Business Expenses

The general deduction test is provided in S 33(1) of the ITA

Business expenses has to fulfill all the following conditions in order to secure a deduction from the gross income of a business source:

1. each business source has to be accounted separately;
2. the scope of expense refers to 'outgoing and expenses';
3. the expenses have to be 'wholly and exclusively';
4. incurred;
5. in the production of gross income from that business source.

MASB 4 - Research & Development Cost

INTRODUCTION

For a transaction to be treated as an asset, it must fulfill the criteria prescribed by the MASB Framework, that is: " It must represent a resources that is controlled by the entity as a result of past events and from which  future economic benefits are expected to flow to the entity and the transaction can be measured reliably" .

Assets are classified as either non-current or current assets, and tangible or intangible assets. Intangible assets are assets that do not have physical substance but are capable of bringing future economic benefits to the enterprise. Intangible assets like computer software, software development costs are definitely able to generate economic benefit for the enterprise; especially if the software is saleable in an active market.

Many technology-based enteprises are involved in developing or purchasing assets that contribute significantly to their operations but do not have physical substance. They carry out extensive research and development work either on their existing products and process, or in the hope of creating new and better products or process. Invariably, the accounting issue arises as to whether these research and development costs qualify to be treated as an asset and can therefore be capitalised, or should they be expensed off to the Income Statement as and when they are incurred

SCOPE

Enterprise who will ultimately bear the risks and reap the rewards from the research and development activities shall apply MASB 4. Enterprises who is appointed to carry out research and development shall accounts for the costs in accordande with MASB 2 or MASB 7 Contruction Contracts.

To be continue......

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Malaysia Public Holidays 2011 - One Stop Malaysia

Test of Details of Balances

The test of details of balances are performed based on a number of sub objectives :

a. Existence - the aim here is to ascertain that the account being tested consists of items which really exist, for example, all the items which are recorded in inventory do not include items that do not exist and or the credit sales only contain items that have incurred.

b. Completeness - here the auditor wants to ascertain that no items are left out.

c. Accuracy - the aim here is to ascertain that every item in the account is correctly recorded, that is, there are no misstatements.

d. Classification- the aim is to ascertain that every item in the account is correctly classified in the ledger, for example, trade debts payable within one year or one accounting period, are classified as a current asset in accounts receivable. Those payable outside the period is classified as a long term asset.

e. Cut-off- here, the auditor aims at ascertaining that the transactions are recorded in the correct period. For example, the sales for the current period as recorded as such and not included as the sales in the next period. Special attention should be paid to transactions that occur near the balance sheet date.

f. Detail tie-in- the aim here is, the auditor wants to ensure the balances in the general ledger and the subsidiary ledger are reconciled. for example, for accounts receivable, the auditor ascertains that the balance of the account in the general ledger is the same as the total of the debtors in the subsidiary ledger.

g. Net Realizable value- Here the auditor wants to ascertain that the item being examined is shown at net realisable value. for example, for accounts receivable, the balance shown should only consist of those that are collectible, that is , after deducting the allowance for bad debts.


h. Right and Obligation- This relates to assets and liabilities. All assets shown in the financial statements, should only consist of those where the client has the right to them. All liabilities should consist only of those that are the obligations of the client.

i. Presentation and Disclosure- this means all accounts are properly classified and described in the financial statements. For example, accounts receivable should be placed under current assets and should be described as such not as note receivable.

Commencement of Business

It is important to set a date for the commencement of a business. Only after a commencement date has been established can overhead expenses, such as salaries, electricity, water, telephone and rental charges, be tax deductible.

Commencement of business is a question of fact which can be decided by reference to the commencement of an essential part of a business activity such as opening door to do business- for a trading and distribution company, employing key personnel - for marketing and service provider or beginning the manufacturing process for a manufacturing company. Documentation is required for the purpose of substantiating these facts in the event of tax audit.

REVENUE NEED NOT BE GENERATED

The generation of revenue or sales plays no part in determining the date of business commencement. Where no sale os generated for a financial year, current year business loss is said to exist. This loss can be carried forward to the following year of assessment where it can be deducted from business income.

The pessimist sees difficulty in every opportunity;
The optimist sees opportunity in every difficulty.

More than one year has gone by and yet I 've not post anything to this blog. What a shame. I can't make excuses like no time, too busy etc... ehm... I will try my best to allocate my time for this blog in my aim to help me, myself, my staff hopefully, my associates and the general public in getting a clear understanding of an auditing, accounting and taxation world.



For a kick start I'll reproduce articles from various reliable sources and hope everybody can learn something from it..


Happy reading!!