Related-Party Transactions
Related-party transactions are discussed in the article because they frequently contribute significantly to accounting fraud and failures. According to research, businesses that have been accused of fraud have more related-party transactions than businesses without fraud allegations. The company's financial statements frequently contain errors that are covered up by these transactions. The paper also emphasizes that stagnating accounting rules with few guidance that make it difficult for preparers to account for these activities in the financial statements provide the biggest issue (Pucek and Richards, 1). The article outlines the three categories of related-party transactions, which are related-party debt forgiveness, related-party debt conversion to equity debt, and related-party forgiveness of other liabilities. Lastly, the article presents the best accounting practices for related-party transactions (Pucek and Richards, 4).
Risks and Preparations
During the preparation of these transactions, some risks may be realized. As a result, preparers of the financial statements need to know the related parties, provide clear documentation of these transactions, make adequate disclosures, and most importantly proceed with caution while handling them. FASB (Financial Accounting Standards Board) should define financial instruments and the recording of transactions in their respective financial statements because wrong entries can lead to misstatements.
Treasury Stock
Companies have the capacity of purchasing and selling their shares of stock in an open market. They can reacquire some of their stock and not retire the shares. This treasury stock projects the difference between the number of shares issued and those outstanding. During this process, there may be a possible realization of gains and losses that are, however, not included in the income statement (Smith and Smith, 312). The exemption can be attributed to the facts that firms cannot report the loss on transactions or current income of their ownership shares. Nevertheless, they can be recognized as direct reductions and additions from the equity of the stockholder in the balance sheet. The gains and losses on capital transactions can be accounted for using the cost method which is widely accepted. In the cost method, if a firm buys its stock, the entry is a credit to cash and debited to treasury stock which is a contra-equity account (Hammer, 3-4). In this case, there is no loss or gain recorded in the equity accounts regardless of the buying prices. If there is a reissue of the treasury shares, then the treasury stock is credited for the cost of the shares while cash is debited for the amount received. Additionally, any difference can be credited or debited to the paid-in capital of excess par. In case a company retires the treasury stock, it needs to book a gain or loss to the equity of the shareholder based on the par value and purchase price.
Capital Gains and Losses
Firms or individual shareholders who sell their owner's equity or capital shares can incur capital losses or capital gains. Capital gains are different from losses because the tax law defines them as the profits a firm receives from selling capital assets such as bonds, mutual fund shares, and stock. There are special rules that apply to these sales (Bank of American Corporation, n.p.). On the other hand, capital losses are losses incurred on the sale of capital assets such as stock and bonds. Both the capital gains and losses can be divided into short-term and long-term periods. The losses of a firm's investment are utilized to offset capital gains of a similar type. Therefore, the short-term losses are subtracted from short-term gains. The same case applies in the long-term. The net losses are then subtracted against the other type of gain (Hammer, 3-4). In conclusion, all these accounting rules are defined by FASB, and the preparers of financial statements can utilize them to record all transactions and avoid misstatements.
Work Cited
Bank of American Corporation. Understanding the Difference between “Covered” and “Noncovered” Securities. 2012.
Hammer, Sarah. Glass Half Full: The Silver Lining of Capital Losses, The Vanguard Group, 2013, pp. 1-7.
Pucek, Ralph M. and Richards, Glenne E. What’s a Little Debt between Friends? Journal of Accountancy, pp. 1-4.
Smith, Margaret H. and Smith, Hary. Harvesting Capital Gains and Losses. Financial Services Review, vol. 17, 2008, pp. 309–321.
Bibliography
Bank of American Corporation. Understanding the Difference between “Covered” and “Noncovered” Securities. 2012.
The article describes the covered and noncovered securities to help understand the difference as well as the short-term and long-term capital gains and losses.
Hammer, Sarah. Glass Half Full: The Silver Lining of Capital Losses, The Vanguard Group, 2013, pp. 1-7.
The article explains the treatment of capital gains and losses. It also explains the netting of losses against gains.
Pucek, Ralph M. and Richards, Glenne E. What’s a Little Debt between Friends? Journal of Accountancy, pp. 1-4.
The journal defines related-party transactions and the types of related-party transactions available. It highlights how they affect transactions and their reflection in financial statements. It also provides the best practices that can be adopted by the preparers of the financial statements.
Smith, Margaret H. and Smith, Hary. Harvesting Capital Gains and Losses. Financial Services Review, vol. 17, 2008, pp. 309–321.
In this review, the authors demonstrate how to realize capital gains by utilizing the excess losses to offset the realized gains.
