Accounting, Financial, Taxation

Further simplification of the general ledger is brought about by the use of subsidiary ledgers. In particular, for those businesses that sell goods on credit and that find it necessary to maintain a separate account for each customer and each creditor, the use of a special accounts receivable ledger eliminates the need to make multiple entries in the general ledger.

The advantages of special or subsidiary ledgers are similar to the advantages of special journals. These are:

1. Reduces ledger detail - Most of the information will be in the subsidiary ledger, and the general ledger will be reserved chiefly for summary or total figures. Therefore, it will be easier to prepare the financial statements.
2. Permits better division of labor - Here again, each special or subsidiary ledger may be handled by a different person. Therefore, one person may work on the general ledger accounts while another person may work simultaneously on the subsidiary ledger.
3. Permits a different sequence of accounts - In the general ledger, it is desirable to have the accounts in the same sequence as in the balance sheet and income statement. As a further aid, it is desirable to use numbers to locate and reference the accounts. However, in connection with accounts receivable, which involves names of customers or companies, it is preferable to have the accounts in alphabetical sequence.
4. Permits better internal control - Better control is maintained if a person other than the person responsible for the general ledger is responsible for the subsidiary ledger. The general ledger accounts as a controlling account, and the subsidiary ledger must agree with the control. No unauthorized entry could be made in the subsidiary ledger, as it would immediately put that record out of balance with the control account.

The idea of control accounts, introduced above, is an important one in accounting. Any group of similar accounts may be removed from the general ledger and a controlling account substituted for it. Not only is another level of error protection thereby provided, but the time need to prepare the general ledger trial balance and the financial statements becomes further reduced.

In order to be capable of supplying information concerning the business’s accounts receivable, a firm needs a separate account for each customer. These customer accounts are grouped together in a subsidiary ledger known as the “accounts receivable ledger”. Each time the accounts receivable ledger must also be increased or decreased by the same amount. The customer’s accounts are usually kept in alphabetical order and include, besides outstanding balances, information such as address, phone number, credit terms, and other pertinent items.

Are you the one who assigned to do order entry? Consider this checklist to make sure order entry task has been completed properly. If you are a controller or an accounting manager and haven’t had order entry control on place, you may consider to include this checklist in your accounting manual book. Of course you are free to simply modify or alter at any part to get the most out of it.

The controls for a basic order entry system are centered on data accuracy verification, and are as follows:

1. Verify approved buyer for customer - The order entry staff will contact the customer and verify that the buyer who signed a received purchase order exceeding $ is approved to do so by the customer.
2. Verify price against price book - The order entry staff will compare the prices listed on each customer purchase order to the official prices listed in the latest version of the company price book and contact the customer for resolution if any discrepancies are found.
3. Contact customers regarding significant freight charges - The order entry staff will notify customers if anticipated freight charges are expected to exceed $ .
4. Pre-number sales orders - The order entry staff will order all new sales order forms with sequential numbers that are in sequence from the last set of sales orders purchased.
5. Review the sales order for accuracy - The order entry staff will compare the sales order to the originating customer purchase order to ensure that all information has been accurately transferred to the sales order.

Computerized Order Entry Controls

The controls for a computerized order entry system mostly involve data accuracy verification, and are as follows:

1. Control access to the order entry system - Access to the order entry software will be password protected.
2. Maintain a transaction log - The computer system automatically creates a keystroke log for every order entry transaction.
3. Data entry validation checks - The computer system automatically performs data entry validation checks, including addresses, delivery dates, and part or product numbers that do not exist.
4. Check on-hand inventory status - The computer system automatically compares the amount of unallocated on-hand inventory to the customer order, and notifies the customer if there is insufficient inventory to fulfill their order.
5. Automatic price matching - The computer system automatically sets up product prices from the standard corporate price book.
6. Supervisory override of special pricing - The computer system routes all nonstandard pricing to the order entry supervisor for manual override authorization.
7. Set up complex billing terms - The order entry staff enters complex billing terms into the order entry database on the order placement date and routes the billing terms to the controller for review.

Electronic Order Entry Controls

The controls for electronic order entry involve having the computer conduct all aspects of the order entry process, and are as follows:

1. Automated payment processing - The computer system will automatically process payments using the customer’s credit card, or notify the customer that there is insufficient credit remaining on the card.
2. Automated credit review - The computer system will automatically match customer orders against a table listing available credit, and notify the credit staff if the credit level has been exceeded.
3. Flag order as approved for shipment - The computer system will automatically flag customer orders as approved for shipment, once either a credit card payment has been processed or an automated credit review has been conducted.
4. Communicate order status to customer - The computer system will automatically issue a confirmation message to the customer, stating that the order has been processed.

Foreign currency transactions are denominated in a currency other than the company’s functional currency. Foreign currency transactions may result in receivables or payables fixed in the amount of foreign currency to be received or paid. A foreign currency transaction requires settlement in a currency other than the functional currency! A change in exchange rates between the functional currency and the currency in which a transaction is denominated increases or decreases the expected amount of functional currency cash flows upon settlement of the transaction. This change in expected functional currency cash flows is a “foreign currency transaction gain or loss” that typically is included in arriving at earnings in the income statement for the period in which the exchange rate is changed. An example of a transaction gain or loss is when an Italian subsidiary has a receivable denominated in lira from a British customer.

Similarly, a transaction gain or loss (measured from the transaction date or the most recent intervening balance sheet date, whichever is later) realized upon settlement of a foreign currency transaction usually should be included in determining net income for the period in which the transaction is settled.

Example:

An exchange gain or loss occurs when the exchange rate changes between the purchase date and sale date. Merchandise is bought for 100,000 pounds. The “exchange rate” is 4 pounds to 1 dollar. The journal entry is:

[Debit]. Purchases = 25,000
[Credit]. Accounts payable = 25,000
(Note: 100,000/4 = $25,000)

When the merchandise is paid for, the exchange rate is 5 to 1. The journal entry is:

[Debit]. Accounts payable = 25,000
[Credit]. Cash = 20,000
[Credit]. Foreign exchange gain = 5,000
(Note: 100,000/5 = $20,000)

The $20,000 using an exchange rate of 5 to 1 can buy 100,000 pounds. The transaction gain is the difference between the cash required of $20,000 and the initial liability of $25,000.

Note that a foreign transaction gain or loss has to be determined at each balance sheet date on all recorded foreign transactions that have not been settled.

Another example:

A U.S. company sells goods to a customer in England on 11/15/X7 for 10,000 pounds. The exchange rate is 1 pound is $0.75. Thus, the transaction is worth $7,500 (10,000 pounds × 0.75). Payment is due two months later. The entry on 11/15/X7 is:

[Debit]. Accounts receivable—England = 7,500
[Credit]. Sales = 7,500

Accounts receivable and sales are measured in U.S. dollars at the transaction date employing the “spot rate“. Even though the accounts receivable is measured and reported in U.S. dollars, the receivable is fixed in pounds. Thus, a “transaction gain or loss” can occur if the exchange rate changes between the transaction date (11/15/X7) and the settlement date (1/15/X8).

Since the financial statements are prepared between the transaction date and settlement date, receivables that are denominated in a currency other than the functional currency (U.S. dollar) have to be restated to reflect the spot rate on the balance sheet date. On December 31, 20X7, the exchange rate is 1 pound equals $0.80. Hence, the 10,000 pounds are now valued at $8,000 (10,000 × $.80). Therefore, the accounts receivable denominated in pounds should be upwardly adjusted by $500. The required journal entry on 12/31/X7 is:

[Debit]. Accounts receivable—England = 500
[Credit]. Foreign exchange gain = 500

The income statement for the year-ended 12/31/X7 shows an exchange gain of $500. Note that sales is not affected by the exchange gain since sales relates to operational activity.

On 1/15/X8, the spot rate is 1 pound = $0.78. The journal entry is:

[Debit]. Cash = 7,800
[Debit]. Foreign exchange loss = 200
[Credit]. Accounts receivable—England = 8,000

The 20X8 income statement shows an exchange loss of $200.

Which Transaction Gain Or Loss Should Not Be Reported In The Income Statement?

Gains and losses on the following foreign currency transactions “ARE NOT“ included in earnings but rather are reported as translation adjustments:

1. Foreign currency transactions designated as economic hedges of a net investment in a foreign entity, beginning as of the designation date.
2. Inter-company foreign currency transactions of a long-term investment nature (settlement is not planned or expected in the foreseeable future),when the entities to the transaction are consolidated, combined, or accounted for by the equity method in the reporting company’s financial statements
3. A gain or loss on a forward contract or other foreign currency transaction that is intended to hedge an identifiable foreign currency commitment (e.g., an agreement to buy or sell machinery) should be deferred and included in the measurement of the related foreign currency transaction.

Losses should not be deferred if deferral is expected to result in recognizing losses in later periods. A foreign currency transaction is deemed a hedge of an identifiable foreign currency commitment if both of these conditions are met:

1. The foreign currency transaction is designated as a hedge of a foreign currency commitment.
2. The foreign currency commitment is firm.

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