Month: November 2022

Every business regardless of how big or small has to maintain proper accounts, without which it is not possible to ascertain the financial status of that organization.

In financial accounting, several journals and ledgers are used.

Today, let us take a close look at a cash book , why it is important, and what advantages or benefits it provides.

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What Is a Cash Book?

A cash book is an accounting book that is used to record all receipts and payments made in cash; this includes deposits to the bank and withdrawals as well.

These cash book entries are subsequently posted to the general ledger.

So, one can say that it is a subsidiary book of the general ledger which contains details of all cash transactions that happen during a specific period.

Transactions are recorded as they happen, in chronological order.

It is updated continuously, and the balance is calculated, verified, and carried forward on a daily basis.

Often, large companies that have innumerable cash transactions every day, maintain two cash books – a cash receipts journal and cash payments journal.

It must be remembered that it is not the same as a cash account, which is an account within the general ledger.

There are three main types of cash books: single-column, double-column, and triple-column.

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Features of Cash Book

Let us take a quick look at the features of a cash book:

• It only records cash transactions
• As it records transactions as they take place, and posts them, a cash book functions as a journal and ledger.
• All entries whether debit or credit, are entered in chronological order, according to the date.
• It acts as an alternative to cash accounts
• It follows the dual entry principle of accounting and has a debit and credit side
• The debit and credit side totals are identical at the end of the period, by balancing them
• Normally, the business will have a debit balance, leaving them with adequate cash to meet everyday expenses
• The debit cash balance id verified against actual cash in hand
• Each transaction is directly posted to the relevant ledger
• The balance in the cash book represents the cash fund in the organization

ALSO READ: What is Physical Stock Verification? 

How a Cash Book Works?

A cash book functions as the general ledger’s subsidiary wherein all cash transactions made in a period are recorded in their order of occurrence.

Large companies with complex operations and tons of cash transactions are likely to maintain a Cash Receipts Journal for recording all the cash that comes into the business, and a Cash Payments Journal to record all payments made in cash by the business during the accounting period.

The Cash Receipts Journal includes all such items as money received from customers on pending bills, cash sales, and any other transactions that reduce the accounts receivables by the business.

On the other hand, the Cash Payment Journal includes all items like payments made on outstanding invoices to suppliers, and cash purchases; items that will help reduce the accounts payables by the business.

ALSO READ: Complete Guide on Economic Order Quantity

Advantages of Cash Book

• A cash book helps in creating and maintaining a regular record of all cash transactions in chronological order.
• Any cash payment or cash receipt can be traced in the cash book as the records are in chronological order.
• Efficient management of cash is the main aim of maintaining a cash book, as it becomes easy to check the cash balance whenever required. This helps accountants and managers in the organization to efficiently budget cash when they need to.
• A cash book also enables easy and quick information access as compared to a ledger.
• Cash can be easily verified by comparing the actual cash in hand with the cash book balance; in this manner, it helps in detecting any errors in entries.
• It helps in detecting any attempts at committing cash fraud in the business.

ALSO READ: What is Goods Received Note and Why is it Important?

Difference Between Cash Book And Daybook

A daybook is usually used in a manual accounting system, to record transactions as they take place, throughout the day.

The entries are then posted to various ledgers based on the nature of the transaction.

The difference between a cash book and daybook is that, while a daybook records every transaction, a cash book records only cash transactions that take place.

Some businesses may maintain multiple-day books for different categories of financial transactions; however, there is only one cash book that is maintained.

Large businesses may maintain separate cash books for receipts and payments, which is not the manner in which transactions are recorded in a day book.

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Difference Between Cash Book and Cash Account

A cash book records all cash transactions, but a cash account is an account in a general ledger.

A cash book can function as a journal and ledger, but a cash account structure is similar to a ledger.

The cash book includes narrations with details regarding the use or source of the cash, which is not found in a cash account.

Businesses prefer cash books over cash account as they can easily determine cash balances every day; these are also easy to calculate and access.

The verification process helps to spot errors quickly, and thanks to the daily verification of cash balances, the entries are always kept up to date.

However, the cash account balances are generally reconciled only at the end of the month, once the bank issues the monthly statement.

ALSO READ: Benefits of Bank Reconciliation in Accounting

Recording in a Cash Book

A cash book has two sides, like any other accounting book: debit and credit.

All cash receipts are recorded as debits on the left-hand side, and all cash payments are recorded as credits on the right-hand side.

The balance of cash is arrived at by finding the difference between the debit and credit sides.

If the cash flow is positive, there will be a debit balance, and if the cash flow is inadequate, it will show a credit balance.

The cash book structure is made up of columns and can be in single, double, or triple columns.

In a single-column cash book, only cash receipts and payments are recorded.

In a dual column cash book, you can find details of bank transactions in addition to cash payments and receipts.

In a triple-column cash book, all these details are recorded, and additionally, as details of sales or purchase discounts.

In a single column cash book, you will find four headings – Date, Details, Amount, Folio or Reference Number, ad Amount.

These headings are on both receipts (left) side, and payments (right) side. The date column of course, mentions the transaction date.

As it is continuously updated, a cash book is in chronological order of transaction.

In the Details column, you will find a narration about the transaction, and the account number is written in the Reference Number column.

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Cash Book Protocols

To start your cash book, make a list of the amount of cash with which you started the petty cash fund.

As the next step, make a list of all the purchases paid for with this fund, and subtract that amount.

Once the amount is exhausted, you need to add more cash into it, and make a note of it.

You must reconcile the account by ensuring the fund amount and the book balance are the same, at regular intervals.

ALSO READ: Difference Between Procurement And Purchasing

Cash Book Bookkeeping

The cash book should contain records of all legitimate business transactions, whether expenses or receipts.

For example, money paid for office stationery, raw materials, wages, repairs, etc. are legitimate business expenses.

Cash paid for purchasing personal products should not be entered in the cash book.

Similarly, cash received from sales, and debtors’ payments should be recorded in the cash book as they are legitimate business receipts – not personal loans received, and so on.

Legitimate business expenses should be transferred to the ledger, and you can claim the expenses as deductions after assigning them to the proper categories.

The amounts of money you withdraw from your bank account for funding your petty cash, must be noted in the bank ledger so that you have a proper record of the same.

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Cash Book Issues

Deciding which purchases are the most relevant for cash book accounting can be a bit confusing.

Unauthorized employees may issue cheques or make use of the company credit cards to make purchases (from the petty cash fund) that may be big enough to warrant other payment forms.

If you become too dependent on petty cash purchases, you could end up spending excessively for things that could have been purchased more economically through wholesale vendors instead.

ALSO READ: How Does Landed Cost Affect the Cost of Inventory?

Conclusion

Manual bookkeeping is not only cumbersome and time-consuming, but is also prone to errors.

A single mistake can have a cascading effect, and impact your financial statements too.

A good solution is to automate and streamline your Accounts functions with reliable ERP software like Tranquil which has a robust Accounts module.

This will help you save time, effort, and money, and ensure accuracy in records.

Moreover, you can leverage the excellent reporting ability of the software and get different types of reports to determine the financial standing of your business.

Still unsure how it will help you? Do schedule a demo at your convenience, and we will be happy to show you how it works. Our representatives will be happy to resolve all your queries.

 

Oil and gas is a critically important industry, and also very expensive and complex.

They are highly reliant on accurate management of workflows and market analysis.

Managers in the industry struggle to keep up with the rapidly evolving demands of commodities and maintain a balance between changing regulations and resource availability.

Workplaces are spread across multiple geographic locations as well.

The demand for energy-related products is on the rise throughout the world as research results in innovative products that depend on oil and gas products to operate.

ALSO READ: Guide on How Do ERP Systems Work

ERP for oil and gas industry can help them manage their production better and enhance overall efficiency by integrating all the information in a central location in a single application.

It is not an entirely new concept; several oil and gas companies have been using ERP solutions since the 1950s.

However, depending on legacy systems can be problematic as other stakeholders like suppliers, distributors, and customers would have moved on to new, improved software.

ERP oil and gas is vital in ensuring greater efficiency of operations for oil and gas businesses corporations.

They can help monitor projects and operations effectively, ensuring growth and profitability.

However, when the business grows continuously, it is essential that the efficacy and vulnerability of the ERP system in use is evaluated; if it does not serve the purpose anymore, it may be time to switch to an innovative, effective, and cloud-based system like Tranquil.

The ERP Systems for Oil and Gas Industry

The oil and gas industry is highly complex, with many regulations to maintain compliance with, and safety concerns to take care of.

It can be highly challenging to generate revenue and keep expenses down, but an ERP system can deliver the solution here.

ERP software for oil and gas industry typically has the following modules: Financial management, project management, inventory management, supply chain management, asset management, production management, and Operations Management, which helps manage natural resources, schedule production, and execute quality control measures.

When each level in the supply chain is well linked to the others, the operations can be managed more efficiently, and you will be able to respond to unforeseen circumstances quickly too.

ERP systems make sure that you have sufficient inventory to fulfil consumer demand while keeping carrying costs low and eliminating excess inventory.

Our ERP solution can make accurate forecasts thanks to its excellent data collection and analysis and robust report generation.

ERP oil and gas also helps in automating business processes, boosting efficiency and customer satisfaction.

Integration of all the relevant data into one application makes it easy to handle all the tasks and processes efficiently and increases productivity.

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Does the Oil and Gas Industry Use ERP?

In an era where the world is searching for alternatives to oil and gas products, ERP systems are even more valuable, and mission-critical to operations than ever.

Increasing compliance mandates and wildly fluctuating oil prices, and volatility of resources has sealed the need for ERP solutions for the monitoring and management of business operations.

ERP can help oil and gas companies:

• Enhance safety during production
• Reduce expenses with improved inventory management
• Adhere to regulatory compliance requirements

Oil companies have been using ERP systems for managing their functions of exploring, producing, refining, distributing, and retailing.

However, they are now also adopting ERP for managing support functions.

ALSO READ: Influence and Importance of ERP System in Different Industries

ERP Software Benefits for Energy and Oil & Gas Industries:

There are a number of reasons why businesses in the oil and gas industry use ERP.

Let us look at the benefits in detail:

1. Seamless Management of Business Processes

The various processes involved in oil and gas exploration and production are critical and risky, and it is essential that these are monitored and managed efficiently.

This includes managing the rig, land and water management, site engineering, tracking the fleet, maintaining compliance, and checking performance of the workforce and project progress.

It is impossible to be present in far-flung locations all the time.

ERP systems allow access to users in real-time, empowering them with critical business information that can help them take vital decisions.

It also ensures inter-departmental communication and collaboration, boosting productivity and efficiency.

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2. Easy Integration

ERP software can be easily integrated with third-party business applications, enabling you to monitor resources and expenses across your organization.

This is very valuable and can help in meeting production deadlines and deliveries.

3. Consolidated View of Business Processes

ERP software has client-side and server-side functionality that can be tweaked to match your unique business requirements.

You can get overall visibility into your business processes, fulfilling the need for crucial data that help in meeting compliance and adhering to regulations.

It also helps your supervisors and managers to check on the progress of employees in real-time.

Thanks to sophisticated reporting and analysis, it can boost employee morale and productivity, and help you craft robust strategies to improve performance.

ALSO READ: Advantages of ERP to Automotive Businesses

4. Manage Risk

ERP software can help oil and gas businesses to recognize the risks in a project much in advance so that you can have a clear picture regarding what to expect and about the potential success of the project.

It can also help with developing contingency plans to deal with emergency situations.

5. Control Cost

Oil and Gas ERP software will help you to reduce expenses by analysing your overhead and labour spends.

With a bird’s eye view of all expenditure, you can manage your demand and supply chain more effectively.

Tranquil has a feature-rich finance module that will also help you to maintain compliance with legal requirements and industry regulations, especially for international transactions, like entering into procurement or logistics deals with other nations.

Our software supports multiple currencies, so you can rest assured that everything will be managed smoothly.

ALSO READ: ERP Trends 

6. Efficient Project Management

Tranquil Cloud ERP will allow you to monitor and handle your onshore and offshore projects efficiently, including resources, finances, schedules, and inter-department communications.

Large and complex projects can be divided into smaller and easily manageable chunks like tasks and jobs, making it easier to meet deadlines and milestones, and to stay within the budget.

ERP software is especially valuable when there are international joint ventures, facilitating local technical assistance and finance management.

ALSO READ: Benefits of ERP for Chemical Industry

7. Local and Global Financial Reporting

The oil and gas industry is essentially an international one; wells and refineries are often in separate countries, and customers are spread all over the world.

Each nation has its own taxation laws and systems, which may be based on sales revenue or volume that comes in or goes out of that country.

A company that wants to do business must be prepared to present whatever financial reports the tax and regulatory authorities demand; a business should also try its utmost to reduce the tax burden on itself.

Tranquil is adept at handling the local reports and in balancing the international tax burden.

8. Asset Management

The asset management module in Tranquil helps you maximize the performance of your assets.

Regular maintenance can help in ensuring excellent performance, prevent disruption in production, and extend the working life of your assets.

An ERP system will help you automate the maintenance schedules so that you don’t forget, and meticulously track all your assets, even after you have retired them or they get stolen or damaged.

ALSO READ: What are the Key Stages of Fixed Asset Life Cycle?

9. Real-time Hard and Soft Asset Control

To ensure efficiency in operations in the oil and gas industry, it is crucial that there are asset controls.

This is because there are wide-ranging dependencies that include acquisition, development, research and development, shipment, etc.

Additionally, you have industrial equipment like rigs, heavy vehicles, pipes, different software systems, hardware and so on, which are all utilized in the delivery of the final product.

A robust ERP system will be able to handle these disparate elements smoothly and without hassles.

ALSO READ: ERP software in Warehouse & Fixed Asset Management

10. Quality Control

In the oil and gas industry, quality control is a very important aspect – and ERP software is valuable here.

The oil and gas products are expensive and essential but potentially hazardous to the environment too.

ERP software is capable of tracking loss in distribution to minimize incidences and to help with compliance reports in purification and refining.

The losses may be solid, liquid, or gaseous; ERP software can help with the conversions.

Each business has its unique requirements; Tranquil ERP can be customized to ensure that your needs are fulfilled optimally.

ALSO READ: How ERP Can Improve Business Efficiency?

11. Helps with New Employee Training

ERP software can be leveraged to pass on the vital technical information to the new engineers and technicians, as all the data is recorded in the software.

The ERP can easily integrate new recruits into the various processes like energy exploration, monitoring, production, refining, and so on.

ALSO READ: Benefits of Having an Employee Self-Service System

12. Business Intelligence

BI is important for all businesses but especially so in the oil and gas segment; international politics and economic conditions need to be constantly monitored to establish the potential impacts on supply and demand.

Companies have to stay on top of compliance requirements, which are subject to change suddenly without notice.

ALSO READ: BI vs ERP

13. Active Compliance and Policy Management

The oil and gas sector is one of the most highly regulated industries, with rules becoming stricter ever so often.

Having to manually keep track of changing regulations across all the countries that a company deals with, can be quite overwhelming and time-consuming.

ERP software for oil and gas can help in this regard, notifying you of any changes in regulations, and helping you stay in compliance.

ALSO READ: Factors for a Successful ERP Implementation

Final Thoughts

ERP software is an indispensable tool for any business that is serious about improving productivity and efficiency; in an industry like oil and gas, it is absolutely critical, thanks to the intense competition, and unstable economic and regulatory environments that it operates.

Robust ERP software like Tranquil can help ease your work in this regard. It’s a secure, cloud-based ERP solution that will make life simpler. Don’t believe us? Simply schedule a demo at a time of your convenience, and we will be happy to show you how!

 

A ledger is a book of entries that contain detailed information of transactions of one account or type of transaction or a summary of all the financial transactions of a company for a specific period.

In other words, the principal account book which contains the balance for each account.

All sets of accounts like nominal, real, and personal, are included in it.

ALSO READ: Benefits of Bank Reconciliation in Accounting

A ledger is the second book of entry which contains everything you need to prepare the trial balance, and profit and loss – the important financial statements for any business.

The entries in the journal are categorized

We have seen that an accounting ledger is basically a catalogue of general accounts within the accounting system in a business.

All the transactions happening in a financial year in any business, are recorded by debiting and crediting the relevant accounts.

These transactions are triggered by normal business processes by adjusting entries or charging customers.

While some businesses still perform manual accounting, most businesses today, especially large corporations with multiple locations and complex and voluminous transactions have switched to accounting software.

What is General Ledger?

The general ledger is the accounting book that contains a summary of all financial transactions of a business in a specific format for a specific period, and it helps to determine the closing balance as on the last day of that period.

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What is Ledger Account?

A ledger account contains the record of every transaction with regard to a specific account within the general ledger.

Individual transactions within the ledger account are recognized with unique transaction numbers, dates, and descriptions which clarify the nature and reason of the transaction.

Each account that the business deals with has an individual ledger account that contains a summary of the account, or the closing balance for that specific period.

Bank, cash, debtors or accounts receivable, creditors or accounts payable, fixed assets, taxes, loans, salaries, profits, etc. are some examples of common ledger accounts.

What is Ledger Accounting?

It is simply a record or account of book-keeping entries that help prepare income statements and balance sheets.

There are three main types of ledger accounts – nominal, real, and personal.

Nominal accounts contain accounts that deal with expenses, incomes, losses, and gains.

Examples are purchases, sales, salaries, commissions, and similar accounts.

Real accounts contain accounts of assets and liabilities like accounts payable, fixed assets, prepaid expenses, cash, debts, loans, and accounts receivables.

Personal accounts contain accounts that are related to transactions with individuals and organizations with whom your business transacts directly.

Customers, vendors, business owners’ capital accounts, etc. are examples of personal accounts.

ALSO READ: What is Goods Received Note and Why is it Important?

Types of Ledgers

The three main types of ledgers are:

• Sales Ledger
• Purchase Ledger
• General Ledger

The Sales Ledger is where a business records all transactions related to the sales of their goods and services, and the cost of the products sold to customers.

It provides an idea about the revenue from sales.

The sales ledger also offers item details, transaction date, the amount sold, and if the sales were cash sales or credit sales.

Most businesses prefer to maintain this information on a monthly basis though it can be done quarterly and annually as well.

The value of the transactions is more important than the volume.

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A ledger only contains data for a single company.

In case there are subsidiary companies, separate ledgers are maintained.

Likewise, credit sales information is maintained in a separate ledger than the cash sales ledger.

The Purchase Ledger is where a business records all transactions related to the purchase of raw materials, services, goods, and accessories from other businesses, and offers visibility into how much money the business pays other businesses.

This ledger basically contains details about all such items purchased along with the quantity, cost, and date.

Just like sales ledgers, the purchase ledgers can also be on a monthly, quarterly, or annual basis, depending on your preference, and considering the frequency of purchases.

Also, a sub-ledger for credit purchases is helpful in knowing how much you owe and their due dates.

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General Ledger is of two types, nominal and private.

We have already seen that the nominal ledger contains information related to income, expenses, insurance, depreciation, etc.

The private ledger contains information like salaries, wages, capital etc.

It is not accessible to everyone, and hence private.

Basically, all entries that cannot be posted to any other ledger, are posted to the general ledger.

Journal Vs Ledger In Accounting

Often people confuse the two terms and use them interchangeably.

It’s true that both these books of account are important, and eventually help in determining the financial status of a business.

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Let’s look at journal vs ledger to understand the differences.

• Journal is the minor or subordinate book of accounts used for documenting transactions whereas ledger is the main accounting book. It classified journal entries (transactions) based on their nature.
• Transactions in a journal are recorded in the chronological order as they happen, whereas in the ledger, the journal transactions are organized under individual accounts.

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• Journal entries contain complete transaction details which is not seen in the ledger.
• The ledger provides the result of transactions which is missing in the journal.
• Balances from various ledgers help to prepare financial statements of a business-like profit and loss account and balance sheet whereas the journal has no direct role in the creation of these statements.

The Benefits of a General Ledger

The ledger books offer several benefits, like

• Help to understand the status of the business at any given time; a cash ledger reflects the available cash on a date, for example.
• It aids in performing bank reconciliation as all transactions for an account at a bank are available in one place.
• As ledgers are classified at the time of their setup by a business, they can get a look at say all their debtors or all creditors quickly.

ALSO READ: What is Landed Cost and How to Calculate It?

• General ledger offers an overall view of an organization’s transactions to auditors, who can analyse them to gain a clear picture about the business.
• It facilitates the proper organization of accounting and helps in the preparation of trial balances – a precursor to the preparation of the profit and loss statement.

Steps to Prepare the General Ledger

Posting

Posting refers to the practice of shifting journal entries, both credit and debit, to classified accounts in the ledger.

There are certain rules to be followed for posting which have to be followed without which you are not likely to get a true picture of the business or prepare the financial statements accurately.

Rules for Posting of Entries in the Ledger Accounts:

• Each account needs its own individual account in the ledger
• To or Dr is used in the Particulars column when the account is on the debit side and By or Cr is used when the accounts are on the credit side. For example, when you have paid a vendor X SAR 1000, the entry will be: By X 1000, or Dr X 1000. The interest received on deposit will be entered as To Interest 2500, or Cr Interest 2500.
• The account debited in the journal has to be debited in the ledger with the reference of the relevant credit account.

ALSO READ: Complete Guide on Economic Order Quantity

Balancing an Account

Closing balance is derived at the end of every month, and at the end of the financial year.

However, you can do it on any given day if required for an audit or any other reason.

This is a simple process.

Let’s suppose you have purchased raw materials worth SAR 30,000, and you have paid your supplier SAR 12,000.

The closing balance against this vendor is SAR 18,000.

It will become part of your accounts payable.

To calculate the closing balance, all you have to do is sum up both sides and find the difference – this is the closing balance.

The account has a credit balance if the credit side is more than the debit side; it will have a debit balance if the debit side is more.

ALSO READ: Debit notes Vs Credit Notes

Credit balance is usually expressed on the debit side as ‘To Balance c/f’, meaning carried forward.

This balances both sides.

When the accounting for the new period starts, this becomes ‘by Balance b/f’, or brought forward, and is the opening balance for the same.

It will be written on the credit side.

The same process is followed if it is a debit balance; the balance is carried forward and written on the credit side, balancing both sides.

Then for the new period, the balance is brought forward and written on the debit side.

Procedure for Writing Ledger

Though accounting software is used by most businesses today, you can create your own general ledger.

Accounting software posts every financial transaction straight to the general ledger.

ALSO READ: Complete Guide to Cash Flow Analysis

Step 1: Create Ledger Accounts

Separate ledgers need to be maintained for separate accounts.

Cash ledger will contain all cash transactions of the business.

Unexpected expenses are normally included in the general ledger account.

The basic ledger account types are Income, Expenses, Assets, Liabilities, and Other Income and Expenses (usually not directly related to the business); some may also include Equities.

Make a list of accounts you need within each account type.

You can create Accounts Payable, and loans under Liabilities, for example.

Step 2: Create Columns

On the left side you can have columns for journal entry number, date, and description.

On the right side, make columns for debit, credit, and running balance.

Debits enhance asset and expense accounts, reducing liability and revenue.

Credit entries enhance liability, revenue, and equity, decreasing assets and expenses.

Basically, credit is what you have paid or is owed to you, and debit is the money you owe or receive.

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Step 3: Recording Financial Transactions

Record every business transaction as it happens on a daily basis. Post journal entries to the relevant ledger immediately.

Step 4: Prepare the Trial Balance

Make a summary of the closing balances from the general ledger and display the totals of each account to prepare the trial balance report.

Once these are matched, you can use them to prepare the financial statements.

In accounts, the double-entry system is followed where every financial transaction has an impact on two separate ledger accounts, and each entry being recorded in two columns.

The debits are posted on the left, and the credits are posted on the right side of the ledger.

The total of all debit and credit entries have to balance.

ALSO READ: What is Zero Inventory and Why it is Important?

Automation Eases your Work

As you can see, doing all of this manually not only takes time but effort as well.

Additionally, you may even have several errors.

A much better option is to take the digital route. Implement a top-class ERP solutions like Tranquil, and its robust finance and accounting module will do all this and much more for you.

Streamline your entire accounting process and classify transactions accurately with our ERP software.

Focus your energies on core business activities that add value and accelerate growth.

Do schedule a demo of Tranquil Cloud ERP at your convenience, and we’ll be happy to show you how it can benefit your business.

 

It’s a well-known fact that stock or inventory is the most crucial aspect for any business that deals in products.

They have to monitor their movement as well as their shelf life so that they don’t end up with excess stock or have stock-outs.

Carrying excess inventory results in heavy expenditure in the form of warehousing, labour handling, utilities, security, insurance, audits, and so on.

The business may also end up with dead stock – goods that sell slowly and eventually remain unsold due to reasons like obsolescence, or because they get damaged.

If you are short-stocked, you risk losing sales, and eventually, customers.

ALSO READ: Top 4 Benefits of Stock Status 

Stock aging is one method that will help you store the requisite inventory stocks, removing those products which can hamper your profitability.

Keeping a tight control of aging inventory offers several benefits to businesses.

You can take speedy, informed decisions to boost the revenues and growth of your company.

The inventory aging report provides important KPIs regarding inventory status and the speed at which it moves.

In essence, it is a list of products on hand, categorized according to the time they have been in stock.

The book-keeper has to establish slow-moving or obsolete inventory which has to be revalued.

This helps to calculate the cost of goods sold precisely.

The stock aging report easily enables this process.

It offers information on the inventory to be bought, thereby helping to reduce the inventory storage cost.

Reports can be generated automatically when you have robust ERP software like Tranquil.

ALSO READ: What is an Inventory Control System?

Calculating the Average Inventory Age For your Business

Calculation of average inventory age is crucial for inventory management, as this points to our inefficiencies and lost profits.

To calculate the inventory age of your products, you must know the average cost of inventory, inventory turnover ratio (ITR), and cost of goods sold or COGS.

Average inventory cost formula: cost of goods sold in a year/closing inventory balance.

You need to have a clear understanding of these numbers as they can convey if the stock of goods you have in your warehouse is actually affecting your profitability negatively.

When you are clear about these figures, it can empower you to manage your inventory better.

ALSO READ: Common Inventory Management Problems and Solutions

Know the Cost of Goods Sold

This is nothing but the cost incurred to manufacture the products that you sell. It includes costs that can be directly linked to production, like raw materials, labour, commissions, fuel, electricity, and so on.

However, it does not take into consideration indirect expenses like administration expenses, marketing, software, etc.

COGS formula: Inventory opening balance + purchases made in the period – closing inventory balance = cost of goods sold.

Inventory opening balance refers to the quantity of inventory left from the previous period, which could be month, quarter, or year.

The closing inventory is what you have left, or did not get sold in that same time period.

Purchases made during the period is the cost of your purchases in that same period.

Know the Inventory Turnover Ratio

This ratio expresses how many times a business sells and replenishes its inventory in a specific time period, like a year, or a quarter, or even in a month.

When you calculate your inventory turnover, you will be better equipped to make the right decisions on not just purchasing inventory stocks, but also regarding production, marketing, and pricing as well.

ALSO READ: What is Zero Inventory?

Inventory Turnover Ratio formula: cost of goods sold / average inventory during the period.

A slow turnover rate could mean you have a huge stock of excess or slow-moving inventory, or that your sales are poor.

A high ratio is likely to mean you have excellent sales, or that your inventory levels are inadequate.

In any case, it is a critical tool of inventory management analysis.

The Next Step: Dividing by the Number of Days

The age of your inventory conveys how many days it takes for your business to sell certain products, on average.

Therefore, inventory aging analysis method is preferred by analysts to check how efficient the sales of a company is.

Days sales in Inventory or DSI is another term used for the average inventory age.

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Know the Average Inventory Cost

The average cost of inventory basically refers to the quantity or value of the inventory of a company over a particular period of time.

Seasonality can cause inventory balances to fluctuate tremendously.

It depends on when shipments are received and so on.

When you calculate the average cost, it neutralizes the effect of these sudden spikes and slumps.

It also serves as a rational guide to the valuation of inventory.

Inventory Aging Formula

To determine the inventory age of the products in stock, use the formula:

The average age of inventory = (Average cost of inventory / Cost of Goods Sold) x 365.

We strongly recommend that as a retailer, you confirm this figure with gross profit margin or other inventory KPIs.

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Why Stock Aging Analysis Is Crucial for Businesses

There are a number of reasons that the inventory aging report is important for businesses.

It identifies slow-moving and non-moving products.

It empowers your Purchase department with the information they require to make the right choices when it comes to ordering products; likewise, the manufacturing department is better equipped to decide what to produce, and how much to produce.

The stock aging report also provides insights into the extra cost incurred on products that stay in your inventory for a long time without getting sold.

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Let us look at all these causes in some detail to get a clearer picture.

• Inventory aging or the time duration of your products remaining in your inventory should be properly understood so that you can make a comparison with the benchmarks set by the industry – basically, your biggest competitors.
• Stock aging can be used for every type of inventory item.
• The stock aging analysis report helps you to know how quickly each inventory item moves, and the reason why certain items move slowly. Knowing which items are not quickly moving out of the inventory will help you in deciding what items to order in the future.

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• The report can include the date of arrival of an inventory item along with information regarding the delivery schedule; this can help you immensely in concentrating on the items that take the longest time to move.
• Better decision-making with regard to timing and quantity of purchasing inventory or manufacturing
• Helps to sell off old or outdated stock at discounted prices
• You can establish costs related to quality maintenance, storage, etc. for the duration that you have the products in your inventory, and look at ways to reduce them to manageable levels.
• Enables businesses to evaluate and think about alternative methods for proper management of inventory to reduce inventory aging or time the products spend in your warehouse or store shelves.

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• Determine which products spend more time in your inventory and hence move slowly, and if you can rearrange the product mix for optimal results.
• Determine if the delivery systems of different vendors have an effect on the time the goods remain in warehouses as inventory – for example, requirements regarding volume and delivery schedules.
• Provides valuable insights into additional costs like electricity, security, insurance, and even taxes in some cases. These expenses are incurred to keep the products in a saleable condition. For example, produce needs to be refrigerated, certain medicines as well; high-value items may necessitate tight security, and so on. Having a lot of products in your inventory for a long time also restricts the space available in your inventory – you could have used the space to store your biggest-selling items. This is the element of opportunity cost you incur.

ALSO READ: What is Pipeline Inventory and Decoupling Inventory?

Useful for Investors

Further, Stock aging analysis insights allow entrepreneurs and managers to be able to predict certain events that are capable of impacting the organization.

Stakeholders like investors, and even potential investors closely watch business growth, and they are interested in learning how you manage your inventory as it’s a key component of good overall management, and impacts growth.

Improve Storage Cost Efficiency

Inventory carrying costs, or holding costs, are not likely to come down any time in the foreseeable future.

However, thanks to inventory aging analysis, you can avoid or reduce charges for long-term storage and improve cost efficiency significantly.

ALSO READ: Understocking Vs Overstocking in inventory?

Inventory aging reports offer details on the duration that products remain in inventory; this enables businesses to create strategies to sell them off.

This is especially useful for companies that use third-party logistics or FBA warehouses, as in both cases you need to pay a hefty fee if your products stay there for extended periods.

Optimize your Inventory Control Strategy

Supervising the supply, storing, managing, and distrusting of your stock of goods is at the core of inventory control.

Both warehouse management and inventory control involve methods that help avoid stockouts, selling products, not in hand, and delayed restocking schedules.

By adding inventory aging analysis in the mix, optimizing your inventory control strategy becomes a breeze.

A properly conducted inventory aging analysis helps you to understand precisely what is available in your stock, and provides the information that facilitates increased inventory turnover – like reduced obsolescence, spoilage, and expiry of products, and so on.

ALSO READ: What is Negative Inventory?

Minimize Excess Inventory

Products that are at the end of their life cycle but are still languishing on your warehouse racks because the projected demand was way higher than the actual, are referred to as excess stock or inventory.

There’s no two ways about the fact that it does not augur well for a business.

It reflects poorly on your inventory management skills and affects your revenue negatively as well.

By focusing on aging inventory, you can decide not to order or manufacture the slow and non-moving items, and come up with a plan to get rid of all dead stock.

You can also innovate and come up with new products that are capable of attracting customers.

Maximize your Cashflow

Every business looks to maximize its cashflow – after all, what is your business without good revenue?

You need cash to pay wages, utilities, vendors, and of course, take home some profit as well.

If you have put in a lot of cash to purchase goods that are moving like snails, you may be left with insufficient funds to purchase fresh and innovative products that are sure sellers.

Inventory aging calculations can help you pinpoint the items that incur high carrying costs as they remain in inventory for an extended time period.

This will help you to plan to dispose of this stock as quickly as possible.

ALSO READ: Importance of Stock Keeping Unit (SKU)

The importance of proper inventory management cannot be stressed enough, but you don’t have to stress yourself! Invest in Tranquil, the right ERP, and its feature-packed Inventory Management module will do the work for you. Do schedule a demo at your convenience, and we’ll happily explain how it works.

 

The Accounts department of a company has numerous tasks to perform every single day – recording all transactions in the correct books of account, posting to the ledger.

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What is Bank Reconciliation?

A bank reconciliation statement is a synopsis of the banking and business transactions of an organization, and it compares and matches the bank account with the financial records of that organization.

This is done by checking the general ledger entries against the bank statements.

This statement contains all activities that affect a bank account for a particular time period, like deposits and withdrawals.

Preparing this statement helps businesses to detect bookkeeping mistakes, and is very valuable in preventing fraud.

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The Difference Between Cashbook and Bank Statement

The cash book balance shows the transactions recorded in the general ledger of a business.

The bank statement balance shows the cash balance as per the bank’s records.

This is the difference between the cashbook and bank statement balance.

Both are compared and matched to prepare the bank reconciliation statement.

The Importance of Bank Reconciliation Statements

For any business regardless of size or industry, bank reconciliation statements are extremely important.

The key objective of reconciling bank statements for small businesses is ensuring that the recorded balances in both the bank statement and in the ledger, match up; this helps manage and track the cash flow of the business more effectively.

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Let’s look at why you must reconcile your bank statements in some detail:

• Fraud identification – this has to be a priority when reconciling your bank statements, you can try to verify if the cheques you issued changed in any way, or if any unauthorized cheques were issued. See if any deposits are missing, or if money was taken out or transferred to another account without the proper authorization.
• Validate data entry – this process will help you detect anomalies like duplicate entries, entry of wrong amounts, missing entries, and so on.

ALSO READ: What is Storage Cost of Inventory?

• Check the accuracy of financial statements – while not very common, banks can make errors too. Performing a bank reconciliation is a way of checking if your bank statement matches your ledger statements. Basically, it’s a way of ensuring that the general ledger postings and the bank transaction records are accurate.
• Minimizes fraud – proper bank reconciliation process can help prevent employees or others from committing financial fraud in your company.
• It can help identify potential delays in clearing cheques.

In case the ledger balance and bank balance don’t match up, you need to sit and examine both sets of records to find out the cause of the irregularities, and take corrective actions.

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How Frequently Should Bank Reconciliation be Performed?

Ideally, bank reconciliation should be performed every day so that you can ensure that no financial irregularities or fraud can happen.

Larger organizations may perform this activity on a monthly basis; however, there is a possibility of multiple anomalies being detected, and these are likely to pile up increasingly – hence the case for daily reconciliation.

Reconciling bank statements enable the detection of irregular transactions that could simply be the result of accounting mistakes or deliberate fraud.

Bank reconciliation does not have to be a formal process – it can be carried out informally as well.

It is even recommended that individuals also perform bank reconciliation and verify that the balance as per their chequebook and the balance as per the bank statement is the same.

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What Happens if You Do Not Reconcile Your Bank Statement

In case you do find any mismatch between the amounts and the accounts, you need to determine the causes and be able to explain them.

For example, you may have some cash in hand which is recorded in the ledger but will obviously not show in your bank statement.

But if there are anomalies which you are unable to explain, it means there is a problem; you need to rectify those before it blows out of proportion.

If you don’t reconcile your bank statement, employees or anyone else may commit fraud and you may find out too late.

Consumer bank accounts have more protection than businesses; ergo, it is critical that businesses detect abnormal activities in the early stages.

You cannot be sure that the bank will detect and correct abnormalities on their own.

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How to Prepare a Bank Reconciliation Statement?

To perform the bank reconciliation properly, you need to have the current month and previous month’s bank statements, and the company ledger.

You can do this with a spreadsheet, or online templates, or use an ERP system like Tranquil with a robust finance and accounting module.

• Start with the closing balance of the previous month – this will be your opening balance for this month.
• Deduct any cheques issued but not yet cleared, and add deposits made but not yet credited. This is the adjusted cash balance.
• Add any interest earned on deposits, and deduct fees charged, penalties, etc. that were not yet recorded in your books of account.
• Check if the amounts of your deposits and cleared cheques are the same as what the bank records show. The final balance must be a match.
• If you detect any anomalies, think about what mistakes the bank has made or what you have missed in your records.

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Example of a Bank Reconciliation Statement

We have seen what is bank reconciliation; companies can recognize the source of errors and rectify them when anomalies are detected.

Let’s understand this with an example.

Company X recorded a closing balance of SAR 500,000 in their books of account. But the bank records show a closing balance of SAR 575,000.

Company X then investigates the matter.

They find out that a cheque issued to a supplier for SAR 50,000 hadn’t been presented for collection, and that a cheque was sent by a customer for SAR 25,000, which the accountant had inadvertently forgotten to record in the company’s books.

Company X adjusts its records, adding the missing deposit, and making a note that a cheque is outstanding.

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Adjusting Balance per Books

The cash account balance in the financial records of a company may have to be adjusted too.

For example, you may incur a charge or fee for having an account open.

Usually, the amount is withdrawn from your account by the bank and it processes the fees automatically.

Hence, when you reconcile the bank statement, you need to ensure that there is a corresponding journal entry in your account books to account for these charges.

You also need to adjust the interest earned on your deposits.

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It is normally deposited automatically into the account at pre-determined intervals like monthly, quarterly, or annually.

To account for this amount, you need to make an entry in your books of account that reflects the increased cash that has come in.

Once all the adjustments are made in the books, the bank balance amount and the balance as per your account books should be the same.

If the numbers are a match, it means that your bank reconciliation statement has been successfully prepared.

What are the Challenges In Reconciling Bank Statements?

Reconciling bank statements is an essential activity and it provides several benefits.

Performing daily reconciliations can be pretty challenging, especially when you are using manual or outmoded systems.

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These are the most common problems companies face:

1. Slow Processing of Data Input

When analysts manually login to banking systems to extract bank statements, and then access the company books of account, possibly from some accounting software, to reconcile it with the cash balance.

This necessitates a high degree of manual intervention, and the process may become slow, and also ties up employees in this cumbersome task.

2. Greater Possibility of Errors

Manual reconciliation can give rise to more errors; this defeats the purpose of improving accounting accuracy.

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3. No Central System for Auditing

Once you have reconciled the bank statement, it must be safely stored so that it can be used for audits in the future.

Maintaining multiple files becomes problematic when you are performing paper-based reconciliation statements.

The Need for Automation in Bank Reconciliation

More and more organizations are veering towards automation in accounting to ensure better accuracy.

Automation can eliminate possibilities of manual errors in data entry and bank reconciliation.

But how exactly will this happen? What is bank reconciliation software and how will it impact reconciliation?

Bank reconciliation software automates the bank reconciliation process, and allows accounting teams to access the ledger balance in real-time, items from the previous months, and compare invoices and bank statements.

These bank statement reconciliations can be electronically signed by the Accounts team and sent for approval to the relevant executive.

After approval, you can retain the data in your system database and use it as an audit trail.

ALSO READ: What is Dead Stock – How Can You Avoid It?

Benefits of Bank Reconciliation Software

1. Automation Brings in Efficiency

Most Finance and Accounts teams spend a great deal of time in data entry, attempting to glean irregularities, wasting time on monotonous and cumbersome tasks.

The bank reconciliation software automates this process, allowing your team to work on value-adding tasks, enhancing accuracy, minimizing audit risks, gaining insights, and having stricter control.

2. Better Internal Controls and Less Errors

The software improves internal control be enabling companies to see how the whole process works, increasing their confidence in its consistent smooth operation.

It helps to stop activities that are not authorized; you can set alerts to be sent in the event of abnormal changes and activities.

Eliminating manual data entry and adopting automation can help minimize errors, saving you money by detecting errors in real-time before they blow up.

ALSO READ: How Does Landed Cost Affect the Cost of Inventory?

3. Higher Transparency and Audit Trail

As all the reconciliation and data history is saved automatically by the software, it is useful to be used in audit trials and helps maintain compliance.

Historical data records help in checking cost of specific items in the past, and you can use this information to budget expenses in the future.

In fact, it will help you to budget more efficiently, and manage your organization’s funds much better.

4. Delegate Responsibilities

Reconciliation software can help you allocate responsibilities and also control access.

This will help your Accounts team to get a clear picture of their roles and responsibilities.

In case approval is needed for reconciliation, this will be assigned to the relevant executive automatically.

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Keep your organization safe from financial errors and fraud, and allow employees to focus on more important tasks with our bank reconciliation software. Do schedule a demo with us at your convenient time to see for yourself how it works.