Forensic accounting

Forensic accounting is the specialty practice area of accountancy that describes engagements that result from actual or anticipated disputes or litigation. "Forensic" means "suitable for use in a court of law", and it is to that standard and potential outcome that forensic accountants generally have to work. Forensic accountants, also referred to as forensic auditors or investigative auditors, often have to give expert evidence at the eventual trial.[1] All of the larger accounting firms, as well as many medium-sized and boutique firms, have specialist forensic accounting departments. Within these groups, there may be further sub-specializations: some forensic accountants may, for example, just specialize in insurance claims, personal injury claims, fraud, construction,[2] or royalty audits.[3] Engagements relating to civil disputes may fall into several categories: calculating and quantifying losses and economic damages, whether suffered through tort or breach of contract; disagreements relating to company acquisitionsperhaps earn outs or breaches of warranties; and business valuation. Forensic accountants often assist in professional negligence claims where they are assessing and commenting on the work of other professionals. Forensic accountants are also engaged in marital and family law of analyzing lifestyle for spousal support purposes, determining income available for child support and equitable distribution. Engagements relating to criminal matters typically arise in the aftermath of fraud. They frequently involve the assessment of accounting systems and accounts presentationin essence assessing if the numbers reflect reality. Some forensic accountants specialize in forensic analytics which is the procurement and analysis of electronic data to reconstruct, detect, or otherwise support a claim of financial fraud. The main steps in forensic analytics are (a) data collection, (b) data preparation, (c) data analysis, and (d) reporting. For example, forensic analytics may be used to review an employee's purchasing card activity to assess whether any of the purchases were diverted or divertible for personal use.
The General Ledger

The general ledger is a collection of the firm's accounts. While the general journal is organized as a chronological record of transactions, the ledger is organized by account. In casual use the accounts of the general ledger often take the form of simple two-column Taccounts. In the formal records of the company they may contain a third or fourth column to display the account balance after each posting.

To illustrate the posting of transactions in the general ledger, consider the following transactions taken from the example on general journal entries: Date 9/1 Account Names Cash Capital Bike parts Accounts payable Expenses Cash Cash Accounts Receivable Revenue Expenses Bike parts Cash Accounts receivable Accounts payable Cash Debit 7500 Credit 7500 2500 2500 1000 1000 400 700 1100 275 275 425 425 500 500

9/8

9/15

9/17

9/18

9/25

9/28

The above journal entries affect a total of seven different accounts and would be posted to the T-accounts of the general ledger as follows:
General Ledger

(T-Accounts) Cash 7500 Sep 15 400 28 425 Bike Parts 2500Sep 18 Accounts Receivable Sep 17 700Sep 25 425

Sep

1 17 25

1000 500

Sep 8

275

Accounts Payable Sep 28 500Sep 8 2500

Capital Sep 1

7500

Revenue Sep 17

1100

Expenses Sep 15 1000 Sep 18 275

Note the direct mapping between the journal entries and the ledger postings. While this posting of journalized transactions in the general ledger at first may appear to be redundant since the transactions already are recorded in the general journal, the general ledger serves an important function: it allows one to view the activity and balance of each account at a glance. Because the posting to the ledger is simply a rearrangement of information requiring no additional decisions, it easily is performed by accounting software, either when the journal entry is made or as a batch process, for example, at the end of the day or week. Finally, while such T-accounts are handy for informal use, in practice a three-column or four-column account may be used to show the running account balance, and in the case of a four column account, whether that balance is a net debit or credit. Additionally, reference numbers may be used so that each posting can be traced back to its original journal entry.
Revenue Expenditure

Definition: A revenue expenditure is a cost that you charge to expense as soon as you incur it. By doing so, you are using the matching principle to link the expense incurred to revenues generated in the same accounting period. There are two types of revenue expenditure:

Maintaining a revenue generating asset. This includes repair and maintenance expenses, because they are incurred to support current operations, and do not extend the life of an asset or improve it. Generating revenue. This is all day-to-day expenses needed to operate a business, such as sales, rent, office supplies, and utilities.

Capital expenditures (CAPEX or capex) are expenditures creating future benefits. A capital expenditure is incurred when a business spends money either to buy fixed assets or to add to the value of an existing fixed asset with a useful life extending beyond the taxable year. CAPEX is used by a company to acquire or upgrade physical assets such as equipment, property, or industrial buildings[1]. In the case when a capital expenditure constitutes a major financial decision for a company, the expenditure must be formalized at an annual shareholders meeting or a special meeting of the Board of Directors. In accounting, a capital expenditure is added to an asset account ("capitalized"), thus increasing the asset's basis (the cost or value of an asset adjusted for tax purposes). CAPEX

is commonly found on the cash flow statement under "Investment in Plant Property and Equipment" or something similar in the Investing subsection. For tax purposes, CAPEX is a cost which cannot be deducted in the year in which it is paid or incurred and must be capitalized. The general rule is that if the acquired property's useful life is longer than the taxable year, then the cost must be capitalized. The capital expenditure costs are then amortized or depreciated over the life of the asset in question. Further to the above, CAPEX creates or adds basis to the asset or property, which once adjusted, will determine tax liability in the event of sale or transfer. In the US, Internal Revenue Code 263 and 263A deal extensively with capitalization requirements and exceptions.[2] Included in capital expenditures are amounts spent on: 1. 2. 3. 4. 5. 6. acquiring fixed, and in some cases, intangible assets repairing an existing asset so as to improve its useful life upgrading an existing asset if its results in a superior fixture preparing an asset to be used in business restoring property or adapting it to a new or different use starting or acquiring a new business

An ongoing question for the accounting of any company is whether certain expenses should be capitalized or expensed. Costs which are expensed in a particular month simply appear on the financial statement as a cost incurred that month. Costs that are capitalized, however, are amortized over multiple years. Capitalized expenditures show up on the balance sheet. Most ordinary business expenses are clearly either expensable or capitalizable, but some expenses could be treated either way, according to the preference of the company. Capitalized interest if applicable is also spread out over the life of the asset. The counterpart of capital expenditure is operational expenditure ("OpEx"). Depreciation refers to two very different but related concepts:
1. 2.

the decrease in value of assets (fair value depreciation), and the allocation of the cost of assets to periods in which the assets are used (depreciation with the matching principle).

The former affects values of businesses and entities. The latter affects net income. Generally the cost is allocated, as depreciation expense, among the periods in which the asset is expected to be used. Such expense is recognized by businesses for financial reporting and tax purposes. Methods of computing depreciation may vary by asset for the same business. Methods and lives may be specified in accounting and/or tax rules in a country. Several standard methods of computing depreciation expense may be used, including fixed percentage, straight line, and declining balance methods. Depreciation expense generally begins when the asset is placed in service. Example: a depreciation expense of 100 per year for 5 years may be recognized for an asset costing 500.

In economics, depreciation is the gradual decrease in the economic value of the capital stock of a firm, nation or other entity, either through physical depreciation, obsolescence or changes in the demand for the services of the capital in question. If capital stock is C0 at the beginning of a period, investment is I and depreciation D, the capital stock at the end of the period, C1, is C0 + I D. Amortization (or amortisation) is the process of decreasing, or accounting for, an amount over a period. The word comes from Middle English amortisen to kill, alienate in mortmain, from Anglo-French amorteser, alteration of amortir, from Vulgar Latin admortire to kill, from Latin ad- + mort-, mors death. When used in the context of a home purchase, amortization is the process by which your loan principal decreases over the life of your loan. With each mortgage payment that you make, a portion of your payment is applied towards reducing your principal and another portion of your payment is applied towards paying the interest on the loan. An amortization table shows this ratio of principal and interest and demonstrates how your loan's principal amount decreases over time. Amortization is generally known as depreciation of intangible assets of a firm.
[edit] Applications of amortization

Amortization (business), the allocation of a lump sum amount to different time periods, particularly for loans and other forms of finance, including related interest or other finance charges.

o o

Amortization schedule, a table detailing each periodic payment on a loan (typically a mortgage), as generated by an amortization calculator. Negative amortization, an amortization schedule where the loan amount actually increases through not paying the full interest

Amortized analysis, analyzing the execution cost of algorithms over a sequence of operations. Amortization of capital expenditures of certain assets under accounting rules, particularly intangible assets, in a manner analogous to depreciation. Amortizing loan Amortization (tax law)

Amortization is also used in the context of zoning regulations and describes the time in which a property owner has to conform or relocate when the property's use constitutes a preexisting nonconforming use under amended zoning regulations.

Depletion (accounting)
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Depletion is an accounting concept used most often in mining, timber, petroleum, or other similar industries. The depletion deduction allows an owner or operator to account for the reduction of a product's reserves. Depletion is similar to depreciation in that, it is a cost recovery system for accounting and tax reporting. For tax purposes, there are two types of depletion; cost depletion and percentage depletion.

For mineral property, you generally must use the method that gives you the larger deduction. For standing timber, you must use cost depletion.[1] According to the IRS Newswire,[2] over 50 percent of oil and gas extraction businesses use cost depletion to figure their depletion deduction. Mineral property includes oil and gas wells, mines, and other natural deposits (including geothermal deposits). For this purpose, the term property means each separate interest businesses own in each mineral deposit in each separate tract or parcel of land. Businesses can treat two or more separate interests as one property or as separate properties.
[edit] Types of depletion

Depletion, for United States tax purposes, (and accounting purposes) is a method of recording the gradual expense or use of natural resources over time. Depletion is the using up of natural resources by mining, quarrying, drilling, or felling.

Percentage depletion To figure percentage depletion, you multiply a certain percentage, specified for each mineral, by your gross income from the property during the tax year. The rates to be used and other conditions and qualifications for oil and gas wells are discussed later under Independent Producers and Royalty Owners and under Natural Gas Wells. Rates and other rules for percentage depletion of other specific minerals are found later in [1] Mines and Geothermal Deposits.

Cost depletion Cost depletion is an accounting method by which costs of natural resources are allocated to depletion over the period that make up the life of the asset. Cost depletion is computed by (1) estimating the total quantity of mineral or other resources acquired and (2) assigning a proportionate amount of the total resource cost to the quantity extracted in the period. For example, Big Texas Oil, Co. discovers a large reserve of oil. The company has estimated the oil well will produce 200,000 barrels of oil. The company invests $100,000 to extract the oil, and they extract 10,000 barrels the first year. Therefore, the depletion deduction is $5,000 ($100,000 X 10,000/200,000).

Cost Depletion for Federal Tax Purposes (USA) is as follows:

Cost Depletion - Deduction for Basis in the Mineral Property in Relation to the Production and Sale of Minerals Cost Depletion for tax purposes may be completely different than for accounting purposes. Formula: Cost Depletion = S/(R+S) AB or AB/(R+S) S = Cost Depletion S = Units sold in the current year R = Reserves on hand at the end of the current year AB = Adjusted basis of the property at the end of the current year CD = Cost Depletion Cost Depletion = S/R+S AB, OR AB/R+S S = Cost Depletion

Notes for above Cost Depletion for Tax: a. Adjusted basis is basis at end of year adjusted for prior years's depletion either cost or percentage. This automatically allows for adjustments to the basis during the taxable year. b. By using the units remaining at the end of the year, adjustment automatically allows for revised estimates of the reserves. c. Depletion is based upon sales and not production. Units are considered sold in the year the proceeds are taxable under the taxpayer's accounting method. d. Reserves generally include proven developed reserves and "probable" or "prospective" reserves where there is reasonable evidence to have believed that such quantities existed at that time. Example of Cost Depletion: Producer X has capitalized costs on Property A of $40,000, originally consisting of the lease bonus, capitalized exploration costs, and some capitalized carrying costs. The lease has been producing for several years and during this time, X has claimed $10,000 of allowable depletion. In 2009, X's share of production sold was 40,000 barrels and an engineer's report indicated that 160,000 barrels could be recovered after December 31, 2009. The calculation of cost depletion for this lease is as follows: Again the formula Cost depletion = S/(R+S) AB or AB/(R+S) S CD = 40,000/(40,000 + 160,000) ($40,000 $10,000)
= 40,000/200,000 = $6,000 $30,000