Notes to financial statements are a part of Financial Statements. They go together for the readers to interpret the standing of the business. It is an explanation of how the financial statements are made. Moreover, the valuation, and how they arrive at the figures. In addition, the status of every account. Because the valuation of accounts includes contingencies, assumptions, maturities, and other events affecting the financial affairs.

What should be included in notes to financial statements?

The external auditor may include or exclude any of the stated below. It depends on how the audit is. Moreover, if the company is under due diligence, or with a special purpose audit. In addition, if the government agencies require other matters related to financial audits. The auditor has to add financial notes to the financial statements. These are the notes to financial statements, but not limited to the following:

• The period applicable to the notes
• Company Information
• Significant Accounting Policies
• Management Accounting Judgments and Estimates
• Financial Risk Management
• Details Per Account Titles
• Related Party Transactions
• Events After the Accounting Period
• Disclosures on Capital Adequacy
• Quantitative Indicators of Financial Performance
• Implications of Fortuitous Events on Business
• Reconciliations and Adjustments

The period applicable to the notes to financial statements

 It is important. Because it tells the reader what specific financial statements periods. Moreover, the date it is intended for use.

Company Information

The company information includes the name of the company and the address. In addition, what, when, and where it is registered for sole proprietor and partnership. What, when, and where it is incorporated if a corporation. It also includes the industry and the purpose of the business. It also includes the date. Moreover, released approval of the financial statements to the external auditor for audit purposes.

Significant Accounting Policies

This includes a summary of more significant policies and practices. Policies – the company set forth in facilitating financials. Moreover, in understanding the data in the financial statements. This note includes:

1.)Basis of preparation of notes to financial statements

The basis is the Financial Reporting Standards (PFRS). PFRS adopted by the Financial Reporting Standards Council (FRSC) from the pronouncements issued by the International Accounting Standards Board. And approved by the Philippine Board of Accountancy. The basis of preparation example is the going concern principle. It contemplates the realization of assets and settlement of liabilities in the normal course of business.

2.) Currency of Presentation

It is for some big companies that transact in multicurrency. The uniformity of currency is important factor. This is to prevent misleading financials. The accounts with foreign currency are converted at the time the financial statements were prepared. Others convert it on an average basis

3.) Presentation of Financial Statements

this explains the order of the financial statements. For instance, the financials are based on liquidity order. This note also includes the analysis of accounts within 12 months after the reporting date (current) and more than 12 months after the reporting date (non-current).

4.) Changes in Accounting Policies and Disclosures

Changes in accounting policies and disclosures are discuss in the notes. This note states the changes in the PFRS or Philippine Accounting Standards (PAS). It will also explain if the changes in the accounting policies have any significant impact on the financial position or performance of the company or not.

5.) Fair Value Measurement

Fair value is the price to sell an asset. Otherwise paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction is to sell the asset. Otherwise transfer the liability takes place either: a.) in the principal market for the asset or liability, or b.) in the absence of a principal market, in the most advantageous market for the asset or liability. The principal or the most advantageous market must be accessible to the company.

The fair value of an asset or a liability is in the assumptions that market participants would use when pricing the asset or liability. This is assuming that market participants act in their economic best interest. If the asset or liability measured at fair value has a bid and ask price. This is the price acceptable to the creditors or market.

6.) Classification, Measurement, and Reclassification of Financial Assets and Liabilities

Financial assets are classified, at initial recognition, then measured at amortized cost, FVTOCI, and FVTPL. The classification and measurement depend on the financial asset’s contractual cash flow characteristics. Moreover, the company’s business model for managing them. The basis of classification and measurement is under PFRS 9 or IFRS 9. Accounting Standards are subject to change. The auditor must refer to the updated PFRS or IFRS when preparing financial statements. The International Financial Reporting Standards (IFRS) adopted in the Philippines. The changes that the IFRS will make are the same as the Philippine Standards.

Reclassification of financial assets is applicable if the objective of its business model for managing those financial assets changes. The change in the objective of the company’s business model must be effected before the reclassification date. The reclassification date is the beginning of the next reporting period following the change in the business model. The classification, measurement, and reclassification of accounts in the financial statements are detailed individually.

Significant Accounting Policies

The preparation of financial statements following PFRS requires the management to make judgments. Moreover, estimates that affect the reported amounts of financial accounts and disclosures of contingent accounts at the reporting date. Examples of judgment are the estimated useful life, estimated allowance, and others assumptions.

Financial Risk Management

The notes include financial risk management because taking the risk is core to the financial business. But some risks are inevitable like operational risks. The company will write all these risks in the notes including the control measures. In addition, the policies, commitments, and regulatory frameworks.

Details Per Account Titles

The details per account are important factor. The comparison of the previous year to the current year is written in the notes per accounts. It also includes earnings per share/book value per share of the corporation. Moreover, taxes if there are changes. The changes will affect the following reporting period.

Related Party Transactions

Related party relationship exists when one party can control, directly, or indirectly through one or more intermediaries. The other party may exercise significant influence over the other party in making financial and operating decisions. Related parties involved are also in the notes to financial position.

Events After the Reporting Period

The company will write in the notes the events that will occur after the date of the financial statements. Especially the one that will affect the financial affairs of the business.

Disclosures on Capital Adequacy

It is also a part of the notes. The explanation of capital adequacy computation. It will also show the possible results of the company’s future decisions that will affect the adequacy of capital. The plans should be congruent to capital adequacy. The capital should be sustainable and other matters.

Quantitative Indicators of Financial Performance 

These are the amounts or rates. The written note could be the amount or rate of income and expense. Debt to equity ratio. The ratio will depend on what industry of the business. The significance to the business industry will be the key indicator of financial performance.

Implications of Fortuitous Events on Business

The notes will state the effect of the fortuitous events in the business. For instance, the covid19 fortuitous event. The notes explain in detail the effect as well as the impact of the events on the business. It will also state the possibilities if the events will take longer. Moreover, the adjustments if there will be a relief or loss. 

Reconciliations and Adjustments

This is the last part. The action made or action the company will make with regards to all the stated above. Reconciliation of accounts such as due from banks, accounts receivables, accounts receivables, and other reconciling items in an account. It includes the adjustments last year. Moreover, and the adjustments in the current year.

How to use the Notes to Financial Statements?

The notes to financial statements have a reference, footnote etcetera. Follow the reference, guidelines, or footnotes written in the notes in using the notes to financial statements. Otherwise, it is arranged based on how useful the notes are. For notes to accounts, it is arranged based on liquidity.

Are notes to Financial Statements a part of Financial Statements?

Yes, it is a part of Financial Statements. Some financial statements presentations present the notes as separate financial statements. The notes are essential in reading the balance sheet. That’s why most preparers input notes to financial statements as a part of the balance sheet.

Are Notes to Financial Statements required by GAAP?

Yes, GAAP requires additional information to the financial statements. It is a part of the financial statement. It is there so that the readers understand the content of the financial statements. Here are some reasons why it is required. The measurement – the readers should understand how the record arrives at the figures in the financial statements. What are the computations, basis, guidelines used etcetera? Another reason is to assess the status and standing of financial statements with regard to the market. Moreover, fair value is observance in the market. Notes to financial position – used in decision-making purposes.

Related Blog: Accounting Best Practice and GAAP Compliance; Bookkeeping Services

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How to improve budgeting and forecasting is an important factor in company success. Successful companies are mostly determined by net income. Correct budgeting and forecasting will give the company the desired net income or even more. Failure to do so will result in low income or a net loss. Knowing the future expenses will hint at how much income is needed. When income is met then the budget will be paid. Moreover, the company will get the desired net income. That is why companies are constantly searching for ways to improve budgeting and forecasting.

Guide on How to Improve Budgeting and Forecasting

How to improve budgeting?

1.) Spending should be within the budget

Companies should spend within the budget. This means monitoring cash advances. Controlling the cash advances will give good track of expenses. Companies usually establish a cash advances protocol. The procedure is all expenses should undergo cash advances. Then, propose cash advances will go to the budgeting department for endorsement. After that, the endorsed cash advance will be approved by the approving authority. On the other hand, the unendorsed cash advance is returned to the origin. The unendorsed cash advance could be amended as needed. It should have a note or supporting documents for it to endorse and approved. Otherwise, it will not proceed.

The cash advance protocol usually gives the company the desired budgeting results. Because, before spending it was already checked by the budgeting department. What the budgeting department does in case of amended cash advances (much-needed expense) is make adjustments. They make adjustments on the proposed cash advance (expense) as needed. They look for unused budget or over budget accounts. Then, they amend the budget by subtracting an amount to over budget and add it to the under budget accounts. Finally, update the new budget. This will still give the desired budget because the amount set for expenses is still within the budget. The only change is the set budget per account but the total amount remains the same.

2.) Unexpected Increase in Expense Needs an Increase in Income

Failure to control cash advances will lead to overspending (out of budget). In effect, it will have an increase in expenses. This happens at times the company needs to adopt the market changes. For instance, fortuitous events like a pandemic. Pandemic makes businesses go online. Adopting the new norm will cost the company. These unexpected expenses will increase the set budget. Given the scenario, the company should update the budget together with the gross income. Because that is the main purpose of budgeting, to get the desired net income or more. Now, overspending the budget means reducing the net income.

Getting the desired net income despite an expense increase is a gross income increase. Otherwise, cost-cutting. Companies should think of ways to increase income to overcome the out-of-budget. They may look for new opportunities that the pandemic creates. The company might add more products or services. Otherwise, pivotal. This is the remedy to keep the desired net income. In this case, cost-cutting is not applicable. Cost-cutting isn’t congruent to digitization. If this is the approach it may lead to poor performance. Sometimes unexpected expenses will give a hint on how to increase income. For instance, digitization. Since it cost more to the company, then, the company should use digitization as marketing. Marketing in the sense of widening the scope of customers using online.

3.) Make a comparison of Actual Data and Budget

The comparison of actual data and budget helps the company in decision-making. Comparison will give insights about how far or how close the projected expenses (budget) are to actual expenses. A comparison could be every month. Others do it semi-monthly to assess if there’s a need for an adjustment. Moreover, relax and/or cost-cutting to arrive at a monthly budget. Comparisons signal the company if they are walking on their budget or they are over or underspending.

 For instance, the output of low income. Reasons might be the marketing budget is unused due to some changes in the platform procedures. As a result, the income is low. Then, the company might concentrate on how to spend the marketing budget to increase income. They might engage on other platforms that could provide good results. Another reason might be overspending on marketing expenses but provides poor results. Some companies spend more on marketing yet get terrible results. Given the actual data, the company can assess the expenses. If the spend is effective or needs to be cut. On the other hand, if the spending is effective that needs to double down. Actual to budget comparison gives an idea. Ideas on what budget to set in the future years based on data and plans.

Additional Information:

A 5-year actual expenses and budget comparison guides the company on the next moves. Because it provides an output of the company’s previous decision-making. For instance, if the budget fails in 5-year time. Then this means that strategic planning is failing. Moreover, operations are failing, plans aren’t executed, or wrong planning. Because the budget is based on plans. If it fails, here are the possible reasons: budget isn’t met because strategic planning isn’t effective. Strategic planning isn’t executed because operations are not following. On the other hand, if operations and strategies are done and followed yet provide poor results then data implies wrong plans made. The reasons for failures are rotating to those factors. Given the comparison, the company can identify where to exert effort to succeed.

How to improve Forecasting?

1.) Use previous years data in the forecasting

There must be reference data in forecasting the future. Because previous years’ data are certain. Forecasting using certain data will provide close to real data. Previous data gives trends to the company’s performance. Previous data provides the lowest and highest values per account. Given the range, the company can forecast future data by simply formulating values based on range. The company might use the range. Otherwise, averaging depending on the data relevance.

2.) Align the forecasting based on plans

Some company fails with this. They make forecasts merely on previous data. If the company has more proposed projects than previous years then there must be an additional amount to the budget forecast. Vast plans cost additional expenses. The company should add a certain percentage based on how big or small the plans (projects) are. Aligning the forecast will also give an idea of how much effort will be added or needed to compensate for the forecast.

Otherwise, it will become useless because the forecast isn’t compensated. Because plans give insights into how much amount and/or effort is required. Failure to align these factors will result in a wrong forecast. And, eventually net loss. The purpose of forecasting is to have an idea of the future. It might not be accurate but it gives a picture of what the future looks like. And it is a good start and a good guide instead of operating from scratch. 

3.) Update Forecast Depending on Strategic Plan

Update the forecast from time to time depending on the strategy made. It may be monthly. It is like checking the accomplishment of the proposed strategies. Failure to execute the proposed strategy affects the forecasting. Because the forecasting is based on the assumption of executed strategic plans. For instance, if there’s a change in strategy then there must be a change in the forecast too. It depends if the strategy made is effective then the forecast will advance or enhance. On the other hand, the forecast may reduce the previous data.

If the strategies will give negative results the company should change strategy together with the forecast. On the other hand, if strategies are effective then the company will double down. Even though no strategy is done at all, the company still has to update the forecast because whatever is done there’s an effect to the forecast. That’s why there’s a need to update forecasts from time to time to become reliable or else it will be irrelevant. 

Conclusion:

Budget and forecast have an interrelation. How to improve budgeting and forecasting is based on plans. Moreover, budget and forecast updates from time to time. Strategies, operations, and plans are the rotating reasons for budget and forecast failure. Actual budget and forecast give insights in making a budget and forecast in the future. It also provides relevant results to the company’s previous decision-making. These are the guide to improve budgeting and forecasting to get good results.

Related blog: Bookkeeping Services

Do you need help?

For individual budgeting and forecasting, see Dave Ramsey Channel

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Rule of Debit:

• Increase in Asset
• Decrease in Liability
• Decrease in Capital
• Decrease in Income
• Increase in Expense

Rule of Credit:

• Decrease in Asset
• Increase in Liability
• Increase in Capital
• Increase in Income
• Decrease in Expense

What is double-entry accounting?

Double-entry accounting is a system used to record transactions, it composes of date of transaction, particulars or description, amount and account title, the account title has left side and right side, the term is called debit (right side of account) and credit (left side of account). Equal debits and credits are made in the account for each transaction thus the total debits should always equal the total credits so that the accounting equation will always stay in balance.

Accounting equation is Asset = Liabilities + Capital

Every account classification has a normal balance

For example,

1. The normal balance of asset account is debit side thus a debit in asset is an increase in asset while a credit in asset is a decrease in asset.
2. Normal balance of liability account is credit side thus a credit in liability is an increase in liability while a debit in liability is a decrease in liability.
3. Capital account normal balance is credit side thus a credit in capital is an increase in capital while a debit in capital is a decrease in capital.
4. Income account normal balance is credit side thus a credit in income is an increase in income while a debit in income is a decrease in income
5. Expense account normal balance is debit side thus a debit in expense is an increase in expense while a credit in expense is a decrease in expense.

What is double-entry accounting example?

    Example:

1. Company A started a Xerox business, invested P200,000 on April 1, 2021.

Note: The double-entry accounting should be one debit entry and one credit entry.

DEBIT ENTRY:

ACCOUNT TITLE: CASH

DEBIT ENTRY:

ACCOUNT TITLE: CAPITAL

Others simply record it this way,

4/1/2021          Cash    P200,000

4/1/2021                     Capital             P200,000

Description: To record cash investment for Xerox business

Note: The capital account is indented to specify that it is a credit entry. Others record transactions with Journal entry numbers and Ledger numbers for filing and audit purposes.

2.) Company A bought 2 Xerox machines for P76,000, 50 reams of a short coupon bond, and 50 reams of long coupon bond for P28,700 on April 2, 2021

DEBIT ENTRY:

ACCOUNT TITLE: XEROX MACHINE

DEBIT ENTRY:

ACCOUNT TITLE: STATIONERY AND SUPPLIES

CREDIT ENTRY:

ACCOUNT TITLE: CASH

Others simply record it this way,

4/2/2021                     Xerox machine                        P76,000

                                    Stationery and Supplies          P28,700

4/2/2021                                                         Cash                                        P104,700

Description: To record purchase of Xerox machine, 50 reams short coupon bond and 50 reams long coupon bond.

Note: Notice that the second example has two debit entries, it is because Company A bought two things (two asset accounts) one for the equipment which is the Xerox machine and the second one is the supplies which is the coupon bond both an asset account with a normal balance of debit.

3.) Company A receives P2,000 from a customer for photocopies with a cost of P1,500 on April 3, 2021.

DEBIT ENTRY:

ACCOUNT TITLE: CASH

CREDIT ENTRY:

ACCOUNT TITLE: INCOME

CREDIT ENTRY:

ACCOUNT TITLE: STATIONERY AND SUPPLIES

Others simply record it this way,

4/3/2021                     Cash                P2,000

4/3/2021                                 Stationery and Supplies          P1,500

                                                Income                                    P500

Description: To record cost of coupon bond paper used and income from a photocopy

Note: Notice the third example has two credit entry, it is because the payment of photocopy consists of a cost which is the cost of coupon bond use (and another minimal cost like ink and electricity to run the machine to perform the photocopying, but since it is minimal or immaterial in amount based on the nature of the business, it could be capitalized and included as one account which is the stationery supplies account) and the remaining amount will be accounted as income

Related blog: Bookkeeping Services

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