Accounting treatment for tax penalty

One of our Accounting & Audiitng blog reader inquired us the following:

" How should penalty on late repayment for tax been accounted for?"

Should it be a tax expense? Should it be other expenses?

To clarify: penalty imposed by inland revenue authority on late repayment for tax should not be accounted for as tax expense; it should be accounted for as administrative expense/ other expense.

No depreciation charge on asset held for sale

This is to confirm that if a property is classified as asset held for sale, no depreciation is to be recorded.

To illustrate, Company ABC entered into Sales & Purchase agreement with 3rd party to dispose one of its property. The Sales & Purchase agreement may take months to complete. In this instance, Company ABC re-classified the property from Property, Plant & Equipment to Asset held for Sale upon entering the Sales & Purchase agreement.

Asset held for sale is de-recognised from the balance sheet upon the completion of the Sales & Purchase agreement.

Auditing Creditors

One of the procedures required to audit trade creditors account is to audit the creditors' statement received from the audit client's suppliers (i.e. external audit evidence).

In normal business circumstances, suppliers will send their monthly Statement of Account to their customers to inform the customers in relation to the outstanding balances. Hence, our audit client will , most likely, receive statement of account from the suppliers.

As part of audit procedure, we can check the suppliers' statement (received by our audit customers) against the creditors' balance recorded in their book. Discrepancies need to be investigated. Statement of account served as an external confirmation to check if our audit client's book has been prepared properly.

However, there are suppliers who do not have practices of sending out Statement of Account to their customers. In this instance, we can send external audit confirmation to the suppliers to confirm outstanding balances.

Cash audit- internal controls in cash process- cash payment

In our earlies entries in relation to cash audit, we discussed about the audit procedures of auditing unpresented cheques. We will discuss more extensively for audit procedures in auditing cash and bank balances of our audit clients.

Auditors may consider test the internal controls of the client's cash process. For this entry, we will provide an overview of the possible audit procedures to test the internal controls in cash payment process:

(a) select certain number of random samples, and test that payment voucher are properly prepared and authorised

(b) select certain number of random samples, and test that bank reconciliations are properly prepared and reviewed

(c) select certain number of random samples, and test that journal entries are properly posted into General Ledger

(d) select certain number of random samples, and test that payment voucher details match with the corresponding payment details

Accounting for Closing Partnership Books on Dissolution

Apart from special circumstances, the following outline of the steps necessary to close the books of a partnership when the assets are sold en bloc, may be found useful:

1. Open a realization account, and debit there to the book value of the assets, crediting the various asset accounts. The realization account will also be debited with any expenses of realization, and cash credited.
2. Debit cash and credit realization account with the amount realized on the sale of assets.
3. Pay off the liabilities, crediting cash and debiting sundry creditors. Any discount allowed by creditors on discharging liabilities should be debited to the creditors’ accounts and credited to realization account.
4. The balance of the realization account will be the amount of the profit or loss on realization, which will be divided between the partners in the proportion in which they share profits and losses and transferred to their capital accounts.
5. Pay off partners’ advances as distinct from capital, first setting off any debit balance on the capital account of a partner against his loan account.
6. The balance on the cash book will now be exactly equal to the balances on the capital accounts, provided they are in credit; credit cash and debit the partners’ capital accounts with the amounts paid to them to close their accounts.

Financial Statements of Companies

 Special features of company financial statements include:

• Profit and loss account

The profit and loss account will be charged with directors’ remuneration and auditors’ remuneration. If the company has borrowings in the form of loan of debenture stock, the profit and loss account will be charged with interest. Company profits are assessable to corporation tax and the profit and loss account thus includes a charge of tax on profits. Finally, the profit and loss account will show appropriations of profit, for example, dividends paid and proposed.

• Balance sheet

The balance sheet will include liabilities for tax and proposed dividends. If may also include long-term liabilities in the form of loan or debentures stock. Finally, the capital section of the balance sheet will include share capital reserves.

Company financial statements to be presented to shareholders are subject to detailed disclosure requirements. The illustration below shows the preparation of accounts in a form suitable for presentation internally.

Principal Disclosures for Single Company Accounts

The principle disclosures are classified as follows’

• Purpose of the checklist
• Accounting policies
• Profit and loss items requiring disclosure
• Balance sheet disclosures
• Cash flow statements
• Directors’ report – Summary of matters to be disclosure

Purpose of the checklist

The aim of the following checklist is to provide a guide to disclosure requirements for the more common reporting arias. All principle companies act requirements for single companies are referred to. The basic requirements are listed below,

1. Long term contracts
2. Goodwill
3. Pension costs
4. Group accounts
5. Earnings per share
6. Cash flow statements
7. Segmental reporting

Accounting policies

1. General policies (Disclosure of significant accounting policies, this would cover all areas)
2. Depreciation (For major class of depreciable assets method of used and useful lives or depreciation rates
3. Developing expenditure
4. Goodwill (explanation of accounting policy and where goodwill is capitalized and amortized, write off period for each major acquisition)
5. Stocks and long term contracts (statement of accounting policies and particular reference to method of ascertaining turnover and attributable profit.
6. Deferred taxation (description of method of calculation)
7. Foreign currency translation
8. Leasing – Lessees (policies for accounting for operating leases and financial leases)
9. Leasing – Lessors (policies for operating leases)