BANK GIRO CREDIT

A method of transferring money by instructing a bank to directly transfer funds from one bank account
to another without the use of checks. Bank giro transfers are predominantly used in European
countries such as Germany, Austria, the Netherlands and Sweden, where they are seen as an
effective way for companies to receive payments from foreign customers. Also known as a "Giro
credit".
The bank giro transfer was developed to help companies increase their ability to receive payments on
the goods and services that they provide. Customers can pay using a giro transfer either through the
mail or online. Giro transfers have become a more accepted payment method than checks because
they provide security when lost or stolen, and they can be processed more quickly than a standard
check.
WHAT IS BALANCED SCORECARD
Throughout the process of creating the BSC, Norton and Kaplan realized an organization must first
begin with goals that can broken down into four distinct perspectives that are uniquely connected:

1. Financial goalsWhat financial goals do we have that will impact our organization?
2. Customer goalsWhat things are important to our customers, which will in turn impact our
financial standing?
3. Process goalsWhat do we need to do well internally, in order to meet our customer goals,
that will impact our financial standing?
4. People (or learning and growth) goalsWhat skills, culture, and capabilities do we need to
have in our organization in order to execute on the process that would make our customers
happy and ultimately impact our financial standing?

Over time, the concept of a strategy map was created. A Balanced Scorecard strategy map is a one-
page visual depiction of an organizations scorecard. It has the ability to show the connections
between all four perspectives in a one-page picture. If you want some examples in your industry,
download one of our free ebooks:

For-Profit Sample Strategy Maps

Nonprofit Sample Strategy Maps
Medical & Healthcare Sample Strategy Maps
How is the Balanced Scorecard typically put to use?
A Balanced Scorecard is most often used in three ways:

1. To bring an organizations strategy to life. Those in the company can then use this strategy
to make decisions company-wide.
2. To communicate the strategy across the organization. This is where the strategy map is
critical. Organizations print it and include it in interoffice communications, put it on their
intranet, communicate it with business partners, publish it on their website, and more.
3. To track strategic performance. Thats typically done through monthly, quarterly, and annual
reports.
OVERHEAD ABSORPTION
Overhead absorption is the amount of indirect costs assigned to cost objects. Indirect costs are
costs that are not directly traceable to an activity or product. Cost objects are items for which
costs are compiled, such as products, product lines, customers, retail stores, and distribution
channels.
 Overhead absorption is a necessary part of the requirement by both the GAAP and IFRS
accounting frameworks to include overhead costs in the recorded amount of inventory that is
shown in a company's financial statements. Overhead absorption is not needed for internal
management reporting, only for external financial reporting.
Examples of indirect costs are:
Selling and marketing costs
Administrative costs
Production costs
Selling, marketing, and administrative costs are usually charged to expense in the period
incurred. However, indirect production costs are classified as overhead and then charged to
products through overhead absorption.
Overhead absorption involves the following steps:

1. Classify indirect costs . Depending on the type of allocation desired, some costs may be include d
in overhead and others may not. For example, overhead absorption for a product would not
include marketing costs, but marketing costs might be included in an internal cost report for a
distribution channel.
2. Aggregate costs . Shift the identified costs into cost pools. Each cost pool should have a different
allocation base. Thus, the indirect costs related to a facility might be aggregated into a cost pool
that is allocated based on square footage used.
3. Determine allocation base . This is the basis upon which overhead is assigned to a cost object.
For example, facility costs may be assigned based on square footage used, while labor -related
indirect costs may be assigned based on direct labor used.
4. Assign overhead . Divide the allocation base into the total amount of overhead included in a cost
pool to arrive at the overhead rate.
Overhead absorption is based on a combination of the overhead rate and the usage of the
allocation base by the cost object. Thus, the allocation of overhead to a product may be based
on an overhead rate of $5.00 per direct labor hour used, which can be altered by changing the
number of hours used or the amount of overhead cost in the cost pool.
Overhead absorption does not necessarily reflect the exact amount of overhead cost actually
incurred during an accounting period, since the overhead rate may be a long-term one that was
based on information derived at some point in the past. If so, the amount of overhead absorbed
may differ from the amount of overhead actually incurred.

ACCRUAL CONCEPT
Accrual concept is the most fundamental principle of accounting which requires recording revenues
when they are earned and not when they are received in cash, and recording expenses when they
are incurred and not when they are paid.
GAAP allows preparation of financial statements on accrual basis only (and not on cash basis). This is
because under accrual concept revenues and expenses are recorded in the period to which they
relate and not when they are received or paid. Application of accrual concept results in accurate
reporting of net income, assets, liabilities and retained earnings which improves analysis of the
companys financial performance and financial position over different periods.
At the end of each reporting period, companies pass adjusting journal entries to record any accruals,
for example accrual of utilities expense, interest expense, accrual of wages and salaries, adjustment
of prepayments, etc.
Examples
The following examples elaborate the accrual concept.
1. An airline sells its tickets days or even weeks before the flight is made, but it does not record the
receipts as revenue because the flight, the event on which the revenue is based has not occurred
yet.
The airline journalizes receipt of cash as follows:
Bank ABC
Unearned ABC
revenue
2. Unearned revenue is a current liability which extinguishes when the flight is made.
Unearned revenue ABC
Revenue ABC
3. An accounting firm obtained its office on rent and paid $120,000 on January 1 as annual rent. It
does not record the payment as an expense because the building is not yet used. Instead it
records the cash payment as prepaid rent (which is a current asset):
Prepaid rent DEF
Bank DEF
4. The firm recognizes rent expense over the period. For example, in preparing its quarterly income
statement on March 31, the firm expenses out three months' rent i.e. 30,00 (= $120,000/12 3]
because 3 months equivalent of time has expired (from 1 January till 31 March).
Rent expense GHI
Prepaid rent GHI
5. A business records its utility bills as soon as it receives them and not when they are paid, because
the service has already been used. The company ignores the date when the payment will be
made.

Cash basis

An alternative to accrual basis is the cash basis of accounting. Under the cash basis, transactions are
recorded based on their underlying cash inflows or outflows. Cash basis is normally used while
preparing financial statements for tax purposes, etc.
ANNUAL PERCENTAGE RATE - APR'

An annual percentage rate (APR) is the annual rate charged for borrowing or earned through an
investment, and is expressed as a percentage that represents the actual yearly cost of funds over the
term of a loan. This includes any fees or additional costs associated with the transaction but does not
take compounding into account. As loans or credit agreements can vary in terms of interest-rate
structure, transaction fees, late penalties and other factors, a standardized computation such as the
APR provides borrowers with a bottom-line number they can easily compare to rates charged by
other lenders.

BREAKING DOWN 'Annual Percentage Rate - APR'

By law, credit card companies and loan issuers must show customers the APR to facilitate a clear
understanding of the actual rates applicable to their agreements. Credit card companies are allowed
to advertise interest rates on a monthly basis, but are also required to clearly state the APR to
customers before any agreement is signed. For example, a credit card may charge 1% a month, and
its APR is 1% x 12 months, or 12%.

Loans are offered with either fixed or variable APRs. A fixed APR loan has an interest rate that is
guaranteed not to change during the life of the loan or credit facility. A variable APR loan has an
interest rate that may change at any time.

APR vs Interest Rate

An interest rate, or a nominal interest rate, refers only to the interest charged on a loan, and it does
not take any other expenses into account. In contrast, APR is the combination of the nominal interest
rate and any other costs or fees involved in procuring the loan. As a result, an APR tends to be higher
than a loan's nominal interest rate.

For example, if you were considering a mortgage for $200,000 with a 6% interest rate, your annual
interest expense would amount to $12,000, or a monthly payment of $1,000. But say your home
purchase also requires closing costs, mortgage insurance and loan origination fees in the amount of
$5,000. In order to determine your mortgage loan's APR, these fees are added to the original loan
amount to create a new loan amount of $205,000. The 6% interest rate is then used to calculate a
new annual payment of $12,300. Divide the annual payment of $12,300 by the original loan amount
of $200,000 to get an APR of 6.15%.

The federal Truth in Lending Act requires that every consumer loan agreement list the APR along
with the nominal interest rate. The scenario most confusing to borrowers is when two lenders are
offering the same nominal rate and monthly payments but different APRs. In a case like this, the
lender with the lower APR is requiring fewer upfront fees and offering the better deal.

COST DRIVER
Ideally, a cost driver is an activity that is the root cause of why a cost occurs.

In the past century, the root cause of indirect manufacturing costs has changed from a single cost driver (such
as direct labor hours) to several cost drivers. Due to sophisticated manufacturing and increased demands from
customers, direct labor is no longer the main cost driver of indirect manufacturing overhead.

In addition to direct labor, today's drivers of indirect manufacturing costs include the number of machine
setups required, the number of engineering change orders, the demands from customers for special
inspections, handling and storage, the number of components in the units produced, and the number of
production machine hours.

Manufacturers that want to know the true costs of their products need to know what is driving their indirect
manufacturing costs. For these companies it is not sufficient to merely spread overhead costs to products by
using a single factor such as direct labor hours or production machine hours.
 BAD DEBTS ENTRIES
Bad debts are accounts receivable that a company does not expect to collect and has
written off to income statement as an expense. Bad debts are also called irrecoverable
debts.
Bad debts are recognized as expense because they are not expected to generated any
economic benefits in future. Recognition of bad debt expense also results in a
corresponding decrease in the accounts receivable balance on balance sheet because
bad debts are no longer an asset.
Although bad debts are a grim reality of doing business on credit, this does not mean
that one should stop selling on credit since a good credit policy outweighs this draw back
by a great margin. Selling goods on credit increases sales volume because customers
like to have the ability to purchase on credit.
There are two methods of accounting for bad debts: (a) the allowance for doubtful
accounts method and (b) the direct write-off method

Allowance for Doubtful Accounts

In the allowance for doubtful accounts method, bad debts expense is estimated and
recognized in the period in which the relevant revenue is recognized. This makes it a
more appropriate method than direct write-off method because it is in accordance with
the matching concept.
In each period, doubtful accounts are estimated and expensed out by debiting bad
debts expense account and crediting allowance for doubtful accounts account. Following
journal entry is required:
Bad debts expense ABC
Allowance for ABC
doubtful debts
There are two methods for estimating bad debts: percentage of
receivables and percentage of sales.
Subsequently, when it is confirmed that an account receivable is no longer collectible, it
is removed by debiting the allowance for doubtful debts account and crediting accounts
receivable. Following is the journal entry to recognize this:
Allowance for doubtful DEF
debts
Accounts DEF
receivable
Direct Write-off
In direct write-off method, there is no estimation of doubtful debts. Instead bad debts
expense is recognized when the account actually turns out to be uncollectible and not
just potentially doubtful.
Direct write-off is recognized through the following journal entry:
Bad debts expense DEF
Accounts DEF
receivable
Example

Sillex, Inc. started operations on 1 January 2013. During the year ended 31 December
2013, the companys sales amounted to $20 million out of which $4 million remained
outstanding at the year end. Average accounts receivable outstanding during the first
year amounted to $3 million. Since the company did not have any comprehensive
accounts receivable policy during the first year of operations, it expensed out $220,000
of uncollectible accounts directly. The companys management decided to apply the
percentage of receivables allowance method for recognizing bad debts expense from 31
December 2013 onwards. Actual bad debts during the second year were $270,000.
Prepare all relevant journal entries related to bad debts accounting for the companys
first two year of operations.
Solution
During financial year 2013, the company applied the direct write-off method which
involved expensing out actual bad debts as follows:
Bad debts expense 220,000
Accounts 220,000
receivable
At the end of first year, the company needs to recognize an allowance for doubtful
accounts based on the percentage of accounts receivable. The percentage can be
worked out by dividing the actual bad debts during the first year by the average
accounts receivable balance during the period.
Percentage of bad debts = $220,000/$3,000,000 = 7.33%
Potential bad debts expense for second year = 7.33% $4,000,000 = $293,333
The allowance for doubtful debts shall be recognized at the end of first year as follows:
Bad debts expense 293,333
Allowance for 293,333
doubtful
accounts
Allowance for doubtful accounts is a contra-account to accounts receivable. Net accounts
receivable balance on balance sheet as at 31 December 2013 shall be $ 2,706,667
($3,000,000 less $293,333).
Actual bad debts during financial year ended 31 December 2014 are written off against
allowance for doubtful accounts as follows:
Allowance for doubtful 270,000
accounts
Accounts 270,000
receivable
At the end of financial year ended 31 December 2014, allowance for doubtful accounts
balance is increased to reflect the additional doubtful accounts.