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Everything About Cost Accounting
Accounting 2021-06-30 From: Mr. Abbas

What Is Cost Accounting?

Cost Accounting is a method of managerial accounting that helps the company to identify the real cost of the production by calculating several types of costs. It’s important to remove and eliminate the useless cost from the production of the goods and services. Cost accounting plays a vital role in determining the final cost of the goods to earn a reasonable profit.  The objective of cost accounting is that a company can make better financial decisions, improve the net margin on the product, and put an accurate budget on a particular project. 

Cost Accounting is used to determine the fixed and the variable cost of the good and service production department by the company internal management. It calculates both the costs then compare the input cost with results, to help the business manage the financial performance.  Cost accounting includes several types of costs such as indirect cost, fixed costs, operating cost, direct cost, and Variable cost.

 

Let’s familiarize ourselves with the formulas that we use in cost accounting.

We use the Formulas to reduce and eliminate the cost that you should know. By using these formulas you can easily identify the product price and increase the profit margin.

  • Contribution Margin - Contribution margin = sales – variable costs
  • Target Net Income - Target net income = sales – variable costs – fixed costs
  • Breakeven Formula - Profit ($0) = sales – variable costs – fixed costs
  • Pre-Tax Dollars Needed for Purchase - Pre-tax dollars needed for purchase = cost of item ÷ (1 – tax rate)
  • Gross Margin - Gross margin = sale price – cost of sales (material and labor)
  • Efficiency Variance - Efficiency variance = (Actual quantity – budgeted quantity) × (standard price or rate)
  • Price Variance - Price variance = (actual price – budgeted price) × (actual units sold)
  • Ending Inventory - Ending inventory = beginning inventory + purchases – the cost of sales
  • Variable Overhead Variance - Variable overhead variance = spending variance + efficiency variance

 

Types of Cost

  • Fixed Cost - Fixed cost doesn’t vary on the production level. It’s used for lease payment, mortgage, and any other equipment that is depreciated.

  • Direct Cost - It’s directly related to the production. For example, Company takes an hour to finish the product. Now indirect cost, we calculate the material cost and an hour labor cost.

  • Variable Cost - Variable cost is also related to product production. Often Variable costs fluctuate.
  • Operating Cost - It’s related to the day-to-day operational work of the business. This cost may be fixed or variable depending upon the situation. 

 

Types of Cost Accounting

  • Activity Based Costing - Activity based costing is also known as ABC costing. It includes the cost of the activities of the business, it may be a special task, event, work for a special goal, etc. It helps businesses to identify the product that is not profitable. It reduces the product production cost and helps in reorganizing the production for a particular product and service.
  •  
  • Standard Cost Accounting - It is an old and popular method of accounting. Standard cost is based on the use of labor and raw material to produce the goods under the standard operating conditions. It assigns the budget and saves time and money.

  • Marginal Costing - It helps the management to identify the effect of different levels of cost and volume on profit. It can be used to determine the potentially profitable products, existing product price of sale, and effect on the marketing campaign.  The marginal cost impacts the production cost by adding an additional unit of the production.

  • Environmental Accounting - Impact on the cost of goods and services on the environment. Environment accounting helps the management to consider that the product production will be expensive. Environment accounting includes.
    - Prevention in technology
    - Taxes, fines, and penalties
    - Wastage of the management cost
    - Technology to prevent the pollution

  • Lean Accounting - Lean Accounting is very beneficial for the management to improve the financial practice. With the help of lean accounting, the accounting department can reduce the expenses on the production and also save time so that labor can be more productive on the valuable task.

  • Target Costing - It helps the management to consider the cost in advance that we need to pay the production department. It helps the company to earn consistent profit.

 

Difference Between Cost Accounting and Financial Accounting

Comparison

Cost Accounting

Financial Accounting

Meaning

Cost Accounting tracks the various costs of the production department.

Financial accounting presents the financial health real picture of the management.

Information

Record the information about the production departments like labor, overhead, and raw material.

Record each monetary transaction properly in the business accounts.

Who uses it?

It’s used by internal management like employees, managers, directors, and supervisors.

It’s used by both internal and external users like managers, directors, shareholders, creditors, etc.

Type of cost uses

Historical and current cost is used in cost accounting.

Only historical financial accounting is used.

Reporting Time

In cost accounting report is shared with management frequently. 

In financial accounting, a report is shared with the management once a year, commonly at the end of the financial year.

Purpose

To reduce the cost of production.

Keep a full record of every financial transaction.

Forecasting

With the help of budgeting techniques forecasting is possible.

Not possible.

 

Check out The Difference Between Accrual and Cash Accounting

If you are looking for an accounting and bookkeeping service in UAE. then risians accounting is the best accounting firm. Risians Accounting has a certified Chartered accountant team that has decades of working experience in different industries and projects. Under Risians accounting roof, you can get tailor-made accounting service along with the tailor-made package. Contact Us for a free Accounting consultation.

 

 

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How to Fill Economic Substance Regulation Reporting?
Economic Substance Regulation 2021-06-28 From: Mr. Abbas

The UAE Government has implemented Cabinet Resolution no. 31/2019 with effect from 30th April 2019 on Economic Substance Regulations (ESR) in the UAE. This was followed by the Ministerial Decision 215.  However, the UAE government introduced the economic substance reporting regulation on 1oth august 2020 through Cabinet Resolution 57/2020 which revoked Cabinet Decision no. 31/2019. It’s introduced in the bid to comply with the global standard set by the OECD to stop unlawful tax practices. According to the law, mainland, offshore and Freeland have to show the ESR regarding relevant activities in the UAE. All companies must submit the SER notification within giving a due date to the regulatory authorities.

 

Relevant Activities As Per ESR Law

The ESR law is applicable for all mainland businesses, offshore, and free zones area businesses. If any business generates profit relevant to the below activities, then the business is required to comply with the ESR and report to the regulatory authorities. 

Activities

  • Banking Businesses
  • Insurance Businesses
  • Investment Fund Management Businesses
  • Lease-Finance Businesses
  • Headquarter Businesses
  • Shipping Businesses
  • Holding Company Businesses
  • Intellectual Property Businesses
  • Distribution and Service center Businesses

UAE Government Official Page HERE.

 

ESR Filling For Multiples Companies

It’s common for companies to be part of the group for accounting purposes in the UAE. As per ESR law, it doesn’t allow us to report a single notification for multiple companies. Companies need to fill the notification individually and as it is not valid for groups. To clear the process of the ESR companies can contact  Risians Accounting and get a consultation regarding ESR, business accounting, VAT, etc.

Penalty In Economic Substance Regulation

Filling ESR notification is mandatory for the business before the due date. If the company fails to fill the ESR notification along with the required supporting documents before the due date then they will be penalized. The range of the penalty can be from AED 10,000 to AED 50,000. To avoid such penalties, businesses should get ESR services from experts.

The time period For Reporting ESR Notification

At the time of filling ESR notification, Businesses need to consider the right to notification. As per this law, the report time is calculated as the beginning time of the financial year and after 1st Jan 2019. It’s required for the companies to mention the start and end date of the notification report.

It business was incorporated  on 1st  July 2019  with a 31 March 2020 then the report time will be

 Start date: 1 July 2019

 End date: 31 March 2020

 

If the business financial year similar to the financial year then the report time will be

 Start date: 1 January 2019

 End date: 31 December 2019

 

ESR Notification Requirement For Companies Under Dissolve And Liquidation

If the company has been dissolved and liquidated before the deadline of the filling ESR notification then no need to fill the economic substance regulations report.  If the company is under the process of liquidation then filling ESR report is required. 

 

Guidance And Requirement To Fill Notification

  • According to Article 6.7 of Ministerial Decision 100, It’s required for the companies to submit the ESR notification online on the Ministry of Finance Portal.

  •  Article 4.4 of Ministerial Decision 100 says that all the notifications must be submitted within six months from the end of the financial year.

  • Article 8.4 of Decision 57 says that all the ESR reports must be submitted within twelve months before the end of the financial year.

How To Fill an Economic Substance Report?

It is very easy to submit the ESR notification. Companies need to just create a user account, but before creating an account they need to read the privacy policy regarding registration and login, Privacy policy link

User Registration link.  If you have already created the login to your ESR portal. Login link.

Now you can easily submit your ESR notification report. You can also watch the webinar to use the Economic Substance Filing Portal. Webinar link.

If you want to consult about How to prepare an ESR Notification Report and any other issue then risians accounting ESR service is best for you. Currently, we are providing our ESR service to many businesses in the UAE and saving their business from the plenty. 

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What is Accrual Accounting?
Accounting 2021-06-21 From: Mr.abbas

There are two basic accounting methods, one is accrual basis and the second is cash basis. Generally, businesses choose one of two accounting methods in their bookkeeping system.

Accrual Accounting calculates the company position and performance by recognizing the economic events. In accrual accounting, transactions are recorded in the accounting book if payment for the particular goods/services has not been received or made. This process is important to evaluate the organization's health and position in financial terms.

It follows the matching principle so that we can recognize the revenue and expenses in the same period of time.

In simple terms - Accrual accounting refers to records of all the transactions even if the payment for the services/goods has not been received by the customer. It is a very appropriate way to measure the company position and health in finance.

 

Examples To Understanding The Accrual Accounting

Understand accrual accounting with an example: - Suppose you are running a firm and the firm name is XYZ Pvt. Ltd. and you are using the accrual accounting system to maintain your accounting books. If you sell any product/ service on credit, the transaction is recorded in the sale book based on the generated invoice. The transaction is also recorded when we buy the raw material on credit from the supplier.

We record cash, credit, etc. transactions in the accounting books so that we can get a real picture of the company's financial transaction.

 

How Does Accrual Accounting Work?

Concept of the accrual accounting is that economic events are recognized by matching the expenses and revenue at the time of the transaction occurring if the payment is received or not.This method allows us to combine the current cash inflow and outflow for expecting future cash inflow and outflow, to provide an accurate real picture of the company's financial position. Its relative complexity makes it expensive to implement. This method works better for those companies who offer goods and services on credit and those businesses who take projects and receive the payment after a long period of time.

It gives instant feedback on the cash inflow and outflow so that business owners manage their resources.

 

Cash Basis Accounting VS Accrual Basis Accounting

 

Cash Basis Accounting

It recognizes the revenue when the cash is received on the sale and expenses are paid. It does not recognize the receivable and payable accounts.

It is simple to maintain and there is no need to track the receivable and payables accounts. It is very easy to determine when the transaction has occurred and the payment is received in the account or in cash.

The cash method accounting is very helpful and beneficial in terms of tracking how much cash the business has in the current period of time.

In cash basis accounting, we don’t record the transaction until the cash is received or paid, the business income is not taxed until the cash is not in the bank.

Accrual Basis Accounting

In this method, we record the income and expenses transaction in the accounting books rather than payment is made or received. For example - your company sold goods but the payment has not been received. The sold good transaction is recorded in the sale book.

Commonly, businesses use accrual basis accounting rather than cash basis accounting.

This method gives a more realistic idea of income and expenses during a period of time. It provides the financial picture of the company which cash basis accounting does not.

Accrual accounting does not give information about cash flow. In this, the business can appear more profitable but in reality, has an empty account. If we don’t monitor the cash flow in the accrual accounting then we have to face potential harmful consequences.

 

Accrual Accounting

Cash Accounting

Record transaction when the sale invoice is generated rather than money is not received.

Record transaction when we received the money on the sale.

Record transaction when we receive the invoice on the raw material or other expenses rather than money is not paid.

Record the transaction when we pay the expenses or raw material bill.

Paid tax on money that we have owed.

We don’t pay tax on money that is not received yet.

To use accrual basis accounting requires over $25 million in revenue.

It’s used by small businesses and individuals.

 

 

Hope this article will help you if you have any question and query then freely contact Risians Accounting Firm. It will our pleasure to assist you.

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Avoid these Common Mistakes in Small Business Accounting
Accounting 2021-06-16 From: Mr. Abbas

Business owners have to face different challenges to run the business but the accounting department is not also different.  To manage your accounting is a different task where you wear different task hats in your daily routine.  Small Business owners don’t have enough budget to arrange all the resources.

 Lack of financial resources can create errors, mistakes, etc in bookkeeping, Inaccurate books, over-reported profit, etc. When these types of issues occur then businesses have to face big problems in finance. If we don’t correct the accounting issues, they can harm the business after a long time, like downsizing the business, making the business financially weak, etc.

It’s best for the small business to keep awareness about the common accounting problems so that you know well what to do and not, and how to overcome the problems.

Small business owners often make these mistakes in their business accounts.

  1. Not keeping full information about the business finance.
    Being a good business owner, it’s your responsibility to know the financial health of the business. To know about it you should know how accounting and bookkeeping work and how to consider business financial health. If you don’t understand it then you can’t take better action or make a decision for business future. A small business owner should have awareness of the assets & liabilities standing and where is your cash and how much. Often business owners make one big common mistake, they think we are doing good in business just because we have cash in the bank. If you don’t compare your cash to liabilities, you can’t assume that you are doing good. Business owners should compare their business liabilities to cash so that they can see where they stand. 

  2. Rely on Accounting Software.
    We can detect accounting errors and mistakes easily while manual auditing. But small businesses can’t detect it because they totally rely on accounting software. Small owner thinks we have purchased the accounting software. Now we don’t need to worry regarding the accounting and bookkeeping, but they should perform the audit process to ensure every transaction has been recorded properly, There is no error in the spreadsheet, etc. Sonner, you will realize that all the errors are not detected by the software. Errors and mistakes in accounting become a huge problem for your business after a long period.

    Don’t rely totally on the accounting software but set one particular time for an audit. Please don’t think that we should not use accounting software. Well, accounting software is good. It saves time, money, effort but it can’t detect all types of errors and mistakes.

  3. Updating Records Infrequently.
    When you don’t record the transaction daily then it is easy for the errors to enter your accounting system. And sometimes small businesses avoid recording the small business transaction.

    It doesn’t matter which type of accounting transaction has been done, we should always record the single transaction accurately and timely to prevent unrecorded data.

  4. Not keep backup of old financial records.
    Businesses make one common mistake that they don’t keep back up the old financial records, they store the data in one place that would be an external hard drive, computer, and paper.  They don’t think, what if we lost the data accidentally then there is no way to recover and we know the power and importance of the old data.

    Smart business owners keep their accounting data and others in two places. Generally, they use the cloud backup site to store the business financial data.

    By storing data in the cloud, you can access your data from anywhere and anytime in the world just you need an internet connection.

    Old financial data helps the business to fix errors and mistakes. By using cloud backup you can easily restore the data into the system and fix the errors and mistakes easily and also in a short time.

  5. Financial Health.
    Bookkeeping and accounting define where your business stands. Successful business owners don’t take any action blindly. They analyze the business finance health to know where their business finance stands, after that, they make any decision for business growth. By doing this business owners can choose the best way among no. of ways. It helps the business owner to invest a particular amount in the project. 

    If businesses don’t analyze the business finance health then it’s easy to invest unnecessary amounts on the project, software, expenses, etc which is not beneficial for the business. 

Final Thought

To start a business is easy but to drive a business toward success is not easy. Accounting and bookkeeping are a major part of the business. Being good business owners, we should record every financial transaction properly and also do the business accounting audit to identify the mistake, error, etc into the business accounts. By doing these we can know the business is financially healthy. 

If you have any issues and query contact risians accounting

 

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Everything You Should know About The About Management Accounting
Management Accounting 2021-05-25 From: Abbas

What is Management Accounting?

Management Accounting is used by the internal team of the organization and is also known as managerial accounting. In Management Accounting, we analyze, identify, interpret, measure, and communicate financial information to generate the management accounting report. That report is provides all the financial information, statistical, and resources to the managers. With the help of the report, managers can make informed decisions easily for day-to-day and short-term decisions for organization growth.

It’s only used by the internal team which is the only thing that makes it different from financial accounting. The objective of managerial accounting is to improve statistics and make better decisions.

This report contains details of accounts receivable and payable, cash, current generated revenue, etc. If you are looking for a management accounting consultancy then Risians Management Consultancy is the best for your organization. 

In simple terms, Accounting managerial is the process of analysis and measurement of the financial information, resources, economy, tactic, etc. This helps the organization to make better decisions. It has no defined fixed format and structure and is not to be shared with an outsider agency like the government. 

Types of Management Accounting Reports:

  1. Analyzing Cash Flow - Most companies record all financial information on an accrual basis accounting. Although, it shows the exact picture of the financial position, accountants analyze the cash flow to determine the cash impact on business decisions while performing analysis, they will consider the cash outflow and inflow as a particular business decision. The accountants may implement the working capital management strategies to optimize the cash flow and ensure the organization has enough liquid assets to cover the short-term work.

  2. Product Valuation - The cost of the product is determined by the cost of production of goods and services. The Managerial accounts find the overhead cost charges on the production. It may be based on the No. of good production and related to it.

  3. Analyzing Inventory Turnover - It is a calculation of the inventory that has been sold and replaced in a particular period of time. It helps the business to make a better decision regarding the price of products and services, purchasing inventory, and marketing.  It contains the carrying cost of inventory and stores unsold items. Accountants find a possible way to reduce the cost of storage.

  4. Management of AR (Accounts receivable) - In this, the Accountant creates the list of all the accounts receivable according to time like 30 days, 30 to 60 days, 60 to 90days, etc.  It creates a positive effect on the business. Accountants review the receivable accounts and identify if there is any customer that becomes credit risk. If they report to the appropriate department manager that a particular customer is not making payment on time. Sometimes businesses may reconsider doing business on credit with that customer.

  5. Constraint Analysis - In Constraint Analysis, Accountants analyze the whole production and sale process. To identify, there is a thing that will create any prevention and limitation and tell how to improve more sales and production process. Business managers use the report and do some implementation for efficiency in the sales and production process of the organization.

  6. Budgeting - Management accountants do the measurement and analysis of the company perforation and previous expenses to create a budgeting report.  Business budgeting contains the list of all sources of expenses and earnings. Budgeting reports guide the managers to offer better renegotiate terms with vendors and suppliers and employee incentives, cut costs. Management can make new strategies to accomplish the business goal within the set budget amount. Every year businesses set a sufficient amount of budget to run a business efficiently. That’s why a budgeting report is a critical measurement of expenditure, Revenue, etc.

What is the Main Purpose And Objective Of Management Accounting?

The main objective of management accounting is to help the business organization in smooth and efficient performance in controlling, planning, directing, organizing, and more.

  1. Planning - The first main objective of management accounting is to aid businesses in planning for future needs, and accomplish the goal. Managerial accountants analyze and measure the company's current & past performance, generated revenue, expenditure, regular expenditure, and more as per the business structure and function to give the report that shows the real picture of the business. By the report, management makes the decisions to increase production and sales.

  2. Analyzing the data - The main purpose of management accounting is to analyze the data.  That helps in finding the problem area and developing methodologies to correct it. Data analysis increases business efficiency, increases productivity, and prevents future problem areas and harm.

  3. Forecasting - As we mentioned above, managerial accounting analyzes the past and current data of the organization and generates a report based on that analysis.  Generated reports play a vital role in forecasting and make better decisions.

  4.  Monitoring - In this accounting, we monitor every process of the organization to ensure that decided strategy implementation is appropriate and all the processes are in as per strategy.
  5. Aids In Achievement - Management accounting reports help in making decisions and birth the new effective strategy that makes the business process feasible. They also monitor the process of the organization that the newly implemented strategy is on track or not and also do time to time forecasting. If they found any loopholes, errors, problems, and overhead costing areas. They take steps to resolve it and take precautions.

The Importance of Management Accounting

As we know, Management Accounting is a major tool for business success. The reasons are following:-

  1. Prevention and rectifying -  Management accounting keeps an eye on each process of the business organization and if they find any problem, errors in any particular area they take action to fix them. By analyzing the data and economy they forecast the business performance and take prevention if they found any future problem.

  2. Introducing New Product - If a business wants to launch any new product and service the management accounting plays an important role. It supports the business from the beginning planning to the end execution by giving details about the producing capability, cost of products, real picture of the product market, etc. They also define how much quantity of the product will be best and profit on it.

  3. Reviewing Products -  In management accounting, review all the current products and services and generate the report that has all products' final cost and profit margin so that the business can identify which product is more profitable and which are not.  They provide you valuable metrics that help businesses to reduce the unnecessary cost of the products and how to increase profit.
  4. Staffing - Organization staff is another area in which management accounting plays an important valuable role. Management accounting aids the business to make the right decision by informing the business how much staff is required, how much we can afford to spend, and the return you can expect from the per employees.

If you want to get all the benefits, get a free Management Consultancy in Dubai, UAE. Risians Accounting has become the pillar of some organizations in the UAE by giving accounting service to them. If you have any questions and issues related to accounting, bookkeeping, auditing, VAT, Tax Agent, Company formation, and management accounting feel free to contact us. Connect with us and discuss your problem with us, we are here for all your business needs. 

 

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