Big data and business decisions – humans still needed
Here is a good article from CGMA magazine which highlights the importance of human interpretation of data. It is a reminder that although we have technology to analyse data which we could not do ourselves, we still need the human eye to make sense of data trends etc. and relate it to organisational context.
Related articles
- Infographic: The Physical Size of Big Data (domo.com)
The power of an infographic
I have written a few posts previously with infographics. I like them. They convey a message in an easy to understand way. Of course, as a management accountant, I would say they may also include some really useful information to help managers (and others) make decisions.
Recently, Dr Stephen Jollands from Exeter sent me this one. It is so clear and it’s message is direct and simple – despite the many complexities within renewables and the environment etc.
What is depreciation?
Okay, the last two posts were about assets, and now I’d like to give a brief introduction to depreciation. As you may know the accruals concept (also known as the matching concept) sets out how revenues and expenditures should be matched against each other – when cash is paid/received is nots relevant. When a business buys a non-current asset, the accruals concept kicks-in. The asset itself is typically used by the business for several years, and thus generates revenue. So applying the accruals/matching concept, the cost of an asset needs to be matched against revenue over several years. How do we do this? Well, we depreciate the asset. This means the cost of the asset is spread over several years.
This raise two questions 1) how much per year and 2) over how many years? This is where certain assumptions are made. First, an estimated useful life of an asset is determined, for example from previous experience of a similar asset. Second, then business will attempt to assume whether the assets contributes to revenue earned equally over time, or more in earlier years for example. In the former case, the business might use what is termed the straight-line method – which charges an equal amount each year. For example, is an asset cost €10,000 and it’s useful life is 5 years, then the depreciation expense in the income statement each year is €2,000. On the statement of financial position, the asset value falls by €2,000 each year. If an asset is assumed to earn more revenue in earlier years, for example a motor van or truck, then the reducing balance method can be used. This method charges more depreciation in the earlier years. For example, if we assume an asset costs €10,000 and is depreciated at 10% reducing balance, here is what will happen:
Cost €10,000
Year 1 (1,000) x 10%
Balance 9,000
Year 2 (900) x 10%
and so on…
Thus, using the reducing balance method, the asset will still have a value in the accounts for many years, but the depreciation charge will be smaller each year. If you think about the total costs of owning a car/van/truck, the repairs tend to get higher as it gets older, so the reducing balance method reflect this too.
How are assets classified in accounting?
In my previous post, I introduced assets. Now let’s see how assets are classified in accounting.
There are two major asset classifications 1) non-current and current, 2) tangible and intangible. Let’s have a brief look at each.
Non-current versus current assets
A non-current assets is one which typically cannot be converted into cash within one year. The classic example of a non-current asset is plant, property and equipment. Current assets normally convert into cash within one year e.g. receivables from customers, inventories. This non-current and current classification is used in the financial statements of most organisations.
Tangible versus intangible assets
This one is a little more tricky to understand, and it is something not normally seen on financial statements. As you might guess, a tangible asset is one which you can see and touch i.e it physically exists. Typically examples are again, plant, property and equipment, but also inventories are a tangible asset. Money due from customers is also arguably a tangible asset, as it does exist as money albeit somewhere outside the business. Intangible assets are those which do not physically exist, but yet have a value. This value may arise from intellectual or legal rights. For example, trademarks, patents, in-house software or knowledge built up through research and development are intangible assets. The accounting standard which governs intangible assets is IAS 38, and it gives some examples:
- computer software
- patents
- copyrights
- motion picture films
- customer lists
- mortgage servicing rights
- licenses
- import quotas
- franchises
- customer and supplier relationships
- marketing rights.
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