, they need to charge a fixed amount to the depreciation expense monthly until the company consumes the asset entirely.
– Even though the company has not received an invoice from the suppliers or make any payments, it may have an obligation to pay its suppliers. Thus, the accountants should create a reversing entry which records the accrued expense (Also see What are Accruals and Prepayments?) within that accounting period. Then, they need to reverse the entry in the following period. This is to make sure that the company has recognised the expense in the right accounting period. In the next accounting period, when the company receives the supplier invoice or make the payment, it will offset the reversal. Hence, there will not be any net entry in the next accounting period (Also see What is an Accounting Cycle?).
Accounting for Incurred Obligations
This type of expenditure happens when the company undertakes an obligation of paying a third party.
– Firstly, the accountants need to determine whether there is an obligation which is likely to happen and whether they can identify the amount clearly. If both the criteria are met, they should record a liability. Then, if they want to offset the liability, they need to charge the amount to expenses.
– In the accounting periods after that, the accountants should review the obligation and determine whether there is a change in the amount. If there is, they need to make adjustments to the liability as well as the related offsetting expense.