What are Retained Earnings

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Retained earnings are that portion of profit not paid out as dividends.

Retained earnings are cumulative and represent both past & present earnings of an entity that have been reinvested. Thus it is important to realise that retained earnings does not represent surplus or leftover cash after the payment of dividends. Instead, retained earnings represent what an entity has reinvested in itself since inception. Retained earnings will be applied to either the purchase of an asset or the reduction of a liability.

Thus retained earnings are often used by an entity to reinvest in such matters as plant & equipment, for research & development or to retire debt.

Retained earnings are accounted for at the end of a financial year and can be either positive or negative earnings. Thus an increase or decrease in retained earnings during an accounting period is directly related to the amount of net income or net loss plus dividend payments for that accounting period.

When accounting for retained earnings, the closing balance at the end of an accounting period becomes the opening balance of retained earnings in next accounting period to which is added the net income or net loss for that accounting period against which is deducted any dividends paid in that accounting period.

Retained earnings are reported in the shareholders equity section of a balance sheet.

For an entity, when retained earnings increase so does shareholders equity which in turn increases the value of the individual shareholdings.

Please note: Prepared by Leigh Barker Tangible Assets, Accountant at MWC Group, Portfolio Finance, Gordon and West Pennant Hills. Note that all content of this blog is general in nature and anyone intending to apply the information to practical circumstances should seek professional advice to independently verify their interpretation and the information’s applicability to their particular circumstance.

What is an Auditor – Leigh Barker

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An auditor is an independent person or company appointed to check and verify the accuracy of financial records. An auditor may be an external auditor who examines the financial records and business transactions of an entity in which there is no affiliation or an internal auditor responsible for providing independent and objective evaluations of an entities financial and operational activities.

External auditors are engaged to express an opinion that the financial statements of an entity are free from material misstatements. An external auditor will communicate to management and staff to obtain a detailed understanding of an entity, of the operations of the entity, financial reporting and internal control procedures.

External auditors conduct the audit in accordance with specified audit guidelines and the users of an entities financial statements rely upon the external auditor to present an unbiased and independent audit report.

Internal auditors while employed by the organisation they audit bring a systematic and disciplined approach in evaluating financial and business activities inclusive of the effectiveness of risk management, control and corporate governance. Internal auditors report to management on how to improve the overall structure and business practices of an entity.

Internal auditors are not responsible for implementing the activities of an entity. The role of an internal auditor is to advise the Board of Directors how to better implement their responsibilities. An internal audit report will summarise the findings, recommendations and generally contains an action plan for management to implement.

Please note: Prepared by Leigh Barker Accountant at MWC Group, Tangible Assets, Portfolio Finance, Gordon and West Pennant Hills. Note that all content of this blog is general in nature and anyone intending to apply the information to practical circumstances should seek professional advice to independently verify their interpretation and the information’s applicability to their particular circumstance.

What is an Accountant – Leigh barker Accountant

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An accountant is a trusted professional whose career is centred on dealing with money and figures.

An accountant will assist business to track income, expenditure and assets. In general an accountant is detailed, well organised and good at communications.

As one of the key roles in any business, the accountant monitors and records the flow of funds and has the responsibility of verifying the accuracy of all transactions ensuring that at all times they are recorded and reported within regulatory guidelines. Accountants obtain certifications from professional bodies and must abide by ethical standards and guiding principles where they practice.

Through financial statements the accountant assesses the health of a business by using their knowledge in areas such as accounting, law, math and finance. The accountant provides this information to business owners who in turn will evaluate business performance over a period of time.

While the main task of an accountant is to examine financial records to ensure that they are accurate, the following duties may also be performed by an accountant.

  • Prepare profit and loss statements
  • Prepare the balance sheet and cash flow statements
  • Prepare and review budgets against actual expenditure
  • Preparation and lodging of annual tax returns
  • Establish and maintain accounting procedures
  • Supervise data entry of financial transactions
  • Resolve accounting discrepancies
  • Compile financial information

Accountants can specialise in various fields such as financial accounting, management accounting, cost accounting, auditing, tax accounting, government accounting, non profit accounting and international accounting.

Please note: Prepared by Leigh Barker Accountant at MWC Group, Tangible Assets, Portfolio Finance, Gordon and West Pennant Hills. Note that all content of this blog is general in nature and anyone intending to apply the information to practical circumstances should seek professional advice to independently verify their interpretation and the information’s applicability to their particular circumstance.

What is a Bookkeeper

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A bookkeeper is the person who records day to day financial transactions such as sales, purchases, recepts, and payments for individuals or organisations. The bookkeeper is responsible for making sure that all transactions are properly recorded in the general ledger, the sales ledger, the purchases ledger, the inventory ledger and the asset register.

A bookkeeper requires accounting and mathematical skills to carry out the task of balancing financial records. The bookkeeping process records the financial effects of transactions. As a document is procedures each time a transaction occurs, the bookkeeper records the details of all source documents into the various ledgers and brings the books to the trial balance stage.

At the end of a designated period each journal is totalled to provide a summary for that designated period. The bookkeeper will check that all posting have been done correctly and balanced. Thus the bookkeeper will maintain a complete set of books, retain records of accounts and verify the procedures used to record financial transactions.

The duties of a bookkeeper include establishing and maintaining accounting records through a bookkeeping system, posting general journal entries, reconciling accounts, the preparation of a trial balance, running the payroll, paying supplier invoices, completion of workers compensation documentation, completion of regulatory documentation.

A capable bookkeeper can handle a constant stream of data and deal with unexpected issues or events. As a bookkeeper is required to interact with others in the business they must also have people skills.

A bookkeeper is an integral part of every business.

Please note: Prepared by Leigh Barker Accountant at MWC Group, Tangible Assets, Portfolio Finance, Gordon and West Pennant Hills. Note that all content of this blog is general in nature and anyone intending to apply the information to practical circumstances should seek professional advice to independently verify their interpretation and the information’s applicability to their particular circumstance.

What are Retained Earnings

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Retained earnings are the profits generated to date less any dividends or distributions paid. Retained earnings are reported in the balance sheet and the owner’s equity statement and are classified as an asset as it has a positive value. Retained earnings are not paid out as distributions or dividends but are retained by the business entity to be reinvested in core business activities or to pay down debt.

From an accounting perspective the retained earnings at the end of an accounting period become the opening retained earnings for the next reporting period which is either increased if there is a net profit or decreased if there is a net loss.

Retained earnings are a reflection as to how a business has managed its profits and does not represent surplus cash available to the business. Retained earnings are important as it demonstrates what a business has done with profits.

While a profitable business will expect a return by way of distributions or dividends there is also an expectation that a business will grow thus becoming more profitable. This means that a business will use retained earnings to grow.

Retained earnings can fluctuate from one reporting period to another and while the general consensus is that revenue is the key driver, the other factors that have an affect are increases of decreases in items such as the cost of goods sold, administration costs, taxes, distributions or dividends.

Please note: Prepared by Leigh Barker Accountant at MWC Group, Tangible Assets, Portfolio Finance, Gordon and West Pennant Hills. Note that all content of this blog is general in nature and anyone intending to apply the information to practical circumstances should seek professional advice to independently verify their interpretation and the information’s applicability to their particular circumstance.

What is Equity – Leigh Barker Accountant

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  • Equity is basically the difference between the value of all assets owned and the cost of any associated liabilities. Within the context of accounting, while the term equity is applied in numerous ways it generally refers to an ownership interest in a business. Thus equity represents what the business owes to its owners which is a reflection of the capital remaining in a business after all the assets of the entity are used to pay off the liabilities of the business.

Equity = Assets – Liabilities

Equity is of great significance to a business owner as it represents that portion of the total assets of the company that the owner owns which may also be referred to as net worth. For example, if an owner purchased cafe worth $500,000 with a $400,000 loan and $100,000 in cash then the owner has acquired an asset of $500,000 but only has $100,000 of equity.

Throughout the existence of a business, the equity of that business will be the difference between its assets and liabilities.

Equity will increase as the value of assets increase. These increase may be derived from such items a the value of the property owned, income streams, shares, client base plus any other asset that can increase in value.

In a balance sheet equity will generally comprise two components being (1) capital received from the sale of company shares or (2) retained earnings which are profits not distributed to owners or shareholders

Please note: Prepared by Leigh Barker Accountant at MWC Group, Tangible Assets, Portfolio Finance, Gordon and West Pennant Hills. Note that all content of this blog is general in nature and anyone intending to apply the information to practical circumstances should seek professional advice to independently verify their interpretation and the information’s applicability to their particular circumstance.

What is Accounts Receivable

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Accounts receivable represents the money owed to a company for outstanding invoices for goods or services provided to a client. It is the right to received for delivering a service or product.

Accounts receivable is an enforceable claim for payment and is generally executed by raising an invoice which is either mailed or delivered electronically to the customer who is required to pay for the cost of goods or services within a specified timeframe which is commonly described as the terms of trade.

To record report accounts receivable a debit entry is posted to accounts receivable when an invoice is raised as receivable and credit entry is posted to accounts receivable when the payment is received for the invoice.

Payment terms are generally 30 days from the date of the invoice and in some instances late payment fees are charged if the invoice is not paid by the due date.

While recording an item in accounts receivable can be accomplished with relative ease, the process of collecting payments and maintaining the accounts receivable ledger can be a full time task.

The Accounts Receivable ledger is divided is generally reported as either current, 30 days, 60 days, 90 days or longer. The accounts payable report is commonly termed an aged trial balance where clients are typically listed in alphabetic order or by the amount outstanding, or according to the company chart of accounts. Zero balances are not usually shown.

Please note: Prepared by Leigh Barker West Pennant Hills – Accountant at MWC Group, Tangible Assets, Portfolio Finance and Gordon. Note that all content of this blog is general in nature and anyone intending to apply the information to practical circumstances should seek professional advice to independently verify their interpretation and the information’s applicability to their particular circumstance.