Lessons · Accounting · Quick reference
Accounting quick reference
136 topics, one line each, in the order Hone teaches them.
Hone is a place to practise a career, one idea a day. This sheet is the whole Accounting track at a glance: every idea it covers, in the order they are taught, one line each. It is a map rather than a lesson. Read opens the full explanation of an idea; Practise gives you a question on it. Both are free, and reading needs no account at all.
In beta. This sheet was written for Hone and has not yet been checked by a qualified accountant. Practice material, not professional advice. What that means.
From the first entry to a set of statements · The equation
the accounting equationWhat the business has equals what it owes plus what is left over for the owner: Assets = Liabilities + Equity. Read: The one equation the whole of accounting sits on · Practise the accounting equation
assets, liabilities and equity in plain wordsAn asset is something the business has that is worth money. A liability is money the business owes. Equity is what would be left for the owner if everything were sold and every debt paid. Read: Assets, liabilities, equity: the three words in plain English · Practise assets, liabilities and equity in plain words
every transaction has two sidesMoney always comes from somewhere and goes somewhere, so every transaction changes at least two accounts, and the equation stays true afterwards. Read: Every transaction touches at least two accounts · Practise every transaction has two sides
the five kinds of accountEvery account is one of five: asset, liability, equity, revenue or expense. Revenue and expenses are equity's story told in detail for one year. Read: The five kinds of account · Practise the five kinds of account
normal balancesAn account's normal balance is the side of the equation it sits on: assets on the left, liabilities and equity on the right. Expenses follow assets (left); revenue follows equity (right). Left is called debit, right is called credit. Read: Normal balance: the side each account expects to live on · Practise normal balances
From the first entry to a set of statements · Debits and credits
debit is left, credit is rightA debit is an entry on the left-hand side of an account and a credit is an entry on the right-hand side. Neither is good or bad, more or less. Read: Debit means left. Credit means right. That is all. · Practise debit is left, credit is right
which side makes an account biggerA debit increases assets and expenses. A credit increases liabilities, equity and revenue. To make any account smaller, use the other side. Read: Which side makes it bigger · Practise which side makes an account bigger
the journal entryA journal entry records one transaction: the date, the account debited on the first line, the account credited indented beneath it, equal totals, and a short note saying what happened. Read: The journal entry: date, debit, credit, and a line of why · Practise the journal entry
posting to the ledgerThe journal is a diary in date order. The ledger is one page per account. Posting copies each side of each entry onto its account's page, so every account can show a balance. Read: Posting: from the journal to the ledger · Practise posting to the ledger
the trial balanceA trial balance lists every ledger account's balance in a debit column or a credit column. If the two columns add to the same total, every entry was posted with equal debits and credits. It does not prove the entries were right. Read: The trial balance: what it proves, and what it cannot · Practise the trial balance
From the first entry to a set of statements · Everyday entries
a cash saleWhen a customer pays at the moment of sale, cash goes up and revenue goes up: Dr Cash, Cr Sales revenue. Read: A cash sale · Practise a cash sale
a sale on credit and the receivableWhen a customer will pay later, record the sale now and an asset called accounts receivable, which is the customer's promise to pay. When the cash arrives, swap the promise for cash. Read: A sale on credit: the receivable · Practise a sale on credit and the receivable
buying on account and the payableWhen the business gets something now and pays later, record what it got now and a liability called accounts payable: Dr the thing received, Cr Accounts payable. Read: Buying on account: the payable · Practise buying on account and the payable
paying a payablePaying a supplier does not create an expense; the expense was recorded when the bill arrived. Paying it swaps cash for a smaller liability: Dr Accounts payable, Cr Cash. Read: Paying what you owe · Practise paying a payable
the owner puts money inMoney the owner puts into the business is not revenue; it is equity: Dr Cash, Cr Owner's capital. Money the owner takes out is drawings, and it reduces equity. Read: The owner puts money in · Practise the owner puts money in
recording an expenseAn expense is a cost of running the business this period. It goes up on the debit side, and whatever paid for it, cash or a payable, is credited. Read: Recording an expense · Practise recording an expense
the bank reconciliationThe bank's balance and the book's balance differ for reasons you can list. A reconciliation adjusts each side for what the other has not seen yet, until they meet. Anything left over is an error. Read: The bank reconciliation, in steps · Practise the bank reconciliation
From the first entry to a set of statements · Adjusting and closing
accrual versus cashUnder cash accounting a sale or a cost counts when the money moves. Under accrual accounting it counts when it is earned or used up, whichever month the cash happens to move in. Read: Accrual versus cash: when does it count? · Practise accrual versus cash
prepaid expensesPaying ahead buys an asset, the right to something not yet used. Each month, move the part that has been used out of the asset and into expense. Read: Prepaid expenses: paid now, used later · Practise prepaid expenses
unearned revenueMoney received before the work is done is a liability, because you owe the work. As the work is done, move it out of the liability and into revenue. Read: Unearned revenue: paid before you have earned it · Practise unearned revenue
accrued wagesIf the period ends before payday, the wages earned so far belong to this period as an expense, and are a liability until the payday that settles them. Read: Accrued wages: worked, not yet paid · Practise accrued wages
straight-line depreciationAn asset that will last for years is expensed a little each year: cost minus salvage value, divided by useful life. The expense goes to depreciation expense and the other side to accumulated depreciation, which sits under the asset. Read: Straight-line depreciation · Practise straight-line depreciation
closing the booksAt year-end the revenue and expense accounts are emptied into equity, so they start the new year at zero. Balance sheet accounts are never closed; they carry on. Read: Closing the books: revenue and expenses go to equity · Practise closing the books
From the first entry to a set of statements · The statements
the income statementRevenue for the period, less the expenses of the period, gives the profit or loss for the period. Sales less cost of goods sold is gross profit; gross profit less operating expenses is net profit. Read: The income statement: what you earned and what it cost · Practise the income statement
the balance sheetA balance sheet is a snapshot on one date: assets on one side, liabilities and equity on the other, and the two sides total the same because of the equation. Read: The balance sheet: what you have and what you owe, on one day · Practise the balance sheet
how the statements tie through equityThis period's profit from the income statement flows into equity on the balance sheet: closing equity equals opening equity plus profit, plus what the owner put in, minus what the owner took out. Read: How the statements tie together through equity · Practise how the statements tie through equity
cash flow in three bucketsEvery cash movement goes in one of three buckets: operating (running the business), investing (buying and selling long-lived things) and financing (money from and to owners and lenders). The three add up to the change in cash for the period. Read: Cash flow in three buckets · Practise cash flow in three buckets
gross margin and net marginA margin is profit as a share of sales. Gross margin is gross profit divided by sales; net margin is net profit divided by sales. Read: Gross margin and net margin · Practise gross margin and net margin
current ratio, quick ratio, debt-to-equityCurrent ratio is current assets over current liabilities: can the business pay what is due this year. Quick ratio keeps only what could be cash within about ninety days, so it takes OUT the inventory and it takes out the prepayments too. Debt-to-equity is total liabilities over equity: how much of the business the lenders already own. Read: Three ratios a lender reads first · Practise current ratio, quick ratio, debt-to-equity
From the first entry to a set of statements · Working with the numbers
inventory: FIFO and LIFOWhen identical units were bought at different prices, the books need a rule for which cost goes out with each sale. FIFO -- first in, first out -- takes the oldest cost first; LIFO, last in, first out, takes the newest. The rule changes cost of goods sold and what is left in inventory, not what is on the shelf. Whether LIFO is yours to choose depends on the standard your books are kept under: the international standard permits FIFO and weighted average and does not permit LIFO, while United States rules do permit it. Read: FIFO and LIFO: which cost leaves first · Practise inventory: FIFO and LIFO
inventory: weighted average costAdd up everything spent on the units, divide by the number of units, and use that one average cost for every unit sold and every unit left. Read: Weighted average cost · Practise inventory: weighted average cost
break-even in units and in salesEach unit sold contributes its price less its variable cost. Break-even units is fixed costs divided by that contribution; break-even sales is those units times the price. Read: Break-even: how many you must sell to cover the costs · Practise break-even in units and in sales
markup versus marginMarkup is profit as a share of cost. Margin is profit as a share of price. The same sale gives two different percentages, and each has its own use. Read: Markup and margin are not the same number · Practise markup versus margin
simple interestSimple interest is the amount borrowed, times the yearly rate, times the time in years: I = P × r × t. Read: Simple interest · Practise simple interest
present value of one sumMoney later is worth less than money now, because money now could be earning. The present value of a future sum is that sum divided by (1 + rate) once for every period you wait: PV = FV / (1 + r)^n. Read: Present value of one sum · Practise present value of one sum
payroll: gross pay to net payGross pay is what the worker earned. Withholdings are taken out of it and held for whoever they are owed to. Net pay is what reaches the worker. The expense is the gross; the withholdings are a liability until they are sent on. Read: Payroll: from gross pay to net pay · Practise payroll: gross pay to net pay
sales tax on a saleTax collected on a sale is not revenue. It belongs to the tax authority and is a liability until it is paid over: Dr Cash for the total, Cr Sales revenue for the price, Cr Sales tax payable for the tax. Read: Sales tax on a sale · Practise sales tax on a sale
From the first entry to a set of statements · Becoming licensed
the licence you may not needMost of the work called accounting is open to somebody with no licence. The licence in question is the CPA -- certified public accountant -- and it protects the title itself and gates a narrow set of acts, most centrally signing an opinion on another party's financial statements as an independent auditor. Read: The licence you may not need, which is the first question and not the last · Practise the licence you may not need
the education requirement, and the rule changing under itA state has traditionally required a total of college credit larger than a bachelor's degree alone provides. More than half of US jurisdictions have now enacted an alternative that trades part of that extra credit for additional supervised experience, and each state decides for itself whether to adopt one. Read: The education requirement, and the rule that is changing underneath it · Practise the education requirement, and the rule changing under it
the examination, and the part that has not movedThe Uniform CPA Examination is national: the same examination whichever state will license you. It is required on every pathway, old or new. Once the first section is passed a state allows a window in which the rest must be passed, and the length of that window is the state's to set. Read: The examination, and the one requirement that has not moved · Practise the examination, and the part that has not moved
the supervised experience, and who signs it offA state requires a quantity of work experience, verified by a licensee. How much, what kind of work counts, and who may verify it are set by the state, and under the newer pathways experience is precisely what substitutes for some of the education. Read: The supervised experience, and who is allowed to sign it off · Practise the supervised experience, and who signs it off
the board that issues, and what passing is notA state board of accountancy grants the licence. The examination is administered nationally, but no national body licenses anybody. Until the board has your education, your experience and your application and has acted on them, you are a person who has passed an examination. Read: The board issues the licence, and passing the examination issues nothing · Practise the board that issues, and what passing is not
working across state linesA licensee in good standing can generally serve clients in another state under a practice privilege rather than by obtaining a second licence. It is a privilege with conditions attached, not a licence, and a firm's own registration is treated separately from the individual's privilege. Read: Working across state lines, which is more permissive here than anywhere else on this list · Practise working across state lines
the renewal clockA licence is held on a cycle and renewed against continuing professional education reported to the board. The obligation begins with the licence; the hours, the cycle dates and any specifically required subject such as ethics are set by the state. Read: The renewal clock, which starts the day the licence is granted · Practise the renewal clock
The California road to a CPA licence · Before anything else
whether you need the licence at allMost accounting work in California is done by people who hold no licence. The licence is not a permit to do accounting; it is a permit to do a few specific things, and to call yourself by a protected title. Read: First, whether you need it at all · Practise whether you need the licence at all
the board that issues it, and the society that does notA state agency decides who is licensed, publishes the requirements and is the only source that binds. A professional society is a membership organisation: useful, often the clearest explainer, and with no power to license anybody. Read: The board issues it. The society does not. · Practise the board that issues it, and the society that does not
the one thing only a licensee may doThe reason the licence exists is that somebody outside a business -- a lender, an investor, a regulator, a buyer -- needs assurance about that business's figures from a person who is not the business. Giving that assurance in a signed report is restricted work, and the board's own word for it is the attest function. Learn that word, because it is the one the rules are written in: a page that never says the word audit is still about this if it says attest. Read: The one thing only a licensee may do · Practise the one thing only a licensee may do
The California road to a CPA licence · The rules are moving under you
when two sets of requirements are valid at onceWhen a state changes what it asks for, it rarely switches overnight. It usually runs the old requirements and the new ones side by side for a period, so that people already part-way through are not stranded. During that period both are genuinely valid, and a candidate has to know which one they are on. Read: When two sets of requirements are valid at once · Practise when two sets of requirements are valid at once
which date decides, and why it is rarely the obvious oneEvery transition is anchored to a specific event on your timeline, and boards name that event precisely. It might be the date you applied, the date you first sat, the date you completed something, or the date the licence was issued to you. These are different dates, sometimes years apart. Read: Which date decides, and why it is rarely the obvious one · Practise which date decides, and why it is rarely the obvious one
reading the board's own notice instead of a forumBoard notices have a predictable structure: what changed, who it applies to, from when, what to do if you are part-way through, and what happens to anything you already hold. Once you can see that structure you can read any of them quickly. Read: Reading a board notice instead of a forum thread · Practise reading the board's own notice instead of a forum
The California road to a CPA licence · Education
the shape of the education requirementThe education requirement has three parts: a degree at a stated level, a quantity of study in accounting and business subjects, and an ethics component. What the board can change is the quantity and the balance between the parts. What has not changed is that all three parts exist. Read: The shape of the education requirement · Practise the shape of the education requirement
a concentration is subjects, not the name of your degreeThe requirement is satisfied by what you studied, evidenced course by course, not by whether your degree is called accounting. A degree in something else entirely, with the right courses inside or added afterwards, satisfies it. Read: A concentration is subjects, not the name on your degree · Practise a concentration is subjects, not the name of your degree
a degree earned outside the United StatesStudy completed abroad is not read directly by the board. It goes first to an approved evaluation service, which renders it into the categories the board uses, and the board reads that evaluation. Read: A degree earned outside the United States · Practise a degree earned outside the United States
The California road to a CPA licence · The examination
the sections everybody takes and the one you chooseThe examination is in two kinds of section. There is a set of core sections every candidate must pass, covering the ground no accountant can do without. Then there is a discipline section, chosen from a small number of options, in the area you want to go deeper in. Read: The sections everybody takes, and the one you choose · Practise the sections everybody takes and the one you choose
the rolling window, and when its clock startsThe sections do not have to be passed at once, but they do have to be passed within a window of each other. The window rolls: it is measured from a pass, so it starts when you pass your first section, and a section whose window expires has to be taken again. Read: The rolling window, and when its clock starts · Practise the rolling window, and when its clock starts
sitting for the examination before you are licensedThe requirements to sit the examination and the requirements to be licensed are separate, and the first is usually reachable earlier. A candidate can often be examined well before they have everything the licence needs. Read: Sitting the examination is not the same as being licensed · Practise sitting for the examination before you are licensed
The California road to a CPA licence · Experience and ethics
supervised experience, and who may sign for itTime worked only counts if somebody qualified will attest to it. The requirement is not merely that you did the work; it is that a person the board recognises confirms what you did, for how long, and under what supervision. Read: Supervised experience, and who may sign for it · Practise supervised experience, and who may sign for it
study standing in for part of the experienceSome roads allow a qualification to substitute for a portion of the required experience. The substitution is partial, it is specific about which qualifications count, and it exists because the board judges that study to have delivered part of what the experience delivers. Read: When study can stand in for part of the experience · Practise study standing in for part of the experience
the ethics step that changed shapeThere has always been an ethics requirement. What changes is its form and its position: it can be an examination sat before the licence is issued, or a course completed after licensing, at the first renewal. California has moved from one to the other. Read: The ethics step, which changed shape · Practise the ethics step that changed shape
The California road to a CPA licence · Getting it and keeping it
the order the steps are actually done inThe road has a sequence, and parts of it run in parallel. Education qualifies you to sit; the examination is passed over a period; experience is gathered, often at the same time; then the application is made, and the licence is issued by somebody else on their own schedule. Read: The order the steps are actually done in · Practise the order the steps are actually done in
the renewal clock and what it asks forA licence is held on a cycle and has to be renewed. Renewal asks for continuing education, of a stated amount and with some of it in stated subjects, and the first renewal can carry requirements that later ones do not. Read: The renewal clock, and what it asks for · Practise the renewal clock and what it asks for
working across a state lineA licence is issued by one state, and the ability to work into another is a separate question with its own rules, decided by the state you are working INTO. There are arrangements that make this routine for much ordinary work, and they have conditions and exceptions. Read: Working across a state line · Practise working across a state line
Management and cost accounting · Costs that behave differently
fixed, variable and mixed costsA variable cost changes in total with how much you make and stays the same for each unit. A fixed cost stays the same in total and falls per unit as volume rises. A mixed cost has one of each inside it. Read: Fixed, variable, and the ones that are both · Practise fixed, variable and mixed costs
splitting a mixed cost with the high-low methodTake the highest-activity period and the lowest. The difference in cost divided by the difference in activity is the variable rate, because only the variable part moved. Put that rate back into either period and what is left over is the fixed part. Read: Splitting a mixed cost, with two months and no statistics · Practise splitting a mixed cost with the high-low method
contribution margin per unitSelling price minus variable cost per unit. It is what one more sale contributes towards the fixed costs, and once those are covered, towards profit. Read: Contribution margin: what each sale leaves behind · Practise contribution margin per unit
the contribution margin ratioContribution divided by sales, as a percentage. It says how much of every pound of revenue survives the variable costs, which makes it the quickest way to turn a sales figure into a contribution figure. Read: The contribution margin ratio · Practise the contribution margin ratio
the volume that reaches a target profitBreak-even asks how many units cover the fixed costs. A target profit asks the same question with the profit added on top: fixed costs plus target, divided by contribution per unit. Read: How many must we sell to make the profit we want · Practise the volume that reaches a target profit
the margin of safetyHow far sales can fall before the business stops making a profit: current sales minus break-even sales, often given as a percentage of current sales. Read: The margin of safety · Practise the margin of safety
Management and cost accounting · What a unit really costs
direct materials and direct labourA direct cost is one you can trace to a particular unit without estimating. Everything else in the factory is overhead, however obviously it belongs to production. Read: Direct materials and direct labour · Practise direct materials and direct labour
the predetermined overhead rateOverhead cannot be traced, so it is spread using a rate worked out in advance: estimated overhead for the period divided by the estimated amount of whatever drives it -- machine hours, labour hours, units. Read: The predetermined overhead rate · Practise the predetermined overhead rate
applying overhead, and the amount left overOverhead applied is the predetermined rate times the ACTUAL activity. It will not equal the overhead actually incurred, and the difference is called over-applied when too much was charged and under-applied when too little was. Read: Applying overhead, and the amount left over · Practise applying overhead, and the amount left over
absorption costing against variable costingUnder absorption costing, fixed production overhead goes into the cost of a unit and sits in inventory until the unit is sold. Under variable costing it is charged to the period. The two give different profits whenever inventory changes. Read: Absorption costing against variable costing · Practise absorption costing against variable costing
Management and cost accounting · Was it the price or the amount
material price and quantity variancesA total difference from standard splits into two. The price variance is the difference in price per unit of material times the quantity actually bought. The quantity variance is the difference between the quantity used and the quantity that should have been used, valued at the standard price. Read: Material: was it the price, or the amount · Practise material price and quantity variances
labour rate and efficiency variancesThe same split, with the same shape. The rate variance is the difference in hourly rate times the hours actually worked. The efficiency variance is the difference between hours worked and hours allowed for the output achieved, valued at the standard rate. Read: Labour: was it the rate, or the hours · Practise labour rate and efficiency variances
reading a variance without blaming the wrong personA variance is a question, not a verdict. It says a number differed from a standard; it does not say who caused it, whether it was avoidable, or whether the standard was right in the first place. Read: Reading a variance without blaming the wrong person · Practise reading a variance without blaming the wrong person
Management and cost accounting · Deciding with numbers
relevant cost, and the cost that is already spentOnly costs that change as a result of the decision are relevant to it. A cost already spent is gone whichever way you choose, so it cannot affect which choice is better, however large it is. Read: Relevant cost, and the money already gone · Practise relevant cost, and the cost that is already spent
making a part or buying itCompare the cost of making it with the cost of buying it, counting only what actually changes. The cost of making includes the variable cost of production and any fixed cost that would genuinely stop if you stopped making it, and excludes any that would not. Read: Make the part, or buy it · Practise making a part or buying it
an order at less than the usual priceWith spare capacity, a one-off order is worth taking if its price exceeds the variable cost of filling it, because every pound above that is extra contribution. The usual full cost is not the test. Read: An order at less than the usual price · Practise an order at less than the usual price
dropping a product lineA line is worth keeping if its contribution exceeds the fixed costs that would actually disappear with it. Allocated common costs do not disappear; they move onto whatever is left. Read: Dropping a product line · Practise dropping a product line
Audit and assurance · What an audit is for
what an audit is actually forAn audit exists because somebody outside a company has to act on figures the company itself prepared. The auditor is not there to find fraud, prepare the accounts, or approve the business. They are there to say whether the statements, taken as a whole, are free of material misstatement. Read: What an audit is actually for · Practise what an audit is actually for
reasonable assurance, not a guaranteeAn audit gives high assurance, not certainty. Testing everything is impossible on any real company, some evidence is persuasive rather than conclusive, and fraud involves people actively hiding things. So the standard is reasonable assurance, which is a deliberate, stated limit rather than an excuse made later. Read: Reasonable assurance, and why not absolute · Practise reasonable assurance, not a guarantee
independence in fact and in appearanceIndependence has two halves. In fact means your judgement really is unaffected. In appearance means a reasonable outsider would agree, knowing what they know. Both are required, because the value of the opinion depends entirely on strangers believing it. Read: Independent in fact, and seen to be · Practise independence in fact and in appearance
Audit and assurance · What could be wrong
what management is claiming when it publishes accountsPublishing a balance sheet is making a set of claims. That the assets exist. That nothing is missing. That the amounts are right. That the company owns them and owes the liabilities. That everything is presented and described properly. Read: What management is claiming, line by line · Practise what management is claiming when it publishes accounts
where a misstatement is likely to beAudit effort is directed at risk rather than spread evenly. Risk is higher where amounts depend on judgement, where somebody benefits from a particular answer, where the process is manual, and where the balance is large relative to everything else. Read: Where a misstatement is likely to be · Practise where a misstatement is likely to be
Audit and assurance · How much wrong matters
materiality: how much wrong would matterMateriality is the size of misstatement that would change what a reader of the accounts decides. It is set at planning, from a benchmark the firm chooses and a percentage its methodology sets, and it is a matter of judgement rather than a number in a rule book. Read: Materiality: how much wrong would change a decision · Practise materiality: how much wrong would matter
why you work to a number lower than materialityPerformance materiality is set lower than overall materiality, so that many small misstatements, each individually acceptable, do not add up past the line without anybody noticing. Read: Why you work to a number below materiality · Practise why you work to a number lower than materiality
Audit and assurance · Getting evidence
what makes one piece of evidence stronger than anotherEvidence is stronger when it comes from outside the company, when the auditor obtained it directly, when it is written rather than spoken, and when it is an original rather than a copy. Read: What makes one piece of evidence stronger than another · Practise what makes one piece of evidence stronger than another
which direction you test in, and what it provesVouching starts in the records and goes back to the supporting document: it asks whether what was recorded really happened, so it catches overstatement and tests existence. Tracing starts at the source document and goes forward into the records: it asks whether what happened was recorded, so it catches understatement and tests completeness. Read: Which direction you test in decides what you prove · Practise which direction you test in, and what it proves
testing some of it, and what that costs youAuditors test samples because testing everything is impossible. The cost is sampling risk: the chance that the sample is not representative and the conclusion drawn from it is wrong about the population. Read: Testing some of it, and what that costs you · Practise testing some of it, and what that costs you
projecting what you found to what you did not look atA misstatement found in a sample is not the misstatement in the population. It has to be projected: scale the error found by the relationship between the sample and the whole, then compare the projected figure against materiality. Read: Projecting what you found onto what you did not look at · Practise projecting what you found to what you did not look at
asking somebody outside the companyA confirmation is a request sent by the auditor to a third party, answered directly back to the auditor. Its strength comes from both halves: it comes from outside, and it never passes through the client's hands. Read: Asking somebody outside the company · Practise asking somebody outside the company
Audit and assurance · What you conclude
whether the company will still be here next yearAccounts are normally prepared on the assumption the business will continue. The auditor has to consider whether that assumption is reasonable, and where there is significant doubt, whether it has been disclosed. The auditor does not predict failure; they assess an assumption and whether the reader has been told. Read: Whether the company will still be here next year · Practise whether the company will still be here next year
the four things an audit report can sayUnmodified when the statements are fairly stated. Qualified when something is materially wrong or unverifiable but limited to specific areas. Adverse when a misstatement is so pervasive the statements as a whole are misleading. A disclaimer when the auditor could not obtain enough evidence to form any opinion at all. Read: The four things an audit report can say · Practise the four things an audit report can say
Payroll · What the worker is paid
the shape of gross pay to net payGross pay is what the worker earned. Deductions come off it. Net pay is what reaches their bank. The business's expense is the gross, not the net, and the difference is money the business is holding rather than money it has saved. Read: Gross pay, deductions, net pay · Practise the shape of gross pay to net pay
overtime and premium hoursHours above a threshold are usually paid at a higher rate: the ordinary rate multiplied by a premium factor. The threshold and the factor are set by law or by contract, and they differ everywhere, so the calculation is always the same shape and never the same numbers. Read: Overtime, and the rate it is paid at · Practise overtime and premium hours
Payroll · What it costs the business
what a worker costs against what they are paidThe business's cost is the gross pay plus the contributions the employer itself owes on top. Those employer amounts are not deducted from anybody: they are an additional expense, and they are why a salary figure is never the cost of employing somebody. Read: What a worker costs, against what they are paid · Practise what a worker costs against what they are paid
pay periods, and the weeks that go missingA year does not divide evenly into months of four weeks. Weekly pay means fifty-two runs a year and fortnightly means twenty-six, while twelve months of four weeks is only forty-eight. Annualising a weekly figure by multiplying by four and then by twelve loses a month of pay. Read: Pay periods, and the weeks that go missing · Practise pay periods, and the weeks that go missing
Payroll · Money you are holding for somebody else
money you are holding for somebody elseAmounts withheld from a worker's pay are not the business's money and never were. The business is holding them on behalf of whoever they are owed to, and until they are handed over they sit on the balance sheet as a liability. Read: Money you are holding for somebody else · Practise money you are holding for somebody else
the liability, and the day it has to be handed overWithheld amounts and employer contributions are handed over on a schedule set by the authority receiving them. The schedule depends on the size of the payroll and it is not negotiable, and missing it is penalised separately from the amount itself. Read: The liability, and the day it has to be handed over · Practise the liability, and the day it has to be handed over
Payroll · The books at period end
wages earned in one period and paid in the nextWages belong to the period in which the work was done, not the period in which the payment left the bank. Where a pay period straddles a month end, the days already worked are accrued as an expense and a liability at that date. Read: Worked in one period, paid in the next · Practise wages earned in one period and paid in the next
when somebody has been paid too muchAn overpayment is an asset: the business is owed money by the worker. It is recovered by agreement rather than by simply taking it back out of the next pay, and how much may be recovered and how fast is usually constrained by law. Read: When somebody has been paid too much · Practise when somebody has been paid too much
Payroll · Getting it wrong is expensive
employee or contractor, and why it is not a preferenceWhether somebody is an employee or an independent contractor is decided by the substance of the working relationship, not by what the contract calls them or what both sides would prefer. Control over how the work is done, who provides the tools, whether the person can send a substitute and whether they bear financial risk all bear on it. Read: Employee or contractor, and why it is not a preference · Practise employee or contractor, and why it is not a preference
what has to be kept, and for how longPayroll records -- hours, rates, gross, each deduction, net, and what was handed over and when -- have to be kept for a period set by law. The retention exists because the questions that arrive about a payroll arrive years later, from a person or an authority, and they are answered from records or not at all. Read: What has to be kept, and why it is kept that long · Practise what has to be kept, and for how long
Fund accounting: government and non-profit · Why the books are split
why these books are not one set of booksA company has one pot of money and one question: did it make a profit. An organisation funded by grants, taxes and donations has many pots, most with conditions attached, and a different question: was each pot spent on what it was given for, and did the spending stay inside what was authorised. Read: Why these books are not one set of books · Practise why these books are not one set of books
what a fund actually isA fund is a self-contained set of accounts for a particular purpose, with its own assets, its own liabilities and its own balance. Money moves between funds only by a deliberate, recorded transfer, never by being quietly used. Read: What a fund actually is · Practise what a fund actually is
Fund accounting: government and non-profit · Money with strings attached
money you may spend as you judge best, and money you may notUnrestricted money can be applied to any of the organisation's purposes, as those running it judge best. Restricted money may only be spent on the purpose it was given for. The distinction is about permission, not about the money being different in any other way. Read: Money you may spend as you judge best, and money you may not · Practise money you may spend as you judge best, and money you may not
who imposed the restriction, and why it mattersA restriction imposed from outside -- by a donor, a grant agreement or a law -- can only be lifted by the person who imposed it. A limit the organisation's own board set on itself can be changed by that same board, because it is a policy rather than an obligation. Read: Who imposed it, and why that changes what you can do · Practise who imposed the restriction, and why it matters
Fund accounting: government and non-profit · The budget is the limit
the budget as an authorisation rather than a forecastIn a company the budget is a plan and exceeding it is a management problem. In a government the budget is passed by people entitled to decide, and the amounts in it are limits on what may be spent. Exceeding one is not poor forecasting; it is spending money nobody authorised. Read: The budget is an authorisation, not a forecast · Practise the budget as an authorisation rather than a forecast
appropriation, expenditure, and what is leftAn appropriation is the amount authorised for a purpose. Expenditure is what has been spent against it. The difference is what remains authorised, and it is the figure everybody wants and most systems do not show on their own. Read: Appropriation, expenditure, and what is left · Practise appropriation, expenditure, and what is left
Fund accounting: government and non-profit · Not overspending
committing money before you spend itWhen an order is placed the money is not yet spent, and it is no longer free either. An encumbrance records that commitment against the budget straight away, so the same money cannot be committed twice while the goods are still in transit. Read: Committing money before you spend it · Practise committing money before you spend it
what is actually available to spendAvailable budget is the appropriation, less what has been spent, less what has been committed but not yet spent. Any figure that ignores the commitments is not the amount available and will let somebody overspend while reading a report that says they cannot. Read: What is actually available to spend · Practise what is actually available to spend
Fund accounting: government and non-profit · What it all means
a surplus is not a profitWhen income exceeds expenditure the difference is a surplus. It belongs to the organisation's purposes, not to any owner, and much of it may be restricted. It is not evidence that the organisation is doing well and it is not money anybody may take out. Read: A surplus is not a profit · Practise a surplus is not a profit
who reads these accounts, and what they want to knowThe readers are funders, regulators, taxpayers, trustees and the public, and they are not asking whether the organisation was profitable. They are asking whether money went where it was supposed to go, whether spending stayed inside what was authorised, and whether the organisation can continue doing what it exists to do. Read: Who reads these accounts, and what they want to know · Practise who reads these accounts, and what they want to know
Tax · The books and the return
the books and the return are different documentsAccounting profit is computed under accounting rules; taxable income is computed under tax rules. They start from the same transactions and they are not the same number, and neither one is a corrupted version of the other. Read: The books and the return are different documents · Practise the books and the return are different documents
differences that reverse, and differences that never doA timing difference means the books and the return recognise the same amount in different periods, so it reverses later. A permanent difference is an amount one of them will never recognise at all. The distinction decides whether anything has to be carried on the balance sheet. Read: Differences that reverse, and differences that never do · Practise differences that reverse, and differences that never do
Tax · How a rate actually applies
a rate applies to a band, not to the wholeUnder a banded system, income is divided into slices and each slice is taxed at its own rate. Moving into a higher band means the higher rate applies to the part in that band, never to everything you earned. Read: A rate applies to a band, not to the whole · Practise a rate applies to a band, not to the whole
the rate on your next pound, and the rate on all of itThe marginal rate is the rate on the next unit of income you earn. The effective rate is the total tax divided by total income. Under a banded system the effective rate is always lower than the marginal rate, and the two answer different questions. Read: The rate on your next pound, and the rate on all of it · Practise the rate on your next pound, and the rate on all of it
why more income never leaves you with lessCrossing into a higher band raises the rate only on the income above the threshold. The income below it is taxed exactly as before. So extra earnings are always worth something after tax, and no raise under a banded system can reduce take-home pay. Read: Why more income never leaves you with less · Practise why more income never leaves you with less
Tax · What may be subtracted
a deduction reduces what is taxed, not the taxA deduction comes off income before the rate is applied, so it saves tax at your rate rather than saving its own amount. A credit comes off the tax itself. Confusing the two overstates the value of a deduction by a large multiple. Read: A deduction reduces what is taxed, not the tax · Practise a deduction reduces what is taxed, not the tax
a deduction you cannot evidence is not a deductionA claim has to be supported by a record that shows what was bought, when, for how much, and why it relates to the activity being taxed. A genuine expense with no evidence is treated the same as one that never happened. Read: A deduction you cannot evidence is not a deduction · Practise a deduction you cannot evidence is not a deduction
Tax · Paying it
what was withheld is an estimate, not the billAmounts taken during the year are an estimate of what will be owed. The liability is computed afterwards on the whole year. If more was withheld than owed the difference comes back; if less, it is still owed. Read: What was withheld is an estimate, not the bill · Practise what was withheld is an estimate, not the bill
filing and paying are two obligationsSubmitting the return and paying the amount are separate duties with separate consequences. They often have different deadlines, and failing one is not the same as failing the other. Read: Filing and paying are two obligations · Practise filing and paying are two obligations
Tax · When it was wrong
when the return was wrongA return found to be wrong is corrected by amending it, and the correction is a normal process rather than an admission of anything. Correcting promptly and voluntarily is treated differently from being found, and the difference is usually substantial. Read: When the return was wrong · Practise when the return was wrong
why behaviour changes the numberA penalty is usually a proportion of the amount involved, scaled by how the error came about. An honest mistake, a failure to take reasonable care, and a deliberate act are treated as different things, and the same underlying error can carry very different consequences depending which it was. Read: Why behaviour changes the number · Practise why behaviour changes the number
Forensic accounting · What the work is
what the work actually isForensic accounting is assembling financial evidence for a dispute or a proceeding. The question is not whether you are right; it is whether you can demonstrate it to somebody who is paid to find the weakness in it. Read: What the work actually is · Practise what the work actually is
who the expert's duty runs toAn expert's obligation runs to the proceeding, not to whoever is paying. The opinion is the same whichever side instructed it, and where the evidence does not support the client's position, saying so is the job rather than a failure of it. Read: Who the duty runs to · Practise who the expert's duty runs to
Forensic accounting · Why it happens
pressure, opportunity, and the story people tell themselvesThree things are usually present together where an ordinary person takes money: a pressure they cannot share, an opportunity they can see, and a way of describing it to themselves that is not theft -- a loan, being owed it, everybody does it. Read: Pressure, opportunity, and the story people tell themselves · Practise pressure, opportunity, and the story people tell themselves
the only one of the three an organisation controlsAn employer cannot remove somebody's private pressure and cannot manage how they explain things to themselves. Opportunity is the only leg it can act on, which is why control design is the whole of prevention. Read: The only one of the three an organisation controls · Practise the only one of the three an organisation controls
Forensic accounting · How money actually leaves
taking money before it is ever recordedSkimming is taking receipts before they enter the records at all. Because the money was never recorded, the books balance perfectly afterwards, which is what makes it the hardest scheme to find in the accounts. Read: Taking money before it is ever recorded · Practise taking money before it is ever recorded
covering yesterday's theft with today's receiptLapping is taking one customer's payment and covering the gap in their account with the next customer's payment, then covering that one with a third. Every account is eventually right and every one of them was wrong for a while. Read: Covering yesterday's theft with today's receipt · Practise covering yesterday's theft with today's receipt
somebody on the payroll who does not existA ghost employee is a payroll record for a person who never worked there, or who left and was never removed. The pay goes somewhere, and where it goes is the thing that gives it away. Read: Somebody on the payroll who does not exist · Practise somebody on the payroll who does not exist
Forensic accounting · Finding it in the numbers
a screening tool, and the data it does not work onIn many naturally occurring sets of numbers, leading digits are not evenly distributed: small digits appear far more often than large ones. A large departure from that pattern is a reason to look closer. It is a screen, never proof, and it only holds for data of the right kind. Read: A screening tool, and the data it does not work on · Practise a screening tool, and the data it does not work on
amounts that stop just short of needing approvalWhere a threshold triggers approval, a second signature or a competitive process, amounts cluster just below it far more often than chance allows. The clustering is the signal, and it is counted rather than sensed. Read: Amounts that stop just short of needing approval · Practise amounts that stop just short of needing approval
why one person should not do all of itThe steps of a transaction -- authorising it, executing it, holding the asset, and recording it -- should not all sit with one person. Where they do, that person can both take something and make the records agree. Read: Why one person should not do all of it · Practise why one person should not do all of it
Forensic accounting · Making it stand up
handling evidence so that it survivesEvidence has to be obtained, recorded and stored in a way that can be described later: where it came from, who has held it since, and that it has not changed. Material that cannot be accounted for in that way may be true and may still be unusable. Read: Handling evidence so that it survives · Practise handling evidence so that it survives
asking without contaminating the answerAn account is worth something only if it came from the person rather than from the question. Asking what happened produces evidence; asking whether they took the money produces a reaction, and a reaction proves nothing either way. Read: Asking without contaminating the answer · Practise asking without contaminating the answer