Back to some basics today, seen as it is almost the beginning of a new academic year for me. I’d like to provide a brief summary of the notion of a provision for bad debts – based on my experience as an accountant mainly, but of course, it is something I would teach too.
First, a provision in accounting is simply an entry for something that has not yet happened but is probable. So, when a business sells on credit, it is likely some portion of customers will not pay – regardless of how good the credit controls are. Thus, based on past experience usually, the accountant in a business will create a provision for bad debts (sometimes called doubtful debts, or irrecoverable debts). At this stage, no specific debt which may be unpaid is identified, it is just a general estimate and the amount is captured as an expense in the income statement of the business. In my experience, the amount set by as a provision in the financial statements is typically about 1-3% of the amount of outstanding receivables, although this can vary from time to time. any adjustments to the amount provided are reflected through the income statement. When a debt is actually identified e.g. a customer goes bankrupt, then this specific amount is a separate expense to the income statement. Such specific debts may cause an accountant to review the amount of the provision too.
Being an accountant is sometimes portrayed as being a boring path in life, but like all professions and jobs, it has its moments when you feel like you may have helped someone. It is great to see a business take your advice and see them grow and become a success. Of course, as you deal with businesses or clients, quite often you may give general advice which may also yield some fruit. At the end of July, The Guardian had a great little feature on Mick Jagger, and it seems he heeded advice from his accountant when he was younger. Seemingly, Laurence Myers was his accountant – and the accountant of many other famous rock stars of the era – and in a new book written by Myers, he outlines the business sense the young Rolling Stones had. This sense would, of course, be nurtured by a good accountant. And indeed, the Rolling Stones have been a financial and business success (see more here), certainly thanks in some part to the advice and partnering of a good accountant over the years.
In recent years in Ireland, business insurance costs have been increased dramatically due to increasing volumes of claims against them. In some cases, the costs have increased so much that the businesses have simply closed. This post is more about the smaller claims, claims for refunds or costs incurred because a product or service was not up to scratch.
I will use Ryanair as the example here. Despite all the criticisms levelled against it, it remains one of my favourite airlines. They run a tight operation and keep costs to a minimum. They also do not payout refunds or claims unless they have to, this is the fun part for me. In a recent Irish Times article, there are details of a customer claiming €222 for taxi fares incurred due to a Ryanair mistake. The company fought it, but the passenger pursued through a small claims court and got their money refunded. Fair play to the passenger.
Recently I was subject to a delay on a Ryanair flight from Bristol. Some passengers, those who were UK citizens I later found out, were offered £5 refreshment vouchers. I was not, and followed up. To be fair to Ryanair they said if I could produce a receipt, they would refund me.
Now the accounting part. In both examples above there are a lot of costs already incurred in having a customer service function to deal with such issues. Let’s deem these as sunk costs. Once a claim is initiated, then I think we could see the situation as an instance of activity based costing perhaps. In my own case, I sent three emails and I can guarantee the cost of dealing with me was way more that the price of a cup of coffee I was seeking to claim. In the case of the passenger taxi fares, costs of engaging solicitors by Ryanair would have far exceeded the cost of the refund had they simply paid it based on the passengers receipts.
The point I am trying to make is that while I fully agree that firms should not just pay refunds without any basis, there is likely some value at which it costs more to defend a refund claim than simply pay it – with vouched receipts of course, not like me and my coffee. But, if you are not getting satisfaction from a company if you feel you should get a refund, apart from legal options, you can always waste their time a little and get some satisfaction that way.
I am sure you have read or heard stories in your country about political leaders or CEOs spending large amounts of money on expenses – hotels, meals etc. I have read a lot of such reports in recent weeks and just wanted to give a view on it.
To me, and much of this is based on experience, the first principle to me is simple – no receipt or invoice, then any expense should not be reimbursed. Doing this sets a basic principle which is easily understood. I have heard some comments over the years that there is a cost is running an expenses reimbursement system, which may exceed the value of the expenses, so why bother. This may be true in some cases, but I do not agree.
A second principle to me is a basic accounting one – business expenses only. The idea of say using a business credit card for personal lunches or whatever at a weekend goes against the entity principle. This principle means only items for the business should no part of the accounting for that business.
Third, the expense, once for the entity should be reasonable, but what is reasonable? This is where common sense must apply. Let’s take hotels as an example. It may be that a room for €100 per night is ample for any business person, but in some cities this may not be enough for even a basic hotel. But, if I were to say €1000 per night, you would probably think that is a bit too much. Of course you may have read reports of business leaders and political figures spending many thousands of Euro/Pounds/Dollars per night on hotels. Is this reasonable? Personally I do think some of these people could be a bit more modest!
This is a brief summary of chapter 15 in our book, written by João F. Ribeiro, José M. Oliveira and Maria F. Brandão. This is also the final chapter in the book, so back to normal posts after this. I hope you enjoyed the chapter summaries.
This chapter details some accounting of the Portuguese Companhia Geral da Agricultura das Vinhas do Alto Douro (hereafter Companhia), which was founded in 1756. While also trading, the Companhia acted as a tax collector and regulation of the Douro wine sector. It was obliged to buy production excess, in accordance with the quantities determined by
the state, to avoid lowering of prices in the market. Furthermore, it acted as a creditor, as it had to lend funds to local farmers at a subsidized annual interest rate of 3%. Finally, it supervised improvement works in roads and waterways in the region, making use of collected taxes. All of this implied in needed to maintain good accounting records. The chapter provides a very detailed chart of the organisation of the accounting function and describes the various books of account maintained. The authors note how the “bookkeeping model is in harmony with the teachings of João Henrique de Sousa, the first teacher of the Aula de Comércio – the Portuguese Public School of Commerce created by Pombal in 1759”. This system was also used by other similar companies in Portugal. It is also noted by the authors that income smoothing was a typical feature after 1784, with reported earnings being very similar and accounts such as “Casks Depreciation, Bad Debt Provision, ‘Profit’ Provision and Extraordinary Income/Costs” being used to achieve this.
Accounting for Alcohol – part 14 “The Monastery of Silos and its wine cellar in Ribera del Duero through its accounting books (14th, 18th and 19th centuries)”
This is a brief summary of chapter 14 in our book, written by Lorenzo Maté, Begoña Prieto and Alicia Santidrián. This chapter details the activities at the Monastery of Silos relating to wine and its production, control and consumption through its accounting books. The monastery is a Benedictine monastery of Silos and was founded in the 11th century. The Rule of St Benedict has general rules on the moderate consumption of wine, and the account books at the monastery give some detail on what was consumed and what it cost.
The chapter reveals records from 1338. These accounts have information on the harvests of wheat and wine production. In the account, the incoming (recebta) and outgoing (despensa) of goods in kind (bread, wine) were noted first; and then income and expenditure in monies. A total of 1,550 16 lire pitchers were received during the year and over twice that was consumed (the being locally produced). The total cost is noted at 4,140 maravedis. Sample accounts from later years are also given and these tend to show more detail. The authors also provide a detailed chart of all the books of account of the monastery and outline how these books were used for various forms of accountability. For example, the Father General of the Valladolid congregation received accounts every six months, which were audited by monks having “intelligence in accounts”. The Father General also made two visits to the monastery during their four-year term of office. Such visits were a control mechanism, and the chapter provides some details on comments made during a visit in 1826.
Accounting for Alcohol – part 13 “Accounting in Spanish co-operative wineries during the 20th century”
This is a brief summary of chapter 13 in our book, written by Francisco J. Medina-Albaladejo. This chapter focuses on co-operative wineries in Spain. They emerged in the late 19th century and have played an increasingly important role in the sector ever since – now accounting for over 70% of wine production in Spain. The chapter explores the accounting records of three Spanish co-operative wineries – Rosario (Murcia), San Isidro (Murcia) and Pinoso (Alicante) from the 1930s to the 1980s.
In the early part of the 20th century, the co-operative model was not very successful. Most wineries were under-capitalised, their financial position precarious and their management non-professional. They operated within the framework of the 1885 Commercial Code,5 which required the use of double-entry bookkeeping, through books such as libro de diario (journal book), libro mayor (ledger), libro de inventarios y balances (inventories and balances book), libro de actas (minute book) and the annual preparation of balance sheets. In essence, the accounting practices used by co-operative wineries before the 1940s directly reflected the characteristics of these organisations – small organisations composed of small and medium-sized landowners with no training in accounting, who followed simple administrative procedures and adopted accounting methods which were dictated by external state pressures in the form of legislation.
During the Francoist period, 1939-1971, financial support of the state saw a boom in co-operative wineries. However, the support provided by the Francoist regime did not contribute to the implementation of sound management policies. In accounting terms, a 1942 Act, and its attached regulations, established accounting systems that differed little from those that had already been put in place in the preceding decades. Single- or double-entry bookkeeping was required, depending on the complexity of the operations carried out by each co-operative, as well as annual balance sheets.17 The regulations also recommended producing annual reports, but this was optional.
After Francoism, the mid-1970s witnessed substantial changes in the wine market. Consumer preferences adopted a new pattern: instead of low-quality wine to be consumed daily as part of the Mediterranean diet, consumers began demanding smaller
quantities of better-quality wines, which were bottled and better presented in general. From the point of view of accounting, the state tried to adapt the existing legislation to the new conditions and bring it closer to European regulations. A 1971 decree made double-entry bookkeeping compulsory, regardless of region and the scale of operations, and also demanded that co-operatives submit a profit and loss account to the public regulators, along with the balance sheet and the annual report, which was no longer optional. In addition, the decree gave members the right, for the first time, to request information on administrative issues and accounts. The outcome of this decree was the homogenisation of accounting practices among Spanish co-operative wineries.
This is a brief summary of chapter 12 in our book, written by Stéphane Ouvrard, Hervé Remaud and Ian Taplin. The chapter describes the so-called Bordeaux Place, the organizing principle by which much fine wine from the region is sold. It is a marketplace with key actors (winery owners, brokers, négociants [merchants] and the officials within the city) interacting both contractually and on trust.
The authors note some form of organisation of the Bordeaux wine trade since the 1400s. The year 1745 saw the first classification of Bordeaux wine, which reflected quality and price. In 1855, the Paris Exhibition (promoting French products) first awarded medals to Bordeaux wine. This classification system has only changed twice since 1855. Today, the Bordeaux Place utilises the en primeur system. This is a futures system whereby customers (wine merchants of Bordeaux, distributors, final buyers) buy (and pay for) wine today, to be delivered about 18 months later. Deciding on the price from the producers perspective is, of course, a difficult one. The price has to cover the cost of producing, but for a substantial number of estates, marketing plays a more critical role in price setting than accounting. Wine producers can get help from brokers, obtaining indications about the price the market is willing to pay. But this is partial and somewhat biased, as merchants and the market prefer cheaper prices. In essence, wine producers base their decision on six main aspects (Remaud et al., 2015): vintage quality; how prices of similar quality wine have evolved over time; the level of stock on the market); the global economy at large, including interest rates, stock exchange prices and confidence in the economy; the status of the brand; and the extent to which an estate has been able to build a brand and not just a (high-quality) wine. This sounds like a great task for management accountants!
Accounting for Alcohol – part 11 “Accounting and wine in Anjou (Maine et Loire) during the 19th century”
This is a brief summary of chapter 10 in our book, written by Valentin Taveau and Béatrice Touchelay. They use the archives of the département of Maine et Loire and the
accounts books of two Maisons de vin, that of René-Jean Goubault-Lambert and that of Jean-Baptiste Ackerman-Laurance. The period covered is between about 1810 and 1870.
As the authors note, the archival records provide an example of accounting practices that were still quite in their infancy and reflect businesses that were not well managed. Indeed in that case of Goubault-Lambert, the authors suggest the account books are a chronicle of a bankruptcy foretold. The main book of account for was the Grand livre which recorded the transactions between the business and partners/customers and was classified by account type – similar to a general ledger today. The authors note little in the way of summary or analysis, and also not several periods throughout the financial years when days or weeks of time seem to be omitted. In the case of the Ackerman-Laurance business, the Grand livre is better maintained and more detailed and includes details about production, sales, inventory and payables – although the book dates from the latter half of the century, and be attributable to the business being taken over by the founder’s son. In both cases, it is interesting to note that the Grand livre captures personal/family transactions also. This is similar to many earlier books of account, where the business and family/owners were not separated as per the present day entity concept.
This is a brief summary of chapter 10 in our book, written by William Jackson, Audrey Paterson and Darren Jubb. The chapter examines some of the roles that accounting has played in the transformation of the whisky industry from its simple roots to its current complexity, with particular reference to the development of the Distillers Company Limited (DCL). It covers a period from 1850-1925. The scale of the whisky industry around 1885 was quite large, yielding about one-sixth of all revenue of the United Kingdom. As the authors note “given the scale and importance of this to the British government, it is easy to understand why excise/revenue men were swarming around the distilleries. Under these conditions it can be no surprise that the quality and completeness of accounting data would be of the very highest standard”.
The volume of whisky produced increased dramatically in the middle of the 19th century and some producers made initial attempts to cooperate in 1856 and 1865. Although the first attempt was short-lived, the second had more duration, and six of the larger grain whisky producers formally combined into the Distillers Company Limited (DCL) in 1877. In the 1890s, whisky boomed which ultimately led to the Pattisons crash in 1898. As noted by the authors “what followed was a period of lost confidence, retrenchment, falling sales, a recognition of overvalued stocks throughout the industry and a need to reduce the production of spirit. It was at this time that DCL began to adopt a pattern of activity that would see them attempt to rescue the industry from its woes. Recognising the overcapacity in the industry and the weakness of many of its players, DCL began to acquire distilleries, often at very low prices, and take them out of production in order to protect the future values of existing whisky stocks”. The came the First World War, which affected all business., but DCL became the UK’s sixth-largest manufacturing company by 1930. As the authors suggest “there can be little doubt as to the importance of accounting practices to this development”
This is a brief summary of chapter 9 in our book, written by Marie Sarita Gaytan.
Tequila, nowadays, is a globally popular drink. Its origins are from a drink (also from the Agave plant) called pulque. As a Spanish colony, Mexico, had vast supplies of agave. Technological advancements in the process of distillation, in the early 18th century saw the commercial production of mezcal, a generic name for all distilled agave spirits. Demand for mezcal from Tequila increased when Mexico gained independence from Spain in 1821. By the turn of the 20th century, tequila was being marketed in the US, and by 1907, there were 96 distilleries, producing upwards of 800,000 gallons a year. From an accounting perspective, this growth is likely to be driven by the perceived demand and profitability of tequila distilling at that time. Prohibition, later, increased the price of alcohol (and associated profitability) and created a new international smuggling enterprise along the US-Mexican border.
After Prohibition and the Second World War, Tequila sales to the US grew. In 1943, La Prensa reported that as much as $250,000 worth of tequila was being imported into the United States per month. In 1944 taxes on tequila and vodka imports were reduced
by 5 percent, which cut costs from $4.99 per fifth to $4.45 per fifth. Lower prices and new demand subsequently led to the first tequila “boom” : between 1940 and
1945, the production of tequila increased nearly 400 percent. Making
the most of these circumstances, Mexican distillers increased production in
order to quench the thirst of American consumers and benefited from increased sales and profits. Brands such as Jose Cuervo capitalized on the mounting interest and started to invest heavily in magazine and newspaper ads. By the mid-1950s, US-based distributors were spending upwards of $100,000 to promote the “Mexican beverage in cocktails and mixed drinks”.
And, of course, the story continued as tequila became the internationally known drink it is today
This is a summary of chapter 8 in our book, written by Julie Bower. The chapter explores accounting history in and around the Scotch whisky industry, looking at managing consumption, production and maturation. As the author notes, the whisky industry has some peculiarities around inventory management, financial management and even tax planning.
On the tax planning side, the author notes that “traditionally, the producers of spirits brands have shipped their products from their own, or shared, home market bonded warehouses to overseas distributors on fixed terms, splitting the profit between them on an ‘arm’s-length’ buyer–seller transaction basis”. Of course, this does not always apply, with the tax regime in Ireland for example, offering advantages to Irish whiskey (as opposed to whisky). With inventory, the time spent to mature creates issues too. The Immature Spirits (Restriction) Act 1915 stated whiskey must mature for a minimum of
two years, extending to three years in 1916. This three-year bonding (maturation) rule has remained in place ever since, meaning the industry’s stock maturity profile is significantly longer than other sectors. Finally, the chapter notes the chapter notes the issue of being able to finance the required inventory levels – the author cites the example of the value of maturing stock in Diageo as being around £4 billion – which of course has to be financed somehow.
This is a summary of the next chapter in our Accounting for Alcohol book, which was written by Viatcheslav Sokolov, Svetlana Karelskaia and Ekaterina Zuga. As the chapter (and post) title suggests, this chapter details accounting practices around vodka in Russia. For me personally, this was a very interesting chapter as I knew very little about accounting in Russia in general.
The chapter details accounting records around vodka dating from the early 1600s. In the 16th century, Russia gradually introduced a state monopoly over the production and distribution of alcoholic beverages. At this time, alcohol could be sold only in special drinking establishments owned by the state, known as kabaks. Profit generated by kabaks was captured made in kabak books, a special type of accounting register, and this profit was reported to the State. In 1649, a standardised system of accounting for alcohol was introduced State wide, and this remained in place until 1832.
In 1817, excise taxes were imposed on private alcohol manufacturers. The tax was based on actual the total output permitted by the producer. Producers recorded different types of beverages in a special book, where they registered the volume of product output, its bottling and delivery. Thes books were maintained using the double entry system. Later in 1895, the State for the first time issued a statute which described vodka, and effectively monopolised its production through strict controls on private producers. This implied Provincial Excise Offices played a key role in the accounting process. They kept ledgers to track cash flows, assets and settlements with the manufacturers, distributors and financial institutions relating to production and distribution of alcoholic beverages.
This is a summary of the next chapter in our Accounting for Alcohol book, which was written by Peter Cleary. The chapter reviews the accounting information produced between 1792 and 1864 by the Watercourse Distillery and how it was used and reported upon by the firm. The distillery was co-founded by Thomas Hewitt, John Teulon and Richard Blunt, with Hewitt (along with his cousin) eventually assuming full control of the business and re-naming it Hewitt & Co. While accounting books were not generally available in the archival records, a reasonable overview of accounting was obtained from other letters and journals.
During the 17th and 18th centuries, the city of Cork expanded, driven by an increase in trade via its port and in the number of buildings within its boundary. As with all cities at this time, Cork’s merchants possessed most of the wealth and were therefore at the forefront of these developments, facilitating further increases in their wealth and influence. As a result, they became known locally as the “Merchant Princes”. The Hewitt’s were among these “Princes”. Increased investment from Cork’s “Merchant Princes” invariably required additional accounting-based information to allow them to determine if, at the end of a particular time period, their commercial exploits had resulted in a financial gain. But, at this time, regular and systematic book-keeping was still rare. As revealed by the archival records, although no accounting books survived, certainly a profit account was maintained for each partner of the distillery. Letters and journals also reveal monthly “closing of the books”. Letter and correspondence also reveal issues with giving credit to customers. From about 1850 onwards, the letters reveal loss being made, and the eventual demise of the distillery.
This is a summary of the next chapter in our Accounting for Alcohol book, written by Karen McBride and Tony Hines. It explores accounting and controls for alcohol in the Royal Navy in the time of Nelson, and is a really interesting topic.
In today’s world, we may find it difficult to imagine, but beer and other forms of alcohol were part of the normal diet of a sailor in times past. As the authors note, beer was bulky to carry and required much room to store, and of course, it had a cost and needed to have an inventory level maintained and controlled. Thus, the British Royal Navy instituted rules and procedures to ensure alcohol use was controlled, both in terms of cost and volume per sailor. The authors provide some examples of forms used to comply with these regulations, and here is a great example from 1808:
It appearing that considerable quantities of wine and spirituous liquors have
been fraudulently run-on-shore from His Majesty’s Ships of War and Transports,
to the great prejudice of His Majesty’s Naval Service, and diminution
of the Revenue; for the better preventing of such practice in future, and
for punishing those who shall dare to continue or renew it, all Captains or
Commanders of His Majesty’s Ships or Vessels are hereby strictly required,
and positively directed, not to suffer any of those species to be ever issued
to the Companies, or any part of the Companies, of the Ships or Vessels
respectively under their command whilst in the Home Ports, nor at Sea, until
after the Beer is all expended.
The chapter is guided by Focault’s notion of governmentality. Rather than I explain this in the context of the chapter, the author’s words are very useful:
Foucault’s work observes that the unthinkable may become thinkable, where procedures and methods are put in place for one purpose but end up being utilised for another purpose that was not expected at first (Foucault, 1980). We argue that initially
the accounting and control of beer was determined for cost and provision
control; beer was issued for the seafarers’ health and well-being, replacing often
foetid water. Later it was used for the prevention of scurvy. Finally, it was used to
keep the men in a controllable but mildly inebriated state, which alleviated the
hardships they were under. Accounting was instrumental in this, as it provided
the means by which the allocation was measured and supplemented.
The chapter has many examples of how accounting was used in the control of alcohol on ships, including some comment on the Royal Navy’s own brewery in Portsmouth. It is well worth a read.