Business Meals & Entertainment Expenses

Article Source: http://www.taxpros-plus.com/travelandentertainment.html

Several months ago, I did an article regarding the deductibility of business travel, meals and entertainment.  In this article I would like to revisit some of these issues, as it has been brought to my attention that many businesses are not deducting as much for theses expenses as is allowed.  The percentage of deductibility for meals and entertainment is somewhat confusing and I am hoping that by giving businesses more details on these matters, it will increase their awareness, as well as their business expense deductions, in the future.

Do I need to keep receipts for all meals related to my business?

While it is a good idea to keep receipts and/or a journal documenting all meals and entertainment expenses, receipts are only required for meal expenses of $75 or more.  Documentation of entertainment and meal expenses should include the amount, date, place, people entertained, type of entertainment, business purpose, and business relationship, and notes on the business discussion which occurred immediately before, during or immediately after the meal.

The IRS only allows a 50% deductions for meals and entertainment.  Why do I have to keep such detailed documentation?

It's true that most business expenses for meals and entertainment are only deductible at 50%.  However, some of these expenses are fully deductible.  The documentation is necessary in the event of an audit.  Whether your expense is 50% or 100% deductible, you would hate to have a portion of these deductions disallowed because of lack of documentation.

I was not aware that any meals or entertainment expenses were 100% deductible.  How do I know the difference between a 50% and 100% deductible meal?

The Tax Code has three basic categories that apply to the 50% limitations.  They are:

1. Entertaining clients or customers.
2. Business travel away from home.
3. Attending business conventions, meetings or luncheons.

Chances are if your expense does not fit into one of these categories, it can be fully deducted.

What are some examples of expenses that are 100% deductible?

The following expenses would qualify for a full deduction:

1. Meals provided to employees related to social or recreational activities.  For instance, a company Christmas party, annual picnic, or retirement party would all be fully deductible provided that they include a nondiscriminatory class of employees.
2. Meals that are provided to employees for the convenience of the employer.  These could include meals provided due to short lunch periods, unavailability of nearby eating facilities, necessity of employees being available at all times for emergency phone calls, and meals furnished to food service employees during and immediately before or after their working hours.  Also, meals provided to employees immediately after working hours that would have been provided during working hours for a business purpose, except work duties prevented employees from eating during working hours are included in the 100% deductibility category.  
3. If a meal is provided to more than half of the employees for the employer's convenience, the employer can then deduct meals provided to all employees at 100%.
4. “De minimis” fringe benefits meals also qualify for the 100% deduction.  This includes meals that are provided infrequently or cost so little that it is not worth the time spent to fully account for them.  Examples would be an occasional meal or meal money provided to employees who work late hours or perform work-related duties outside the normal workday, or coffee and doughnuts. 
5. Under the de minimis rule, 100% deductibility may also be allowed for meals provided to “promote goodwill, boost morale, or attract prospective employees.”
6. Meals provided to several prospective clients at one time at which a marketing presentation is made are also 100% deductible.

I was not aware of the 100% deduction for these expenses and have expenses in past years that would qualify for the full deduction.  Can I still get credit for the remaining 50% deduction that wasn't taken?

Yes.  Provided you have adequate records to document such expenses, you can amend your tax returns for up to three prior years and claim the full deduction.  The dollar amount of the additional deduction will no doubt play a role in your decision to amend prior returns. 

And remember, documentation is the key.  The IRS is aware that many businesses do not keep adequate records for meals and entertainment expense, thus creating an audit target.

How can I be sure that I am taking the full allowable deduction on meals and entertainment expenses in the future?

The best way to assure yourself that you are taking these expenses to your fullest advantage is to learn the deduction categories well and keep adequate records documenting these expenses.  Also, teach your employees about the meals and entertainment deduction categories and how to keep records containing the necessary information.

How to file your Form 571-L / Business Property Statement (BPS)

What is a Form 571L Business Property Statement (BPS)

• A property tax form that is required for declaring business personal property (assets owned) as of 12:01 a.m. January 1st (Lien date)
• This is an annual filing that is required in each of the California counties where your business(es) is located.
• The 571L (BPS) form is used to declare cost information regarding supplies
• Business equipment and leasehold improvements for each business location.   (The cost information the business owner provides is used to assess and tax property in accordance with California state law)

---

What is the "lien date" for property tax purposes?

• January 1st of every year
• Lien date is the date on which property becomes assessable
• The date property taxes for become a lien against a business property owner

---

Who must file a BPS?

• Anyone who was sent a form by the Assessor's Office.
• Any business that owns business property (supplies, business equipment and leasehold improvements) having a total combined cost of $100,000 or more is required to file the form even if the Assessor does not request that you file one.

---

What is business personal property?

All property used in the course of doing business that is not otherwise exempt.
Examples: (not limited to this list)

• Computers
• Manufacturing Equipment
• Office Furniture
• Copiers
• Fax Machines
• Lab Equipment
• Video Equipment
• Printing Equipment
• Shop Equipment
• Restaurant Equipment

---

What equipment is not taxable or exempt?

• Business Inventory (equipment held for sale or rent)
• Application Software (examples: Microsoft Excel, Word)
• Licensed Vehicles (DMV licensed vehicles)

---

What is the deadline for filing the BPS?

• The form is due on April 1st.
• The form is considered delinquent if filed in person after 5 p.m. on May 7th. (If mailed, the form must be postmarked May 7th) If May 7th falls on a weekend or a holiday, then the form is due by 5 p.m.on the next business day.

---

Books and records you will need to file your BPS:

• California State Tax Returns
• Balance Sheet or General Ledger
• Fixed Asset Listing or Depreciation Schedule
• Income Statement or Profit & Loss Statement
• Purchase price of equipment (if purchased an existing business)

NOTE: Use records as of 12/31 of the year immediately preceding the filing year. For example, if filing a 2008 BPS, use records as of 12/31/07.

FDIC Insurance Coverage Basics

Article Source:  http://www.fdic.gov/deposit/deposits/insured/basics.html

The FDIC - short for the Federal Deposit Insurance Corporation - is an independent agency of the United States government. The FDIC protects depositors of insured banks located in the United States against the loss of their deposits if an insured bank fails.
Any person or entity can have FDIC insurance coverage in an insured bank. A person does not have to be a U.S. citizen or resident to have his or her deposits insured by the FDIC.
FDIC insurance is backed by the full faith and credit of the United States government. Since the FDIC began operation in 1934, no depositor has ever lost a penny of FDIC-insured deposits.
What does FDIC deposit insurance cover?

FDIC insurance covers all types of deposits received at an insured bank, including deposits in a checking account, negotiable order of withdrawal (NOW) account, savings account, money market deposit account (MMDA) or time deposit such as a certificate of deposit (CD).
FDIC insurance covers depositors' accounts at each insured bank, dollar-for-dollar, including principal and any accrued interest through the date of the insured bank's closing, up to the insurance limit.
The FDIC does not insure money invested in stocks, bonds, mutual funds, life insurance policies, annuities or municipal securities, even if these investments are purchased at an insured bank.
The FDIC does not insure safe deposit boxes or their contents.
The FDIC does not insure U.S. Treasury bills, bonds or notes, but these investments are backed by the full faith and credit of the United States government.
How much insurance coverage does the FDIC provide?

The standard maximum deposit insurance amount is described as the “SMDIA” in FDIC regulations. The SMDIA is $250,000 per depositor, per insured bank, through December 31, 2013. On January 1, 2014, the SMDIA is scheduled to return to $100,000 per depositor, per insured bank, for all account ownership categories except Certain Retirement Accounts, which will remain at $250,000 permanently per depositor, per insured bank. ¹.
The FDIC insures deposits that a person holds in one insured bank separately from any deposits that the person owns in another separately chartered insured bank. For instance, if a person has a checking account at Bank A and has a checking account at Bank B, both accounts would be insured separately up to the SMDIA. Funds deposited in separate branches of the same insured bank are not separately insured.
The FDIC provides separate insurance coverage for funds depositors may have in different categories of legal ownership. The FDIC refers to these different categories as “ownership categories.” This means that a bank customer who has multiple deposits may qualify for more than $250,000 in insurance coverage if the customer’s accounts are deposited in different ownership categories and the requirements for each ownership category are met.

---

¹ In 2006, the U.S. Congress permanently increased the SMDIA for Certain Retirement Accounts to $250,000 per depositor, per insured bank.

GAAP Requirements for Nonpublic Companies New Views on ‘Big GAAP’ Versus ‘Little GAAP’

Article Source: http://www.nysscpa.org/cpajournal/2006/506/essentials/p40.htm

By Jeffrey S. Zanzig and Dale L. Flesher

MAY 2006 - The accounting profession has long struggled with the idea that the financial reporting needs of small, closely held businesses often differ from those required by large, publicly traded companies. In formulating generally accepted accounting principles (GAAP), the profession has primarily addressed the needs of a public corporation. This is partly attributable to the importance of ensuring the integrity of U.S. capital markets. Smaller, private organizations have generally been subject to the same reporting requirements as the public corporation. This article addresses the AICPA study regarding the subject of “Big GAAP” versus “Little GAAP,” issued by the Private Company Financial Reporting Task Force in February 2005.
The task force report points out that deficiencies exist in current GAAP’s ability to meet the financial reporting needs of nonpublic companies. A resolution subsequently passed by the governing Council of the AICPA on May 23, 2005, directs “AICPA management to work with the Financial Accounting Foundation (FAF) and the Financial Accounting Standards Board (FASB) to identify and implement a process that would evaluate, where appropriate, potential changes in recognition, measurement, and disclosure from current GAAP as applied by public companies.”
The profession recognizes that GAAP reporting must provide relevant information that is useful for the decision-making needs of those groups for whom the information is provided. For example, in 1974 the standards division of the AICPA performed a study of the application of GAAP for small or closely held businesses. In 2004, the AICPA’s Private Company Financial Reporting Task Force conducted a nationwide survey to determine how to address the continuing concern over differences in the reporting requirements of public and private companies. This article presents findings of the study regarding GAAP and its relevance in the reporting environment of private organizations.
Background
There are diverse perspectives on the subject of GAAP as applied to public and private companies.
Separate GAAP requirements. For many years, it has been proposed that the same accounting standards do not have to be required for both public and private companies. In the December 1972 Journal of Accountancy, two CPAs expressed frustration with GAAP requirements’ being applied to smaller organizations. Betty McGill, a small-firm practitioner, pointed out that local practitioners are aware that requiring smaller organizations to name a long list of noncompliance with GAAP can be so confusing to clients that the statements become meaningless and sometimes intolerable to the client. Peter Arnstein, a partner of a large regional firm, suggested that clients are reluctant to pay for services that they see as providing no value to them or to the public. Arnstein suggested that certain closely held companies should be exempt from GAAP requirements that primarily serve the readers of publicly held companies’ financial statements.
In a 1974 article discussing the necessity of duality in accounting standards for public and private organizations, CPA Journal editor Max Block stated that “the accounting standards should not have been made mandatory to public and private companies without exception. In some instances, later exemplified, they should have been made optional to private companies.” Later, in a 1977 article, Block makes use of the words of John C. (Sandy) Burton, SEC chief accountant from June 1972 to September 1976, to point out that public accounting is actually two professions. In one, where the primary relationship is between the accountant and the client, attestation is less important, because it really exists only with parties that have a direct relationship with the client, such as its bankers. The other profession also has a relationship with the client, but it primarily serves the interests of outsiders. Burton suggested that although a basic accounting model is appropriate for all preparers of financial statements, this is different from the need for specific detailed disclosures and comparability between financial statements. In referring to Burton’s statements, Block clarified his perspective that public corporations and nonpublic companies are actually more like two types of clients that should be sharply distinguished.
In 1976, Haim Falk, Bruce C. Gobdel, and James H. Naus published “Disclosure for Closely Held Corporations” (Journal of Accountancy, October 1976). They had surveyed commercial lending officers regarding their process of evaluating closely held companies and found the following factors to be of importance:

• Disclosures regarding balance sheet items tend to be important in evaluating a closely held company. This is in contrast to research indicating that analysts evaluating public companies find income-statement items such as earnings per share to be most important.
• Information regarding obligations such as contingent liabilities and commitments, leases, and long-term debt is important.
• The statement of changes in financial position is an important financial statement.
• The disclosure of accounting policies is important, particularly with regard to changes in accounting methods.
• Information such as earnings per share, price-level adjustments, and product-line reporting was found to be relatively unimportant.
• Commercial lending officers often encourage their customers to have audited financial statements.
• The lenders strongly believe that the accountant’s report for unaudited financial statements should disclose known departures from GAAP.

Jane E. Campbell, in “An Application of Protocol Analysis to the ‘Little GAAP’ Controversy” (Accounting Organizations and Society, vol. 9, No. 3/4, 1984), studied the process by which commercial bank loan officers evaluate financial information of small and closely held companies to see if the officers use certain GAAP requirements in extending credit to their customers. Campbell found little or no evidence that bank officers used earnings per share and deferred tax disclosures in reaching their decisions. In contrast, it appeared that capitalized lease information was useful to the loan officers. It should be kept in mind that SFAS 109 has since changed the reporting of deferred taxes. (The AICPA’s 2005 task force report points out that the concept of deferred income taxes for private companies is relevant to the decision-making process of the creditor/lender group).
Although much time has elapsed—and GAAP and the business environment have changed—since this research was conducted, it does provide the background necessary to appreciate the driving force behind the AICPA’s 2004 study.
Common GAAP requirements. In contrast to the preceding opinions supporting a separate GAAP for closely held businesses, James Naus, in “Practitioners Forum: Unaudited Financial Statements Revisited” (Journal of Accountancy, January 1974), took a position contrary to his coauthors, Betsy McGill and Peter Arnstein, and presented reasons for not allowing separate rules for public and private companies. First, Naus pointed out that allowing alternative treatments may weaken a CPA’s position in achieving fair presentation and full disclosure. Second, a private company may still interact with the public environment. For example, an organization may wish to compare itself with larger competitors or later become a public corporation. Naus implied that CPAs associated with nonpublic organizations would do better to influence GAAP in a way that would meet the reporting needs of all entities.
A compromise position. In the 1970s, the AICPA’s accounting standards division studied the application of GAAP to small and closely held businesses. As explained by Charles Chazen and Benjamin Benson in “Fitting GAAP to Smaller Businesses” (Journal of Accountancy, February 1978), in reporting its findings the committee distinguished between two sets of principles. First are principles that are used in the measurement process. The committee believed that this process should not be affected by the nature of the user, because confusion would result from similar transactions’ being reported on an inconsistent basis. Second are principles that regulate disclosure practices. The committee supported the idea that particular disclosures may depend upon the needs of the user or on other factors.
A flickering interest in separate GAAP requirements. In the 1970s, the opposing perspectives described above received significant attention that led to a comprehensive study, supported by FASB, to provide detailed empirical data to consider the possibility of having different accounting principles govern reporting by public and by private companies. The statistics in the study, “Financial Reporting by Private Companies: Analysis and Diagnosis” (completed in 1983; principal researcher A. Rashad Abdel-Khalik), indicated that although accountants believed that a separate GAAP would be beneficial, bankers found GAAP-based statements useful for decision making and favored the continued reliance of all companies on one set of GAAP. No consistent opinion was found among managers. In addition, in 1983 FASB published a special report which found that most lenders and other creditors feel “that their financial information needs and decision making practices are essentially the same for private as for public companies.”
This temporarily settled the issue until 1995, when the AICPA’s Private Companies Practice Executive Committee (PCPEC) concluded that standards overload was one of the most significant concerns of members practicing in small firms. The issue of separate GAAP for private companies was again rejected, however, when it was decided that allowing a new basic accounting method would only contribute to the standards overload problem. Therefore, in 1996 the AICPA’s “Report of the Private Companies Practice Section Special Task Force on Standards Overload” recommended that the best approach would be to have “the Financial Accounting Foundation (FAF) make a concerted effort to recruit and select trustees, FASB board members, and FASB staff persons who have experience with and understanding of the needs of small non-public entities.” In fact, The CPA Journal had reported that in 1989 the Private Companies Practice Section (PCPS) of the AICPA Division for CPA Firms had promoted other comprehensive bases of accounting (OCBOA) as an alternative for small businesses to meet financial reporting needs in certain situations, but not as an alternative form of GAAP. After the turn of the century, the AICPA noted that no in-depth study of the issue had been conducted in recent years. This concern led to the following study.
Private Company Financial Reporting Task Force Study
The AICPA’s Private Company Financial Reporting Task Force began comprehensive research in early 2004 to consider whether the general-purpose financial statements of private companies, prepared in accordance with GAAP, meet the financial reporting needs of constituents of that reporting, as well as whether the cost of providing GAAP financial statements is justified compared with the benefits they provide to private-company constituents.
GAAP requirements. One survey question presented 12 GAAP requirements and asked respondents to rate the requirements in regard to relevance or decision usefulness. The following GAAP requirements were included in the survey:

• Accrual basis accounting
• Cash flow statement
• Classification of liabilities and equity (e.g., mandatory redeemable financial instruments, such as ownership buyout agreements as addressed in SFAS 150)
• Comprehensive income measurement (e.g., items excluded from the income statement)
• Deferred income taxes (e.g., deferred tax assets and liabilities)
• Fair-value basis of measuring assets and liabilities (e.g., as compared with historical-cost measurement)
• Guarantees (e.g., recognizing and measuring their fair value)
• Intangibles (e.g., goodwill accounting)
• Leases (e.g., capitalized versus operating)
• Postretirement and retirement plans (e.g., pensions)
• Share-based payments (FASB’s current proposal allows private companies to use the intrinsic-value method instead of the fair-value method for determining compensation expense related to stock options)
• Variable-interest entities (e.g., the need to consolidate entities if certain conditions exist).

Survey participants. The respondents were separated into three groups: owners/managers, practitioners, and external stakeholders. Respondents were further broken down by the size of the company (by revenues), the number of partners, and the type of stakeholder (creditor/lender, investor/venture capital, surety/bonding).
Responses were received from 3,709 individuals. The discussion uses a classification scheme based on the mean response on each GAAP requirement for the respondent categories. Subcategory information for respondents is presented only where there is inconsistency in the mean score rating for the overall respondent group.
Basic measurement principles. The respondents were permitted to rate each of the study’s 12 GAAP requirements on a scale of low (1), medium (2), or high (3). Respondents were also given the option of indicating either that the requirement did not apply to them or that they did not know.
Three GAAP requirements received a mean score greater than 2.0 from each of the three groups: accrual basis of accounting, cash flow statement, and classification of liabilities and equity. The consistently high score for these items indicates that they are perceived as important to relevance/decision usefulness. In accordance with the previously described recommendation of the AICPA’s accounting standards division, the authors propose that these items be included as part of principles used in the measurement process in order for financial statements to comply with GAAP (public or private organizations). In other words, they are not to be considered optional requirements when a GAAP presentation is the intent of the information provider.
Value-added service unrecognized by practitioners. Exhibit 1 identifies the GAAP requirements which all groups of external stakeholders and some owners/managers rated high on relevance/decision usefulness. Practitioners, however, scored these requirements as medium or low. Although the results show that some owners/managers also rated the requirements as low, overall the requirements provide perceived value that should receive further evaluation. Future research is needed to determine the role that organizational size and possibly other factors play in determining the value of specific GAAP requirements for private companies.
It is possible that practitioners view comprehensive income measurement and fair-value measurement of assets and liabilities as unnecessary requirements for private companies. It does appear, however, that this information is often something that external stakeholders desire and that some owners/managers may be willing to pay to have provided.
Demonstrate value or discontinue. The information shown in Exhibit 2 identifies GAAP requirements that external stakeholders and owners/managers scored as medium or low on relevance/decision usefulness. Practitioners’ ratings are somewhat mixed, except for the high value assigned to leases. Some practitioners, however, rated each of the Exhibit 2 requirements at the high end of the scale.
This is not to suggest that these GAAP requirements are of no value in providing appropriate financial reporting for private companies. If the profession wishes to continue these requirements, however, owners/managers and stakeholders should be educated as to their value. With the exception of leases, not even practitioners are in agreement on the value of these requirements, because practitioners in different-sized firms evaluated the relevance/decision usefulness at varying levels.
Educate owners and managers. The information shown in Exhibit 3 identifies GAAP requirements that some external stakeholders and practitioners ranked highly. Owners/managers, however, scored the requirements as medium or low. Although both practitioners and external stakeholders were mixed in their evaluation of these requirements, the external stakeholder groups of creditor/lender and surety/bonding both rated the requirements on the high end of the scale. Also interesting is that firm size was directly correlated with practitioners’ rating assigned to both deferred income taxes and guarantees.
Because the purpose of financial reporting is to satisfy the needs of decision makers with capital, owners/managers should be shown the value that certain external stakeholders place on financial information. Given the mixed results for practitioners, accountants may need to further evaluate the value of the Exhibit 3 requirements to their clients.
Consider discontinuing the requirement. The mean scores for the GAAP requirement shown in Exhibit 4 are medium to low on relevance/decision usefulness for all three groups of respondents. If information about share-based payments is not perceived to add value to private-company financial reporting, then this area might not be relevant for private companies. (Of course, some may argue that it is not relevant for public companies either.)
Confronting the Inadequacy of a Single GAAP
The AICPA task force concluded that most of the constituencies in the 2004 study are of the opinion that it would be useful if the underlying accounting for public versus nonpublic (private) companies were different in certain situations. It found that some of the GAAP requirements for public companies studied lack relevance/decision usefulness for private companies. In addition, the task force found that, although respondents rated certain GAAP requirements as low on decision/relevance usefulness, respondents appear to believe that the benefits of complying with GAAP outweigh the costs. This apparent conflict may be explained by the favorable ratings given the overall value of GAAP.
The task force also concluded that allowing GAAP exceptions and other bases of accounting is not an appropriate response to the unique needs of private-company financial reporting. The task force believes that such an approach would erode the overall recognized value of GAAP, while other bases of accounting may not adequately serve the needs of private companies.
In essence, the task force recommends that a recognized set of standards be established as GAAP for private companies. Although the task force has not attempted to determine the structure of such an arrangement, it has suggested that the framework include the following:

• Changing the composition of FASB and the FAF to be more representative of private-company constituents; or
• Increasing private-company constituents’ representation on the FAF and establishing a new private-company GAAP standards-setting board under the FAF that would address only the needs of these constituents; or
• Creating a new private-company GAAP standards-setting body outside the FAF.

Perhaps the creation of the Public Company Accounting Oversight Board (PCAOB), with its responsibility for establishing separate auditing standards for public companies, has renewed interest in the differences between financial reporting for public and for private companies The 2004 study conducted by the AICPA’s Private Company Financial Reporting Task Force clearly points out the inadequacy of having a single set of GAAP that is geared to public companies. Both public and private companies have unique and important reporting environments that can best be addressed by having GAAP applicable to what is truly useful to the parties using the information.
As eloquently stated by FASB Chairman Robert Herz in 2005: “Private companies are a vital force in the nation’s economy and it is, therefore, critical that their financial reporting be conceptually sound, cost effective, and provide relevant, reliable and useful information.” This does not mean that there should be two sets of GAAP requirements that do not share some common components. The information drawn from the task force study provides a good starting place for identifying the beginning principles of GAAP for private companies.

---

Jeffrey S. Zanzig, PhD, CPA, is an assistant professor of accounting at the College of Commerce and Business Administration of Jacksonville State University, Jacksonville, Ala.
Dale L. Flesher, PhD, CPA, is associate dean of the Patterson School of Accountancy of the University of Mississippi, University, Miss.

 

How to Deal with Bill of Exchange

Article Source:  http://churmura.com/business/finance/how-to-deal-with-bill-of-exchange/33057/
The holder of the Bill of Exchange has following options to deal with the bill:
1. Retain the bill till the date of maturity;
2. Discount the bill with the bank;
3. Endorse the bill in favour of a creditor ; and
4. Send the bill for collection.
1. When the Bill is Retained Till the Date of Maturity
When the bill is retained till the date of maturity, the drawer receives the money from the drawer on the due date. The entry is :
      Cash or Bank A/c                         …Dr.           [With the amount of the bill]
          To Bills Receivables A/c                             [With the amount of the bill]
Cash or Bank Account is debited because cash comes in and Bills Receivable Account is closed by crediting the account because the amount has been received against the bill receivable.
 2. When the Bill is discounted with the Bank
Entries in the Books of Drawer or Person Receiving the Bill: When the holder of the bill takes amount from a bank against the bill before the due date, it is known as discounting of the bill. The bank charges an amount termed as ‘Discounted Charges .’ The charges depend upon the rate of interest and the period of maturity. If, for example, a bill for Rs. 10,000 payable after three months is discounted @6% p.a, the
          amount discount will be Rs 150,                            Rs 10,000×6x3
                                                                                                -—————- The student must always
                                                                                                     100×12
Be careful to calculate the discounting charges with reference to the remaining period, from the date of discounting till the due date. For example, if a bill having three months maturity is discounted after one month, the discount charges will be Rs.120.
Accounting Entry
 When bill is discounted and Cash is received or credited to bank account:
       Cash or Bank A/c                               ….Dr.                             [The amount of the bill less discount]
       Discounting Charges A/c                 .…Dr.                                  [The discount charge by the bank]
     To Bills Receivables A/c                      …Dr.                                              [The full amount of the bill]
 Drawee’s Books: The acceptor or drawee is not affected by discounting of the bill and therefore, does not make any entry in his books in this regard. He will pay it to the holder of the bill (whosoeverhe may be) on maturity.
Accounting Entry
    Bills Payable A/c                     …Dr.
     To Cash or Bank A/c
 3. When a Bill is Endorsed or Negotiated in Favour of a Creditor
  When the holder of a bill transfers the bill to a third party, the bill is said to have been endorsed or negotiated. The term endorsement or negotiation means the transfer of a bill of exchange or promissory note to another person. The person who endorse the instrument (bill) is called the endorser.The person to whom the instrument (bill) is endorsed is called the endorsee.
Accounting Entry
In the Books of Drawer or Person Receiving the Bill:
Creditor                                                              ….Dr.
     To Bills Receivables A/c
  (Being the bills Receivable endorsed )
Creditor’s account is debited because a liability has been paid and Bills Receivable Account is credited because Bills Receivable has been endorsed.
As on the date of maturity, the payment will be received by the endorsee. Hence, at the time of payment, the endorser does not pass any entry in his books.
Acceptor’s Books: The acceptor of the bill does not pass entry relating to endorsement of the bill. He will pay the amount on the due date to the holder of the bill  and record the following entry:
    Bills Payable A/c                     …Dr.
      To Cash or Bank A/c
Endorsee’s Books: From endorsee’s viewpoint, the transaction entered into is: Receiving a bill receivable from the endorser. The Journal entry is:
Bills Recevable A/c                                   …Dr.
       To Endorser                
When bill is honoured at maturity, the following entry is made:
     Cash or Bank A/c                                …Dr.
         To Bills Receivable A/c
4. When the bill is Sent to the Bank for Collection
  The person receiving the bill of exchange, may retain the bill till maturity date and receive the amount as per the bill. But in order to ensure safety, he may send it to his bank with instructions that the bill be retained and realized on its due date. It means bank will retain the bill in safe custody and present it for payment on the due date. The bank will credit the account of the customer on realization of amount. If the bill is sent to the bank with such instructions, it is known as ‘bill sent for collection’. It is better to make a record of this also in books by passing the following entry:
   Bills Sent for Collection A/c                             …Dr.
       To Bills Receivable A/c
When the amount is realized, the entry is:
   Bank A/c                                                                 …Dr.
    To Bills Sent for Collection A/c
The balance  in the Bills Sent for Collection Account is shown in Balance Sheet as an asset.
Note that the drawee will not pass any entry in his books for the bills sent for collection. He will pass the entries in his books in the usual manner when he makes the payment, no matter whether the payment made to the drawer or his bank or an endorsee.

Frequently Asked Questions on 1031 Exchanges

Article Source: http://www.1031exchangemadesimple.com/1031-faq.html

Equity and Gain

Is my tax based on my equity or my taxable gain?
Your tax will always be based upon calculations of the taxable gain. Contrary to misconceptions, gain and equity are two separate and distinct items. When determining your gain, you should identify your original purchase price. From that, deduct any previously reported depreciation and then add the value of any improvements, if any, which have been made to the property. The resulting figure is your cost or tax basis. To calculate your gain, subtract the cost basis from your original net sales price.

---

Deferring All Gain

Is there a simple rule for structuring an exchange where all the taxable gain will be deferred?

If the following actions are performed, all taxable gain on your property is to be deferred.

1) A replacement property equal to or greater in value than the net selling price of your relinquished (exchange) property is purchased.

2) Equity is move from one property to the other.

---

Definition of Like-Kind

What are the rules regarding the exchange of like-kind properties? May I exchange a vacant parcel of land for an improved property or a rental house for a multiple-unit building?

If properties are of the same nature or character, regardless of whether or not they differ in grade or quality, they are “like-kind” properties. The two properties must be of the same type, disregarding any improvements made. To clarify, two residential pieces of real estate are “like-kind” towards one another. A residential piece of real estate and a car would not be.

---

Four most common 1031 exchange misconceptions:

1. All 1031 exchanges must involve swapping or trading with other property owners...... (NO)
   
   Well before delayed exchanges were codified (by IRS) in 1984, all simultaneous exchange transactions of Real Estate required the actual swapping of deeds plus the simultaneous closing among all parties to a 1031 exchange. In most cases these type of exchanges were comprised of many of exchanging parties, as well as numerous exchange real estate properties. Now today, there's no such requirement to swap your own property with someone else's property, in order to complete an IRS approved exchange. The rules have been refined and ratified to the point that the current process is much more indicative of your qualifying intent, rather than the logistics of the Real Estate property closings.
2. Its required that all types of 1031 exchanges must close simultaneously....... (NO)
   
   There was a time when all types of exchanges had to be closed on a simultaneous (same day) basis, now they (1031) are rarely completed in this type of format any longer. As a matter of fact, a majority of the exchanges executed are closed now as delayed exchanges.
3. "Like-kind" means purchasing the same type of property which was sold....... (NO)
   
   Often the definition of "like-kind" has been misinterpreted or misunderstood to mean "The requirement of the acquisition of property to be utilized in the same form as the exchange property". In laymen's term, hotels are for hotels, apartments are for apartments, farms are for farms, etc. This is all true however, the exact definition is again more reflective of intent than its use. As a result, there are currently only 2 types of properties that qualify as a 'like-kind':
   -- Property held for investment and/or
   -- Property held for a productive use, as in a trade or business.
4. 1031 Exchanges must be limited to 1 exchange and 1 replacement property....... (NO)
   
   This statement is a perfect example of another 1031 exchanging myth. Let me repeat, there are no provisions within either the IRS Code or the US Treasury Regulations that can restrict the amount and number of real estate properties that can be involved in an exchange. Thus, in exchanging out of several properties into one replacement property or the vice versa of selling of one property and acquiring several other properties, are perfectly acceptable strategies and uses of a 1031.

---

Simultaneous Exchange Pitfalls

Is it possible to complete a simultaneous exchange without an intermediary or an exchange agreement?

It is possible to complete an exchange without an intermediary or an exchange agreement, yet is not recommended. In addition, it is very difficult to perform this process due to the Safe Harbor addition of qualified intermediaries in the Treasury Regulations and the recent adoption of good funds laws in several states. As two closing entities cannot hole the same exchange funds on the same day, the Exchanger is left with serious constructive receipt and other legal issues for attempting such a simultaneous transaction.

The main reason for the addition of the intermediary Safe Harbor was to suppress the practice of attempting such marginal transactions. Many tax professionals believe that an exchange that is completed without an intermediary or exchange agreement will not qualify for deferred gain treatment. If such a transaction had already been completed, it would not pass an IRS examination due to constructive receipt and structural exchange discrepancies. As you may have hesitation to invest in a qualified intermediary, we advise you to do so, as in comparison to the tax risk that is associated with attempting this exchange, the investment is easily insignificant.

---

Property Conversion

How long must I wait before I can convert an investment property into my personal residence?

A one-year holding period before investment is advised. As there is no definitive holding period that currently exists, the IRS did propose a one-year holding period before investment property could be converted, sold or transferred, yet it was never adopted by Congress. Please do not misconstrue the failure of the adoption of this proposal as an approval to convert investment property at any time. As the one-year period reflects the intent of the IRS, most tax practitioners advise clients to hold their property at least one year before converting into a personal residence.

As intent is extremely important, we remind you that it should be your intention at the time of acquisition to hold the property for its productive use in a trade or business, or for its investment potential.

---

Involuntary Conversion

What if my property was involuntarily converted by a disaster or I was required to sell due to a governmental or eminent domain action?

If your property is involuntarily converted, reinvestment must occur within 24 months from the end of the tax year in which the property was converted. It is also possible to apply for a 12 month reinvestment extension. This information is addressed within Section 1033 of the Internal Revenue Code for reference.

---

Facilitators and Intermediaries

Is there a difference between facilitators?
There is most definitely a difference in facilitators. Similar to most professional disciplines, the capability of facilitators will vary based upon their exchange knowledge, experience and real estate and/or tax familiarity.

Facilitators and Fees

Should fees be a factor in selecting a facilitator?

Fees should be a factor in selecting a facilitator, however, they should be considered only after first determining each facilitator's ability to complete a qualifying transaction. This can be accomplished by researching their reputation, knowledge and level of experience. It is recommended that fees are not considered first as you may get a good price, yet not good quality.

Personal Residence Exchanges

Do the exchange rules differ between investment properties and personal residences? If I sell my personal residence, what is the time frame in which I must reinvest in another home and what must I spend on the new residence to defer gain taxes?

The previously stated rules that dictated that you had to reinvest the proceeds from the sale of your residence within 24 months before or after the sale, and that you had to acquire a property which reflected a value equal or greater than the value of the residence sold, have been discontinued with the passage of the 1997 Tax Reform Act. These were formerly found in Section 1034 of the Internal Revenue Code. Currently, if a personal residence is sold, provided that residence was occupied by the taxpayer for at least two of the last five years, up to $250,000 (single) and $500,000 of capital gain is exempt from taxation.

Exchanging and Improvements

May I exchange my equity in an investment property and use the proceeds to complete an improvement on a vacant lot I currently own?

Although the attempt to move equity from one investment property to another is essential to tax deferred exchanging, unfortunately, you may not exchange into property you already own.

---

Related Parties

May I exchange into a property which is being sold by a relative?

Unfortunately, you cannot exchange into a property being sold by a relative. An Exchanger may sell to a related party; however, the related party will then be subject to a two-year holding period.

---

Exchanges During Divorce

I am married and I am going through a divorce, can I still do a 1031 exchange?

This is a very difficult question to explain because there is no clear answer set forth with the IRS and very little case law, on the subject. In most cases it is recommended that the title be switched to the person in need of a 1031 exchange (before the divorce is complete). The problem comes into play with the joint ownership of the property. What is needed is to get the property into ONE name and simplify things. This can be achieved in a number of different ways. First, you can simply execute a "quit claim deed" to get the property into one single name. Second, you can have your spouse simply buy out the other person involved and get sole title into ONE name. Another option is that you keep the property in both names and then buy the new property in both names - execute a 1031. Then once the 1031 is complete, split up the property, so that in this case taxes are deferred by both husband and wife. There is no clear answer on this subject so you have to speak with your accountant or attorney for legal or tax advice.

---

Partnership or Partial Interests

If I am an owner of investment property in conjunction with others, may I exchange only my partial interest in the property?

Yes you may. Partial interests qualify for exchanging within the scope of Section 1031 of the Internal Revenue Code. However, if your interest is not in the property but an interest in the partnership which owns the property, your exchange would not qualify. This is because partnership interests are excluded from Section 1031. But don't be confused! If the entire partnership desired to stay together and exchange their property for a replacement, that would qualify.

Another caveat, those individuals or groups owning partnership interests who desire to complete an exchange, and have for tax purposes, made an election under IRC Section 761(a) can qualify for deferred gain treatment under Section 1031. This can be a tricky issue! See elsewhere in this publication for more information. Then, only undertake this election with proper tax counsel and only with the election by all partners!

---

Reverse Exchanges

Are reverse exchanges considered legal?

Yes, reverse exchanges are considered legal. Although reverse exchanges were deliberately omitted from Section 1031, the Internal Revenue Service issued the addition of Revenue Procedure 2000-37 in September, 2000 which provides a safe harbor for reverse exchange transactions.

---

Selling A Business

I am selling my business, can I execute a 1031 exchange?

Yes, but it is important to determine first what portion of the business is actual property and what portion is deemed "business" or "good will". Only the portion that is deemed "property" can be applied to a 1031 Exchange.

---

Condo's and Co-Op's

I own a Condo or Co-OP, can I still do a 1031 Exchange?

Yes, In the state of New York, even a Co-Op is deemed Real Property and is qualified for a 1031 Exchange.

---

Identification

Why are the identification rules so time restrictive? Is there any flexibility within them?

The current identification rules represent a compromise which was proposed by the IRS and adopted in 1984. Prior to that time there were no time-related guidelines. The current 45-day provision was created to eliminate questions about the time period for identification and unfortunately, there is absolutely no flexibility written into the rule and no extensions are available.

In a delayed exchange, is there any limit to property value when identifying by using the Two Hundred Percent Rule?

Yes. Although you may identify any three properties of any value under the Three Property Rule, when using the Two Hundred Percent Rule there is a restriction. When identifying four or more properties, the total aggregate value of the properties identified must not exceed more than 200% of the value of the relinquished property.

There is an additional exception for those whose identification does not qualify for either the Three Property or Two Hundred Percent rules. The Ninety-five Percent Exception allows the identification of any number of properties, provided the total aggregate value of the properties acquired totals at least 95% of the properties identified.

Should identifications be made to the intermediary or to an attorney or escrow or title company?

Identifications may be made to any party listed above. On many occasions, however, the escrow holder is not equipped to receive your identification if they have no yet opened an escrow. Therefore it is easier and safer to identify through the intermediary, provided the identification is postmarked or received within the 45-Day Identification Period.

---

Master Lease

What is a "Master Lease" and how does it work?

The master lease is a management structure where a single entity is known as the "master lessee". The management company leases the entire property from the owners in return for a stipulated rent. This means that the owners [the investors] have a single tenant and predictable, stable rent, which will be stated in the prospectus accompanying the offering. Under the "triple net lease", the master lessee is responsible for all aspects of management, maintenance, repairs and leasing; and furthermore is responsible for paying expenses associated with the property, including real estate taxes and assessments, insurance and all maintenance and repair costs (excluding capital expenditures). Should these costs increase, the master lessee is obligated to pay them without reducing the rent due the owners.

What Is a Blanket Purchase Order?

Article Source: http://www.ehow.com/facts_5158253_blanket-purchase-order.html

If a company uses a purchase order system of any kind, it has the option of utilizing blanket purchase orders for the purchase of frequently purchased items or services. Blanket purchase orders are designed to make procurement processes more efficient whenever possible.

Definition of a blanket purchase order

1. Oftentimes, a blanket purchase order is a long-term agreement between a company and its supplier. Although a single blanket purchase order number is only set up one time, it can allow multiple releases against it at different times throughout a set time period. A "release" occurs each time a blanket purchase order quantity is fulfilled and invoiced against.

Purpose of a blanket purchase order

2. A blanket purchase order increases efficiency by eliminating repetitive data entry and multiple one-time purchase orders. In addition, it streamlines the invoicing and purchasing processes so that invoices are paid in a more timely manner. According to AllBusiness.com, a blanket purchase order can also be used for an automatic reordering process.

Difference between a regular purchase order and a blanket purchase order

3. A regular purchase order is used for one-time purchases, while a blanket purchase order uses the same purchase order number for multiple purchases (releases).

Uses for a blanket purchase order

4. In many companies, blanket purchase orders are used to cover long-term service or maintenance agreements, as well as standing orders for goods or services.

Fictitious scenario

5. Let's say that your company wishes to set up an agreement with a landscaping service for monthly lawn care. Your company cannot pay for the entire year of service upfront; instead, it wishes to create a blanket purchase order so that it can pay the lawn company each month. In the purchasing system, a buyer will create a blanket purchase order for 12 months on a single line of the purchase order; it will include the monthly dollar amount as well. The buyer will also create blanket order rules that will set an expiration date (12 months from now) as well as how many months are allowed to be released at one time. Each month, as the lawn care service provider performs the work and invoices for it, the buyer will generate a release of one month in order to pay the invoice. Once 12 releases have been done against this blanket purchase order, the purchase order is complete.

How to Analyze the Balance Sheet

Article Source: http://beginnersinvest.about.com/od/analyzingabalancesheet/a/?once=true&

Putting It All Together
The balance sheet financial ratios are important parts of valuing a stock or analyzing a small business.

Formulas and Calculations for Analyzing a Balance Sheet
Various formulas and calculations used to analyze a balance sheet including financial ratios such as receivable turnover and working capital per dollar of sales and current ratio and debt to equity ratio are important for investors attempting to understanding how well a business is performing.

Retained Earnings on the Balance Sheet
Retained earnings are the profits a company has reinvested in itself. Retained earnings are carder on the balance sheet under Shareholder Equity.

Treasury Stock
Treasury stock is listed under shareholder equity on the balance sheet. It represents the stock a company has issued and subsequently reacquired.

Capital Surplus and Reserves
Capital surplus and proprietorship reserves on the balance sheet are important to understanding the strength of a company, whether analyzing a small business or researching a stock.

Common, Preferred, and Convertible Shares
Common Preferred and Convertible Shares are carried on the balance sheet. Learn more in Investing Lesson 3

Book Value
Book Value and Net Tangible Assets are the excess of assets excluding intangible items subtracted by total liabilities. Book value can be calculated using the balance sheet.

Shareholder Equity
Shareholder equity is the difference between total assets and total liabilities on the balance sheet.

Minority Interest on the Balance Sheet
Minority Interest is found on the balance sheet under Liabilities. It is the value of the minority shareholders' holdings in a company's subsidiary or affiliate.

Other Liabilities
Other liabilities on the balance sheet represent items such as accrued expenses, sales tax payable, or other debts.

Long Term Debt and the Debt to Equity Ratio on the Balance Sheet
Long term debt and the debt to equity ratio are important indications of the financial stability of a company. They can be found using the balance sheet.

Deferred Long-Term Asset Charges
On a balance sheet, deferred long term asset charges are used to spread out asset charges over longer periods of time, as opposed to having them affect the company's earnings in a single quarter or year.

Goodwill on the Balance Sheet
Accounting goodwill is the premium over book value a company pays during an acquisition. It goes on the balance sheet and is subject to periodic tests for goodwill impairment.

Intangible Assets
Intangible assets on the balance sheet represent items such as patents, rents, royalties, and other assets that don't have physical form but still have value. Intangible assets are an important part of companies such as pharmaceuticals, which rely on drug patents to make money.

Property, Plant and Equipment
Property, plant and equipment on the balance sheet represents fixed assets purchased for a company's operations such as factories, machines, computers, and other necessary assets.

Long Term Investments
Long term investments and carrying values on the balance sheet are easy to understand. Both long term investments and long term assets represent assets owned by a company that may not be easily converted to cash but still have value.

Quick Test Ratio
The quick test ratio is the strongest test of a company's liquidity and is an extreme measure of a company's working capital.

The Current Ratio
The current ratio is a test of a company's liquidity. It can be calculated by dividing current assets by current liabilities on the balance sheet.

Negative Working Capital
Negative working capital is possible for companies with high inventory turnover.

Working Capital Per Dollar of Sales
Working capital per dollar of sales is a financial ratio that can tell you how much working capital a business needs for ever one dollar of revenue it generates.

Working Capital
Working capital on the balance sheet is the difference between current assets and current liabilities. The reason working capital is so important is because it lets you know the resources management has on hand to pay day-to-day bills and conduct operations. Some companies, such as Wal-Mart or other restaurants, can actually have negative working capital.

Current Liabilities
Current liabilities on the balance sheet represent all of the liabilities or debts a company owes for the next twelve months. Current liabilities are an important part of measuring a company's liquidity position.

Prepaid Expenses and Other Current Assets
Prepaid expenses on the balance sheet represent a current asset because the company still has the right to receive the product or service for which it has paid.

Inventory Turns / Inventory Turnover
Inventory turns and inventory turnover can be calculated for any company using the information found on the income statement and balance sheet.

Inventory on the Balance Sheet
Inventory carried on the balance sheet consists of goods or merchandise a company has but may not yet have sold to customers. When managing inventories you should try to keep them as low as possible to increase profits and return on equity.

Receivable Turns
To calculate receivable turns, divide credit sales by the average receivables for the period.

Accounts Receivables
Accounts receivables represents money owed to a business by its customers. The nature of accounts receivable and the portion they represent of current assets on the balance sheet depends upon the industry in which a company operates.

Current Assets on the Balance Sheet
Cash and cash equivalents and short term investments are carried under current assets on the balance sheet.

Table of Contents for Understanding the Balance Sheet
Balance sheets can be complicated but this table of contents will walk you through the understanding the balance sheet investing lesson so you'll be able to feel more confident when facing an annual report or small business financial statements.