Duration: 3 Hours
Lectures: 13
Video: 2.5 Hours
Level: Beginner

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Accounting rules, ratio analysis for small business accounting, budgeting and forecasting for financial projections, business plans

In this course, we will be covering the basics of Financial Accounting rules, accounting equations, chart of accounts keeping in mind practical situations in small hotel businesses. we’re going to take a short exercise to confirm the different types of translations in small businesses.

This course is not for theoretical purposes but will be covering the Practical aspects of small businesses. We will also be covering different accounting policies which are normally required in small businesses such as
1. depreciation accounting.
2. Fixed Asset Accounting
3. Revenue Accounting
4. expense accounting and as well as the working capital.

These are generally accepted and followed accounting policies and controls which small hotel business should be putting in their business. These policies are in line with internationally accepted accounting standards however, different countries may require separate accounting treatments.

We will also learn what are the drawbacks & limitations of the impact of choosing different accounting policies.

Videos may give you the feeling of being in live classroom as courses are part of my live class for startup founders.

This course is being taught by Mr Manish Gupta, you can check out his other hotel management courses  here

Learn how to analyse and maximize Restaurant Profitability

Analyze & Interpret Overall Hotel Financial Statements

1
What is Financial Accounting
2
Accounting Double Entry System and Fundamental Accounting Rules
3
Financial Accounting Process and Financial Statements Generates
4
Basic Accounting Equation and Four Financial Statements
5
Define Chart of Accounts and Classify the accounts
6
External and Internal Transactions with companies
7
Short Exercise to Confirm what we learned in this section

Key Accounting Policies and controls for small business

1
What are Major Accounting Policies need to be decided by companies
2
Depreciation Policies
3
Operational Fixed Asset Controls
4
Inventory Accounting and Controls
5
Revenue Accounting and Controls
6
Expenses Accounting and Working Capital
this so the accounting policy from one organization to another organization can be different so it doesn't mean the rule will change so the accounting policies normally govern how much to recognize when how is the how we value the assets and how do we recover for example depreciation you can have a different policy of charging depreciation in ten years for same car depend on some other company whom HR for five years or another company you may charge for twenty years so accounting profit for all the three companies will be different irrespective their operational capacities and everything else remain the same the net profit will be different right so to be able to compare between three two different companies you need to make sure that the accounting policy they follow is same if they don't follow the same accounting policy you will not be able to compare and two different companies or if let's say you change the company policy for this year then you cannot compare previous year income and expense anymore because it will be different so the how it different accounting policies can be different in revenue recognition so how you recognize your revenue so there are different ways the companies can recognize their revenue let's say for example a hotel Hotel normally charge you the service charge service money right so the hotel two different hotels can have different accounting policy one hotel will say okay whatever is my income only I will record let's say you pay you have a bill of hundred dollars then the hotel will charge you ten percent service money right and that becomes hundred and ten and the common say there will be some five five dollars as a government tax so total become one one five so one hotel can say okay government tax we do not recognize as an income anyways because that we have to pay to the government but service charge is we collect so we will recognize one one zero as our income another hotel can say I the ten is actually for the staff that is that that doesn't money that mean doesn't belong us so means we will record only hundred so same operating performance revenue will be different expense when it comes to expense the hotel which recorded income as service charge because they paid to the service they pay to the staff they will they will record as an expense also but the hotel which we does not record the service charge as an income they will not record any expense correct so it means the different different revenue recognition so profit will be the same but revenue and expense are different take another example let's say you are buying and selling so you buy anything from let's say again because laptop in is in front of me so naturally I use this so let's say you buy from the market and sell to the to somebody else so you have two choices one is you record the full value let's say you buy this for 1000 and you sell for 1500 so you can recover 1500 as your sale 1000 s cost offset and the company on the other hand can say a I don't want to record the whole I want to record only my profit because I pay 1000 1000 500 500 is my income so I will record 500 as myself so there accounting policies can be different based on the how they structure the the contract if let's say you buy the laptop keep in your pocket for a long period of time and then sell it then it becomes your cost and sale but if you are waiting for customers to tell you okay where you should buy what kind of laptop then you are going and buying means you are not taking any risk right so in that case you can recognize only the difference your sale so a revenue recognition inventory valuation inventory is your inventories can be valued differently there are different valuation policies we can all learn in bit and depreciation method how we charge the depreciation fixed asset we cannot recognize all our spending as fixed asset or we can recognize only some as so you may say if I'm if I have spending anything above $100 that will be my I said anything I spent less than hundred dollars that is my expense no matter what is the life of the asset so you can have a different policy so the companies with different policy will show different accounting results different profit is right so you need to understand your accounting policy and craft your own accounting policy as per your business requirements if you want to focus on every single item as an asset you can say okay no debbie's no fix no floor limit for amount whatever we buy more than one year it's going to be charged as a asset even if it's $10 or $20 correct but if you say I do not want to focus on the small amount anything I be i buy beyond $1,000 is gonna be my si anything below $1,000 is all expense doesn't matter what is the life of the asset okay so the companies who need you to decide at the outside what is the policy they want to follow but policy is something which is very important to decide in the beginning because you cannot change it every year the policies are not supposed to change every year you can change it only once only one you are required to change materially impact and whenever you change the normally financial statements require a lot of disclosures especially if you follow IFRS or any other recognized international accounting standards whenever you may change a policy you have to do a lot of disclosures so that may be painful so select your policy carefully okay so we're going to look at now some different policies how they affect your business depreciation policy so as we said deposition policy can cover few aspects means the life the minimum criteria to recognize as asset so you can have a mean some fixed fixed amount for example like in hotels we have a policy that normally a spoon you can use for more than five right if it's a stainless steel moon so but every spoon we are not going to recognize it and I said because it does cost very less amount so we have a policy that ok if anything is cost unit price is cost less than hundred dollars we will not touch it as an asset we will just charge it to the expense because we don't want to stock in into the spoons forks or the letters we don't want to we don't want to recognize that we just record that as operating expense but we keep inventory physically of all the items that we buy even a spoon even a fork we have record of every single thing whatever is coming out of the hotel or whatever is coming in the hotel but we don't recognize as a Zionist we immediately charge to the expense but it depends on the size of the hotel why when I used to work for shangela the size of the hotel is very big so we can afford hundred dollars when I am working here in Miami the size of the hotel is a small so I made a policy of fifty dollars because otherwise the everything will go charged as a expense nothing will be remaining the asset right then you have estimate life of use so you it depends on how you use your asset and in which location you are stately situated at the same value same asset will have a different life in different conditions for example a water filter if you are in younger the water is very heavy so filter will go run out very fast but if you have if you are in a city where the water is clean then the water filter will not damage so fast right so it depends on where you are and what are the intended use of a set so the company is normally determined what are the life of their assets some companies because they don't want to have a separate set of accounts they follow government rates whatever is government prescribed we will use we don't want to have a different accounting policy like my current company we follow government rules we don't have our own accounting speciation rates because otherwise we have to have one for our set and one set for government so which is not ideal to maintain right so we follow one then you have method of charging depreciation so how you charge the deposition you have different methods of charging depreciation one is straight line whatever you buy you just divide by five and charge equal another method is if let's say you say are the initial here my business is very low or let's say you buy a machine which can produce let's say ten thousand units and you know in the initial year I am NOT going to use my my production will not be very high because I just started up the business maybe I will use one thousand correct second year I may produce three thousand fourth year I will produce two thousand four fifth year I may produce another the balance so you are charging based on your estimated production so based on production capacity okay and then another method is called written down value method did I explain yeah so written down value method means we will charge you based on a fixed percentage let's say we charge twenty percent depreciation every year but on the balance so if the been if the start I said when the star asset starts with one thousand so first year depreciation will be twenty correct the what is the balance left 100 minus 20 is 80 so the next year I will charge twenty percent of 80 so that next year position will be 16 right what is the balance eighteen minus sixteen becomes whatever and then twenty percent of that left over so that is called written down value so we are charging deficit of fixed percentage here the deposition is not fixed in straight-line method every year depreciation is the same in written down value definition is not the same is the highest in the beginning and lowest at the end of the year right it follows the sudden rule that okay when the acid is new is used most when the acid get older the efficiency of acid get reduce right you have to you have you used less the value is less so you charge less or based on usage if the life is fixed let's say a car car can engine can be run 400,000 kilometers so it depends on how you intend to use it if you intend to use every year same amount then you charge exactly the same if you have a different schedule you can use different schedule I depend on accounting policy of the company so you can have a different set of policies but you don't change it every year once you said you have to follow it and you have to follow for all the ethics you cannot say my building will be written down value and my laptop will be straight like cannot do that you have to follow the same method for every asset that you have in the company okay this is an example so it let's say there is a machine that makes shoes okay so the makes assuming the cost is hundred thousand dollar and the life is $10.00 residual value is ten thousand what is the residual value sorry the spelling is wrong but residual value what is the meaning of residual value no means at the end of ten year what will be the value of this machine yes what is the mean what is the residual value how much the value of life how much with the value of machine after ten years so that is called residual value so the production schedule is like this two thousand three thousand four thousand I just made it up so now if we calculate the depreciation so this is the depreciation as per how we calculate cost is one hundred thousand minus the residual value you don't charge depreciation on residual value and the most companies they made mistakes on residual value all the International Accounting Standards they require us the companies to defy a residual value for all assets and the depreciation is charged only on the balance amount so total value of construction - residual value the balance since 90,000 so you can charge the appreciation on 90,000 not on hundred thousand okay when we're the most of the companies they make mistakes is they don't recognize ten thousand they charge a position on all one hundred thousand bigger is very difficult to know what will be the value of machine after ten years but there will be certain value right even though the laptop after ten he is gonna go race you still can get maybe $10 maybe $20 or if you break down the screen can get something the hard disk can get something right so there is a value it's not that a zero value there will be some value so companies normally have to identify a value which they can get after the life of the asset and then they reduce it so the balance amount is nineteen thousand ninety thousand so as for straight life you charge nine thousand each year if you follow the usage usage is total is that is usage is 2000 3000 4000 total is 36 so what you do is 90 thousand divided by thirty six thousand five hundred for every single unit how much is the value of asset then you multiply with the unit of he say every year so here you are using you are charging the depreciation as per the usage okay and the written down value means if let's say we assume 25 percent depreciation every year so the written down value will be every year we charge 20 based on the reducing balance so first year is ninety thousand into twenty five percent first year we charged 22,000 that the machine will be left with 67 thousand then we charge twenty five percent of sixty seven sixteen thousand okay and so so at the end of the year we will be left with we will be able to charge 84 thousand in this case the value will never be zero because you will still have left something which you can charge the only thing is after very long period of time the deposition will be negligible maybe zero or one or two dollars only that's it okay but it will never become zero so this is how we charge depreciation three different policies now you can say three different results means three different accounting profits okay so you have to choose your accounting policy based on how you feel the assets are used if you feel the assets are used equally over the years follow straight line straight line is the most simple method which you get used because you just have to divide by a number and then use it right most company is your straight line and even the government prescribed straight line the most governments prescribed straight line that's why they use straight line but you can use any method as you want now most of the numbers not normally the companies use straight line because it's very simple to use where do you when you see that the asset will be mostly used in the initial years and after the initial years the life the usefulness of the asset is very low for example like production machines so production money when you are right when you are writing when you bar just bought the machine it's most productive it's very efficient highly efficient right after that the efficiency will start to slow down and at some point of time the efficiency will be very low all you need to spend more money to invest okay to keep the efficiency up so if you are deposition is high in those years then you have a problem you can use written down value to charge more into the profit and loss in the initial year to save tax but if the government allows it if government does not allow written down value there is no incentive okay the incentive of charging them written down value is you are charging more expense in the initial years and less expense in the future years car dealer but what is the car dealers a second no yeah that's that's another important point that you made up in the difference between inventory and si it depends on your use if you are using the if you are buying a car for buying and selling only then it becomes your inventory not your asset yes because the most the cars the hat will be highly producible in the initial years first two three years the most productive after that the production will go down because the efficiency is very low right so you will not be able to use the Karma so you use written down when you not a straight line the car after 10 here and Kyle the beginning is not the same so it's written down value but government will not allow but for your own accounting perspective you can use yeah but for deal for inventory you don't charge the appreciation you just keep it as it is but you assume if as the car is two years in your showroom and you are not able to sell what will happen but it is a depreciation but you cannot charge the appreciation because then I said it's not an asset so it's a written down well so the value is still going down right so there was something we discussed inventory adjustment so you look at the value of inventory so a car which was bought 100 thousand $1000 in the in the initial year now you will not be able to sell 100,000 anymore because two years gone so you will be able to sell only for twenty thousand right maybe 80 thousand so that 20 thousand is the loss in the value so that 20 thousand will be charged to profit and loss statement every year whenever it go down on the value but you cannot turn it into an asset or you cannot charge the depreciation is the return norm is adjustment inventory adjustment okay so the control aspects of assets and depreciation are you need to categorize your assets into fixtures buildings plants because they all have different rights different age right buildings mostly will be longer here's plant which means you are using for your production facility so maybe your generators your machines your other things look and picture means the building pictures so you have to categorize your asset properly so that you can charge the cluster rate so you normally we are not charging the depreciation for each and every asset single asset we charge based on category so if something we recover we assume as our furniture we will charge maybe let's say five or five years depreciation if something we recognize as of not maybe it's a higher depreciation if we consider something as a building it's higher depreciation so whatever it goes into that category will automatically get attracted but you are not defining the deposition for each particular asset okay and the minimum amount should be set to put into the register otherwise every single thing you will put into your fix it so every company need to have a fixed asset register so what does the fixed asset register means it's just a list of your assets whatever you buy why is it important hmm not really it doesn't affect company value you have your set or you don't have your asset register but as you if let's say you are business is now 10 years older already and you bought something 10 years ago not now and you don't have a list and your business is in 10 locations how will you know how much asset you should have and how much you actually have what if somebody is stealing right somebody let's say Pandya is not recording the chairs I come here to teach I bring the chair with me so if bindiya does not have a list of assets they have no idea where the chair goes they because they don't know their chair was there or not they may know immediately but after two days three days they have no idea right and how will they measure they cannot write so if I am able to stream skim it out I will take the money right so your money is lost but we have no idea where is it so that companies need to have a set register to control their own assets that because you are not there every year right every place especially when your business is a long business or have multiple locations you have no idea so you are not present at every location you don't have CCTVs everywhere even CCTVs people can bring citizen TV together right so you will lose the assets so every year normally first job first task every company must do which mostly in Yama especially not even in Yama in Thailand in Indonesia everywhere I worked it in specially in Southeast Asia they don't make a fixer resistor they don't register register whatever you buy they don't make an itemized list and every year you're supposed to go and check does it still exist or not now you take this is owners control right now you take a scenario of an investor who is coming in from outside and you are telling him you know I have a value of 1 million dollar assets how do you explain so he will ask you ok give me a list can you give you don't have so you will make up the list of whatever you can see okay but if let's say half of the assets are already gone stolen so you cannot produce a complete list of I said right so the investor will not give you a will will not trust you have 1 million or 2 million or 10 million so it's very important to have a register of things assets especially when your business is growing and you have a lot of locations lot of assets makes use of assets so it's very important to keep it otherwise it's very difficult to sustain justify in future even to the revenue departments so for tax purposes for investor properties for your own personal control purposes you need to have a register and every year every two year every year every three years you have to go and check physically is it still exist or not if it does not exist anymore stole and broken even the likes of most in the hotels what we normally faces the chairs are broken the staff or the general manager they get they say ok it is too broken up throw it away by anyone so you buy a new one you will enter into the raise register but the one that you throw you don't end up means you don't take it out so your inventory list is a set list continues to grow and once after four years you say ah as per my register I need to have 50 chairs but I can see only 30 we haven't begun so they will say what's broken so when is the broken don't know so that is normally the happens with the businesses which does not maintain a fixed asset register they experience loss of value immediately like if you do a valuation today they will lose maybe 20% or 30% of their value immediately because they can't they cannot explain where the sets are gone okay and that components so if lesson you are buying a very big asset which is has a lot of components so you may be losing you may have a different components which has different life so we need to recognize is differently because if a scene you are buying a water treatment plant so what a treatment plan chamber have the motors have the pipes all our different value might be the plant will maybe can survive for two year three years or for five years my pain maybe can survive for ten years right or the motor can survive for another ten years so you cannot charge all at the same way jump all at the same life different so you need to cluster understand how the component works and then separate charge separately okay and the register we just discussed okay so normally how we identify which expense is going to be anti-de fixed assets or what is going to be an expense so there is a simple asset test we call it acid test when you see the future economic value is there by spending in more than one period of accounting that is the accounting definition if whatever you spend if you see the value of this company their spending is going to be last for more than a year it calls for fixes it but you may define by your own accounting policy based on your amount how much you want to recognize as a fixed asset or you want to charge immediately as an expense but the definition is there okay example research and development so if you let's say you are developing a product which normally the startups or the technology companies are doing all the time right you are doing a research and development which air which whenever you are doing developing a new product so how do you call it this research governor dynamic benefiting you in future you right so you want to capitalize it means make it a fixed asset or charge would have expensive mmediately it depends on the company policy and the results of research how likely the research is going to be successful if let's say the right if the research is curving successful then okay you can say the research is going to be successful I can charge future here but if the research is not likely to be successful then is a expense right immediate expense so normally when the big companies they do research and development if new product they normally start with expensing it out but whenever they see the possibility is there that okay he's going to get something else then they put it into a product development cost so normally they recognize as a product development cost in the initial initial time without charging to the profit and loss statement but as soon as they get near to the result and if they are sure is going to go as a product development if the product will be successful they capitalize everything if they see that the chances are very less now then it goes as an expense but here you are talking about judgment which is not standard right every company every company even every executive can have different judgment you change as he or change the general manager judgment will change correct patents trademark license you're going to recognize as an asset or fix asset patents means you can I use you made you pay today but you're going to use it tomorrow right so you're going to recognize as a fixer said most most of the time database consumer list let's say you spend $10,000 on a Facebook ad to generate a customer list will you recognize as a fixed asset or as a expense advertising expense no you will get a customer list let's say you spend $10,000 on Facebook ad which can generate you a customer base of 10,000 customers for startups or businesses nowadays customer customer list is a very important tool right because you can generate a lot of business by those customers so you're going to use this as a fixed asset or as expense as a realizing expense highly subjective right you can do both actually you can it depends on the startup if let's say they put as an expense they our profit and loss will it right immediately so their value will go down but if they put as asset this asset is maybe valued by another company as equally valued or not it depends right if you don't put into as fit P&L you have to pay a higher tax if you are profitable if you're not profitable doesn't matter if you're not profitable is better to put it into asset because at least you are building the asset value right but that's what most of the companies nowadays do like big companies uber or other companies they they spend a lot of money on promotions to build a customer database and they call it a try not as I pricing expense they call it mostly that okay some companies call it advertising expense revenue department come and say this is not capital this is not advising expenses because you are going to get the benefit of this customer in the future so for me it's a capital expense put it into capital and pay that X sum and the company is going to say this is my realizing but some companies who want to show a profit they will show this is my capital expense because the benefit will be in the future now this is the balance of my profit so if you want to stay profitable put it into fixed assets if you want to save the tax put into expense I am NOT the I am not telling you what to do it's your judgment okay but there are risks everywhere the revenue department can take different judgements source code if you let's say you buy a source code from somebody that's also a fixer side right because you're gonna use that for your product development the source code can be expensed or can be depending on how you want to use it okay so that is on the assets and depreciation then we come to inventory the difference between inventory and asset is the same the intention of use if intention of use is selling it becomes inventory okay use in production of goods and services so it's used in actual production for selling so it can be a raw material for your product it can be in progress means something in is it made in the progress or it can be finished goods and sold finished course so you can categorize normally in three parts the raw material which is not yet processed products which are in development and finished course thus service companies have fixed assets if let's say you are selling a consulting assignment you are doing a consulting do you have inventory what if you have a project which lasts for six months and you just got the product and maybe he's hot in the middle at the time of closing the financial statements you spend only three months you finish only three months but of the service is not complete yet so you will not get the money from the customer right but you spend three months salary on your staff so what will that happen you will recognize the income next year right when you complete a project but you recognize the expense today for three months so how you want to do it then three months expenses here three must expense in the future but six months of income in the future right so means you want to recognize these three months as inventory means as may be a cost of unsold services and put into next year profit and loss statement otherwise this your profit and loss statement is hit okay so service industries can have unfinished projects which on which you have been working on it but are not finished yet so you don't have an income recognition but you have expense already so you need to put that expensing the income in the year when you are servicing the income or the research work which you are doing for future projects so that also can be recognized as inventory but it's a highly depend on the company's policy okay these are just examples so thus you can have different policies but you need to have a policy you must you need to have observed whatever policy you want to follow you want to put into asset you want to put into inventory you want to put into an expense immediately but you need to have a policy for that why so that you can follow it here on a year and you can explain whenever somebody asks what is this so then you can explain how I am doing it and it depends on your objective and your individual condition do you want to stay profitable if you want to stay profitable don't show it as an expense right put into either expense or put it into inventory if you don't worry about profitability then you can decide however you want it okay so the costing is another in policy matter of inventory means how you value the inventory so what are the different values does do you know have you remember have you heard of it first in first up what is first in first out first in and first out so if let's say you buy two Apple the first Apple you buy at $10 now next Naida and you are not able to sell it in the market next day the price of Apple go up to $12 now you buy another Apple also right because you just want to buy so now you have two Apple one costs $10 another cost $12 on the day you sell one Apple you don't know what which one because you don't mark because the same happily doesn't matter which you buy it for $10 quite low right now you sell for 13 so how much profit you make three or two three or one because you buy for 12 also you buy for 10 all right so how much is your profit depend on your accounting policy right how you value your inventory so first in facade means the buy I bought one the latest at $10 right so that will go out first so means my profit will be thing but if I have another policy called last in first out means the latest one I bought will go first me so then what will be the profit now 13-12 one so same process everything remains the same the sale remains the same purchase remains the same the value is different the profit is different correct so you need to make a counting policy so accounting policy will affect your profitability another method is called weighted average so now I bought one amber light m1 Apple at 12 so what is the average cost 11 10 plus 12 divided by 2 so each Apple cost me 11 now so whenever I am selling at 30 I will say I will make one $2 profit right so which one is more preferable method first-in first-out yes but then in that case you are showing a very high if lessen the price are increasing of raw material you show higher profit in the current right but low profit in the future years because the cost is not adjusting out yet if the price are decreasing your profit your profit in the initial month will be low in the future one will be higher right and also but so what is the the better way for me the most easier way is weighted average whatever you bought you just weighted average you just continue to adjust the average especially when the item is not identifiable let's say you are buying apples this you cannot differentiate right but you can differentiate in other let's say you buy a laptop also the same but if but if you buy something which can be differentiated by when you buy it then you can specifically use first in first out or last in first out depends on you but if the if the items are not differentiable then you have to use weighted average you don't have a choice because otherwise you cannot follow the correct processing ok the weighted average cost takes care of your average cost and so the profitability will stay will sustain will remain the same over a period of time otherwise it will fluctuate and it's very difficult to explain okay so normally the nowadays the most of the companies follow a weighted average and the valuation that was only the how you charge inventory but how about the valuation so valuation normally is done at cost or net realizable value whatever is low so if you bought at 10 now the market price is only 8 so if you want to go and sell in the market you can get only $1 but actually you bought a 10 so your inventory will be valued at 10 or 8 it because that is the net realizable value okay the net reliable net realizable value minus the cost of sales if you have to sell if you have to go to the market spend another $1 to sell it so the net realizable value is 8 minus 1 not eight anymore so the salmon so that the value of your inventory is only seven because that is what you can realize okay so absolutely Midori what is absolute inventory the inventory which is not usable anymore maybe my Apple is rotten out already correct so means we have to continue to look at our inventory every month or every year and see is it still worthwhile or not it was not we have to charge it off okay the control point in inventory our monthly inventory taking we have to take in monthly and do the valuations all the time okay because specially for inventory the value can change the market prices can change right even for fixed assets or for the for your purchasing cause for the selling cost raw material whatever and match with the admitted records when you take the monthly monthly inventory same as fixed asset you have to make sure nothing is stolen by the customers oh by the employees okay and then also identify the consumption means let's say you have open you have 10 in the beginning right - in the - you sell so the balance should be 10 a panel should be 8 but and physically is okay but your sale record is showing only one but actually you you you deduct it - correct so what is the difference then rather one go maybe the stuff I did okay so means you need to match your - consumption with your actual sales record we just normally happens in especially in the consumer graphics like for example in hotels we make okay we because we cannot control the chef right he can eat while cooking correct no we cannot control him ie by him maybe 10 t-bones but we are we are selling only 8 the balance of the two is eaten by the chef in the kitchen and we don't have a CCTV so we don't know the only way we can know is we check how much he consumed and what did we sell if there is a difference means he consumed it or he wasted it maybe he not eat but while making he make a spoilage or he made didn't dinner was not tasty enough so he throw into the dust way but for company because you pay for 10 and we get income for 8 which is not a good idea right so even though the staff may be honest but they may be inefficient so it will help you to understand that it is there any inefficiency or not but for that you need to maintain a lot of Records and then identify what are going to be obsolete or slow moving items okay then normal the LA the next point is revenue nowadays specially for the startups which are selling bundled items so normally you will say ok now you maybe buy a subscription lifetime subscription on any website right lifetime subscription means you pay now $100 for lifetime access but the company has to do a lifetime service right they have to maintain the website they have to maintain the servers so does it mean they earn 100 now already or not no right they didn't read yet because they had to do the service in the future so normally the companies now especially with the new IFRS there is a new accounting standard previously before this the company was recording $100 as a revenue today but the cost will continue to come in the future years so revenue is here the experience is in the future years so you are not matching there a menu an expense correct so the new accounting standard requires company to split the revenue into current revenue and future promises so you have to estimate how much money you have to pay for future if let's say all hundred mostly maybe only 50 is for this year the rest of the 50 you need to pay for future so unit you can recognize 50 as this year income the balance of 50 will go in future two to offset the expenses in the future you buy a car the company gives you three here guarantee okay but they don't charge you anything right so that this guarantee is bundled into the car price correct so company may charge you $100,000 but and they are saying okay 90 thousand is for car value another 10,000 is the guarantee three years guarantee or four years guarantee which is free of cost for that company need to pay after three years up to three years right they still need to have a staff they still need to have maybe somebody if let's say your car is actually damaged they still need to pay for it correct so they come nowadays companies cannot recognize revenue upfront that today we receive one hundred thousand so we receive under thousand oh you have to split the revenue for future applications whatever you have to spend in future okay so normally the equipment can have like let's say for example you are buying equipment so you may have equipment you have an installation cost you have post sale services and you have material rights so let's say you charge contact price 14,000 the rest is all free installation is free service is free or there are some other benefits which are given out as a free so the previously recognized previously before this the company need to recognize 14,000 as income the rest all go as a cost because it's free okay now the new after the new accounting standard companies are required to split the revenue into okay 19,000 for equipment ten thousand thousand for installation 4800 for cell services and four thousand for other freebies so the revenue is recognized when the items either delivered or installed or when the actual future sale service is done or when the company has the person has claimed for the freebie discounts so the company need to split out every new we do need multiple parts so we will not go into this detail is gonna be very complicated for you the last thing is in revenue is segmentation so as I said segmentation means understanding where your revenue come from what are you who are your customers so how do you thing with the revenue base how we segment the customers is there any criteria amount of yeah you can say it like a pain capacity so one customer maybe a businessman for example I give you an example of hotel okay there are many customers who go on internet and by means they are paying a full price site there are customers who don't want to go internet and buy they want to go to a travel agent and pay so do you know the travel agent will pay you will pay the hotel maybe 20% or 30% of whatever you pray so we gave the margin of 30% to the travel agent but he will not sell you cheaper than the online rate even but for us as a hotel if you book directly we can hundred all our if you book the same room by a travel agent make it only 60 or 70 if you are a company we are sell we are not selling at the online rates we are selling at a different rate have a contract rate right if you buy 10 rooms in a buck you are paying us much lesser than if you pay or individually right so for us you are a different customer so we want to understand how our business is coming from our business coming directly our business coming from travel engines our business coming from the contract staff or our business coming in the course so the revenue segmentation is normally done in from the customer in the way of how we approach them how do we market so how they booked us how they come to us they can come us directly they came gun to us indirectly indirectly by our travel agent so our corporate companies by other companies right and the value proposition expected so means one customer may be require a suite and another customer may stay in a deluxe room one customer and we require business class in the aeroplane one customer is happy with the economic right the the one customer may buy a full service if you buy a ticket do you buy a ticket which is able to change the price or we just not able to change the price sorry it takes if you buy a ticket online now and you search which is fixed dates they will cost you very cheap because the dates are fixed but if you want to buy a flexible ticket you have to pay a higher amount right so they are new different these are the same person same ticket same plane that different customers are two different because of their paying capacity somebody want to buy very cheap somebody want to pay higher so the company the person who want to sell cheap company cannot have a different rates right they can they can have only one ring in the public so they differentiate the rates by giving different options okay if you want to buy cheaper no problem but you cannot change in the future if you want to buy expensive you can pay expensive okay pay full price right so it depends on the customer now and depends on their needs so you can also depend you can also segment your customers by charging different prices or offering different services how they want to pay so it depends on their willingness so that's why we can say willingness to pay for goods and services so these are the three criterias but you don't need to have multiple segments it doesn't mean that you will create 20 segments because you have 20 type of different customers you need to categorize them to a maximum of maybe six five to six segments maximum otherwise you have 1020 different segments means you need to have a 20 different focus on marketing and proposition right so which is not a good idea so you need to keep your segments between five to ten maximum not more than that otherwise it's too much details that you're marketing them or your your yourself are not able to focus upon okay okay that's the I think the last may be expense matching so how you expense the match the only thing is you need to expense match the expense when you are recognizing the income okay that is the important only important point in expense matching means whenever you are earning the income you need to recognize related expense you pay or you don't pay otherwise you defer your revenue to actual expenses whenever you need to make the expense okay okay the rest is not really important and didn't differentiate between your capital and operating expense and non operating expense okay operating expense and non operating expense are I explained to you that previously right you can have different operating expense means to justify different models different business model you're using and non operating expense are if you don't separate non operating expense means your interest your rental of the property where you are doing the business it doesn't affect your business performance you own the building or you rent a building is the same thing right but for my operating prospective as a business you need to know what is my operating profit so that you can compare with other businesses so you need to understand what what expenses are making an impact on business performance not on your profitability profitability yes if you pay the rent for this building you have to have a less income but from the operational perspective it doesn't matter you own the building or you write the building right is a different business model so you have to understand what is operating expense for me what is non operating expense for me so then you can understand is your business making enough operating income or not okay so large expenses does not mean that its capital some people they say oh I spend $100,000 is a variable a lot of amount to spend on profit and loss but amount does not qualify for capital expenses and intention and the usage okay yeah not yet the last cough Center I also don't know how what it what it is what else I put it here okay so cost Center accounting means you need to identify your significant departments or significant contributors of revenue and match the revenue and expenses to each profit Center okay for example maybe in a hotel where the money come from we have resale rooms we sell outlets we have spa we have transportation right so for us ever Department is a separate department separate profit center so we want to understand the profitability of each and every one separately so that we can shut down the one which is not profitable to maximize our business right in the initial in the beginning I gave you an example of ten different businesses maybe - I'm making loss eight are making profits so you may want to remove something with the one which I am making loss but you need to identify them first so there will be some cost which are common for example one CEO is managing all the businesses so how will you identify the business cannot right you cannot identify the time spent by the CEO on each and every business you are not recording the timesheet so there are certain cost which are common like brand building grant CEO experience but there are certain expenses which are which can be identified like specific marketing expense specific remaining specific cost of sales so at least if you know that you will know that come with the business or the profit centers operating capacity okay common expenses you cannot segregate if you not cannot said you can just keep them together which is not necessarily you have to put in two otherwise if let's say you say okay the CEO will be charged one tenth in every business in actually if the business one some business is very low income even though he is making money you will say this is not profitable anymore because after charging the salary of CEO in this profit this profit Center does not make any money so shut down that business which is not correct without charging the common expenses he is still making money right so it's contributing to the salary so you need to understand that what are the fixed and common expense and what are the specific expenses to the business okay okay control aspects of AR means you need to have a credit approval system for your business businesses can make credit sales so you need to know who are our customers and how we control you are not giving credit to every single body right not everybody who is going on it can come and say I want I will give me the money give me the services today we'll pay you tomorrow you think that person will come back tomorrow maybe not right so you need to have a control system credit approval system on-time billing and serialized so the billing need to go on time and it need to have a serial number to make sure that even your own staff are not cheating maybe they give you that maybe give Excel something and they took the money in cash and pocket it so as the owner you will not know right I have seen the cash collection controls cash collection frauds my company the the car the person who go out in the cash and collect the cash he can mess up your cash collections I have seen a fraud of up to like two million dollars somebody who did a fraud of two million dollars while only the cash collection so he is most no he was not even the highest position staff in finance where only the pill collector he go and collect the money and doesn't report to the company because the company didn't give him the sea lice controls and they don't ask him and so how the money because this customer is not paying right so how he does it he managed he take money from one customer and put into another one take money from this customer and say ok this person already collect so whoever is avoid you he had just the first but keep all the money with himself so he's not reporting the money to the company after a while he spent all the money so now the company lost two million dollars and finally the provision for bad that means once you review your customer you need to and understand who is going to pay us who is not or will not be able to pay so we need to recognize your expense finally earlier you recognize better for you right ok advances are similar means normally we don't look at it once we pay the advance normally there are you need to receive the services right but this is something which we normally don't do we don't know how many advanced we have given and the services or not because there is no register there is no control on the the aspects so you need to have like a advance register where you are recording how much money you are paying in advance to whoever and have you received the services which they were supposed to give or not and have it reviewed like every three months every six months to make sure nothing is spending for a very long period of time when I snore Mele start any new job I first go and check what are the pending advances being there so normally what I find is over for four years we paid the advance to certain company and we have not get the money or we are not getting the services so what does it mean you pay the advance the supplier go and you lost your money right so that normally happens in every business okay then what is working capital the money that you need for your day-to-day business right maybe your daily or monthly cash requirements amount that you need to make for purchasing the raw material so you need a lot of money to run the business right so normally you assessment you do based on either your cash flow how much money you need to spend on a daily basis to survive the business how much credit sale you need to do how much supplier you can get on credit what you can buy on credit but you cannot buy on credit right and how much inventory you need to keep in your stock all the time so that becomes your working capital so you need to estimate and make sure you have it all the time okay so normally you have a higher cash conversion cycle means you normally buy materials until it's sold it's called inventory days and once you collect from the selling until you connect the money is called receivable day total becomes operating cycle okay but you don't need to pay for your inventory all the time so that becomes payable days when - till the time you pay your suppliers so the balance is called cash conversion cycle so our objective in working capital management is to reduce this cash conversion cycle so how you can reduce it either try to sell faster if you not able to sell faster collect faster if you are not able to collect faster pay your supplier too late right if you pay your suppliers late you can manage your current cash conversion cycle to be the lowest otherwise you have to if you if you are payable you are paying too fast and you are collecting very late you need a lot of money to survive in your business right which is very difficult especially for a new company or which does not have enough capital okay so our objective is to minimize this cash conversion cycle so you need to identify first where the cash can will cycle kattappa what is the cash car will cycle what our components are we collecting are we selling too late are we collecting too late or we are paying too fast so either you sell faster you collect faster and you pay late then your cash canvas cycle is reduced you know what is the cash conversion cycle of Apple Apple Apple company apple night - - 60 days - means because they don't sell they fell very fast in advance mostly they don't sell or credit okay you have to pay the money in advance but they pay their supplier after 90 days so their cash can recycle is actually they they are actually getting financed from their suppliers they don't do that and most sometimes company can have a cash conversion cycle up to like 90 days means sometimes they take a long time to sell and if for example like Samsung has a higher cash conversion cycle why because Samsung made a lot of product this their product sells slower than Apple and they sell on credit also they sell to the dealers which pay them money later and they pay their suppliers comparatively faster than Apple so they are cached and they have a positive cash conversion cycle means they need money to run their business while on the other hand Apple they don't need money to run their business they run their business from the supply of money so they they they get the material first they pay them later but whatever they sell they can get the immediate cash so our our target is we have negative cash scandal cycle or at least the lowest possible okay the smaller it is smaller money you need to run the run your business okay this is the last one hundred percent last okay this is for tomorrow actually a precursor for tomorrow what we are going to learn tomorrow so tomorrow we gonna learn on financial analysis method now so far we learn how to draw the financial statements okay so if you get time which you will not get to draw financial statements you will maybe draw for next week so there are different method of furnaces financial analysis we do buy common size statements and we do trend analysis so here is an example of two different companies no sorry one company only Southwest Airlines so how we do it you can see that every year that revenue is different twenty one thousand twenty one thousand four hundred twenty thousand right but operating expenses are also different so how we will know the operating expense is growing or if you are spending more money is it good or bad so we normally do a common size statement means you everything you divide by 20 1965 so make everything equal two hundred dollars one two and three correct so then you can see now operating expense are continue to increase right in 2016 it was 76% 2017 it was 78 percent and 2018 it is seventy nine point nine percent which means even though the company's revenue is growing companies operating expense is growing faster then they are revenue that is why they are a beta percentage is dropping from 23 percent to 20 percent so what does it tell you it means the companies but this is called trend analysis also right every year we look at the trend similar number in the previous year so you can see more twenty three to twenty one to twenty so

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Fundamental Accounting Rules and Policies for small hotel business Owners
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