A bank reconciliation or bank reconciliation is a report used to check and explain the differences between the cash balance in a company’s accounting ledger and the bank statement balance. A bank reconciliation is also one of the main ways to prevent fraud and embezzlement of company funds. Here is how it works.
Explanation:
A bank reconciliation checks the accuracy of both records: the bank statement and the accounting records. Basically, a bank reconciliation has two columns: one for all the bank statement transactions and one for all the accounting record transactions. Each transaction is matched and checked off to see what checks are outstanding and what deposits are in transit. Once the bank statement balance is adjusted for deposits in transit and outstanding checks and the book balance is adjusted for bank account activity not recorded in the accounting system, the two adjusted balances should be equal. Here is what an example bank reconciliation looks like.
In a nutshell :
- A bank reconciliation statement summarizes banking and business activity, reconciling an entity’s bank account with its financial records
- . Bank reconciliation statements confirm that payments have been processed and cash collections have been deposited into a bank account.
Bad debt expense is a receivable that is no longer collectable, also called an uncollectible account. This can happen when a company allows a customer to put a purchase on credit. Just about every department stock and home improvement stock offers their own credit cards. This is kind of the same concept.
Explanation :
There are two methods available to recognize bad debts expenses . Using the direct write-off method, accounts are written off as they are directly identified as being uncollectible. This method is used in the United States for income tax purposes. However, while the direct write-off method records the precise figure for accounts that have been determined to be uncollectible, it fails to adhere to the matching principle used in accrual accounting and generally accepted accounting principles (GAAP).
Example:
The customer takes the inventory, charges the store credit card, and doesn’t actually pay for goods when he leaves the store. The company assumes that the customer will repay the balance on his store credit card, so the company makes an account receivable for the customer. After trying to collect the balance from the customer, the company realizes that they will never be repaid this money.
In a nutshell:
- Bad debt refers to loans or outstanding balances owed that are no longer deemed recoverable and must be written off.
- This expense is a cost of doing business with customers on credit, as there is always some default risk inherent with extending credit.
- To comply with the matching principle, bad debt expense must be estimated using the allowance method in the same period in which the sale occurs.
- There are two main ways to estimate an allowance for bad debts: the percentage sales method and the accounts receivable aging method.
- Bad debts can be written off on both business and individual tax returns.
The back office is the supporting department of the company that carries out administrative functions that assist client-facing positions in performing their responsibilities.
Explanation:
In general, the backoffice provides the required documentation and technical support to the front office to facilitate the course of work and the business transactions. People in the backoffice perform processing and data management tasks on projects handled by the front office such as keeping accounts, maintaining records, and checking regulatory compliance. In some companies, the backoffice is also specialized to the offering of accounting and finance services as well as settlements, clearances and IT services. Although the back office is not facing the customers, it is the backbone of the company as it handles several functions that are important for the best representation of the organization to the customers by the front office.
In a nutshell:
Backoffice means the admin employees who run the administrative side of the company.
A base rate is the interest rate that a central bank – such as the Bank of England or Federal Reserve – will charge commercial banks for loans. The base rate is also known as the bank rate or the base interest rate.
Explanation:
Base rate is decided in order to enhance transparency in the credit market and ensure that banks pass on the lower cost of funds to their customers. Loan pricing will be done by adding base rate and a suitable spread depending on the credit risk premium.
While commercial banks are free to set their own interest rates for borrowing, the rates that they charge on loans and offer on savings tend to be derived from the base rate.
This means that central banks can use base rates to encourage or discourage consumer spending,
Example:
A large company might be charged, say, an interest rate of base rate plus 2% on a loan, whereas a smaller borrower might be charged, say, base rate plus 4%. Formerly, base rates were linked directly to BANK RATE but are now fixed by reference to the ‘official’ rate of interest set by the MONETARY POLICY COMMITTEE of the Bank of England.
In a nutshell:
- Base rate is the minimum rate set by the Reserve Bank of India below which banks are not allowed to lend to its customers.
- Base rate is decided in order to enhance transparency in the credit market and ensure that banks pass on the lower cost of funds to their customers.
- Loan pricing will be done by adding base rate and a suitable spread depending on the credit risk premium.
Diplomacy is the skill or ability to deal with people effectively to achieve positive outcomes. The term mostly applies to the profession that manages international relations, mainly between countries’ representatives.
Explanation:
The world is generally connected through foreign relations among nations and diplomats are government representatives that deal with international affairs. Nevertheless, this term can also be used in any context where relationships need to be properly managed. Diplomacy is commonly understood like a peaceful, respectful and productive manner of conducting discussions around specific subjects, aiming to achieve some kind of beneficial agreement or resolution. Considering the other side’s opinions and beliefs as well as communicating self perspectives through non-aggressive manners, are key elements in diplomacy. In business, diplomacy is often useful and that is the reason why certain employees should learn how to apply diplomacy at workplaces. There are occasions when constructive, non-stressful debates are required between two parties in order to reach valuable results.
In a nutshell :
- It is a diplomacy that focuses on development of business between two countries.
- It aims at generating commercial gains in the form of trade and inward and outward investment by means of business and entrepreneurship promotion and facilitation activities in the host country.
- Commercial diplomacy is pursued with the goal of gaining economic stability, welfare, or competitive advantage.
Dunnage is material employed to protect a given cargo from damages that may occur during transportation. It is normally cheap or waste material that is employed to secure items being shipped.
Explanation :
Dunnage placement is basically a measure taken by shipping companies or shippers directly to prevent situations that might put in harm the items being transported. The dunnage is mostly made of plastic, wood or metal, normally recycled and cheap, since it will probably be disposed of after the shipment arrives. Some examples of dunnage are wood crates made out of wasted wood, shredded paper, plastic air bags or even structures made of metal that are designed to fill the voids between the structure of the vessel and the cargo, or the empty spaces inside the cargo container itself.
Importing companies, due to their experience in the field, might demand a particular dunnage to be used for certain items, because of its effectiveness. Also, disposability is an important element to be considered, since dunnage will be received by the importer and depending on its nature it might create difficulties to dispose of it properly. Some companies find ways to reuse dunnage and this might reduce handling costs in certain situations.
In a nutshell :
- Dunnage is inexpensive or waste material used to load and secure cargo during transportation;
- More loosely, it refers to miscellaneous baggage, brought along during travel.
- The term can also refer to low-priority cargo used to fill out transport capacity which would otherwise ship underweight.
Disposable income, sometimes called disposable personal income (DPI), is the total earnings a household makes that are available to save or spend after taxes have been paid. In other words, it’s a household’s take home pay after taxes and other employee deductions have been taken out of their paychecks.
Explanation :
Disposable personal income is the amount of money that you receive in your paycheck. This amount is net of any income taxes, payroll taxes, health care deductions, retirement savings deductions, and other items taken out of your paycheck like cafeteria plans. This is your take home pay that you can choose to spend or save. Economists look at this metric to gauge the health of an economy. As income levels rise, families are able to afford more goods than the necessities in life and can purchase products like TVs, video games, and snowmobiles. Rising incomes also allows families to save more money in case of a rainy day.
In a nutshell :
- Disposable income is net income. It’s the amount left over after taxes.
- Discretionary income is the amount of net income remaining after all necessities are covered.
- Economists monitor these numbers at a macro level to see how consumers save, spend, and borrow.
- Shelter, food, and debts are usually paid using disposable income.
- The government uses disposable income when deciding how much of a paycheck to seize for money owed in back taxes or child support.
Detection risk is the possibility that an auditor fails to identify material misstatements in the financial statements of a firm and determines that there are no omissions or material errors before the statements are issued even though there are mistakes present.
Explanation :
One of the most common mistakes that auditors make is to believe that a misstatement in a financial statement is trivial. This is true when examining the misstatements on an individual basis, but when accumulated, they may alter the result of the audit. Actually, the detection risk increases the audit risk at an above acceptable level, since the other two components of audit risk, inherent risk, and control risk, increase as a result of the business risk.
In a nutshell :
- Detection risk occurs when an auditor fails to identify a material misstatement in a company’s financial statements.
- There are three types of audit risk: detection risk, inherent risk, and control risk.
- Auditors must implement correct audit procedures to limit detection risk.
- A certain amount of detection risk will always exist, but the auditor’s goal is to lower the detection risk sufficiently for overall audit risk to maintain an acceptable level.
A decentralized government is a type of government that disperses power over a legislative body instead of maintaining power amongst a few individuals.
Explanation:
The main characteristic of a non centralized government is the existence of several smaller governing bodies, which are elected through voting and have the power to exercise political decision-making at a local level. Political decentralization seeks to address societal issues by handing the citizens increased power through an elected representative government. Depending on the country, political decentralization may pertain to constitutional or statutory reforms, the creation of local political unions or new political parties and so on. Moreover, in the case that a part of the legislative body becomes corrupted, the decentralized system can easily throw it out.
In a Nutshell :
- Decentralized finance, or DeFi, uses emerging technology to remove third parties in financial transactions.
- The components of DeFi are stablecoins, software, and hardware that enables the development of applications.
- The infrastructure for DeFi and its regulation are still under development and debate.
Demand deposit funds deposited in a bank account at a low or a zero interest rate, which allows depositors to directly withdraw their money and issue bank checks up to the limit of their account balance at any time.
Explanation :
Demand deposits can be on a checking or a savings account, and withdrawals can be made either from an ATM or from the bank’s cashier. Unlike term deposits, which require a predetermined period to pass by before allowing the depositor to make a withdrawal, demand deposits allow withdraws up to a certain daily limit. Usually, demand deposits make interest payments on a monthly, bi-annual or annual basis, and are mostly preferred by the banks as they incur the lower costs due to their low-interest rate. In some cases, i.e. capital controls, depositors can withdraw money from their demand deposits up to the specified withdrawal limit imposed by the government. In other cases, demand deposits may allow for an overdraft, and the account is converted into a liquidity account.
Example :
Company ABC is a commercial company that trades aluminum foils. The company keeps its funds in demand deposit accounts in a local bank. When a customer deposits money to any of the company’s accounts, the accountant can withdraw the funds and make timely payments for salaries, wages, and suppliers. Demand deposits have a low interest rate, but the company can withdraw funds whenever they need money to pay for supplies, office expenses, and so on. There are many ways a company can open a demand deposit. They can do so in the name of the company or in the name of its legal representative and the funds deposited can be managed only by the people who are mentioned as beneficiaries in the account. The transfer of funds to the accounts of suppliers can be made through a bank teller, an ATM, via the company debit card, through online banking and/or through a check. In all these cases, the company demands the bank to make a payment equal to the sum of money indicated to the payee identified.
In a nutshell :
- Demand deposit accounts allow funds to be withdrawn at any time from the financial institution.
- Demand deposits provide the money consumers need for cash and for daily expenses and purchases.
- Demand deposit accounts pay little or no interest—the trade-off for the funds being so readily available.
- Demand deposit accounts can have joint owners: Either owner may deposit or withdraw funds and sign checks without permission from the other.
- Demand deposit accounts contrast to time or term deposit accounts, in which the funds are locked up for a certain period, unavailable for access without penalty, if at all.
