Temporary New Account
Understanding Temporary New Account
In the context of a fund, a temporary new account is a holding state created to hold a balance following a substantial cash inflow or outflow. The temporary new account is created to hold funds in the account until they may be disbursed to unitholders, used to buy more assets for the fund, or utilized for other significant fund expenditures. Because they isolate balances intended for inflows or outflows from other balances or assets, temporary new accounts make fund accounting simpler.
For most businesses, having a large portfolio of external cash flows might be problematic. The execution of a mandate, aim, or strategy for investments can be dramatically impacted by these financial flows. They may also have an impact on a composite's or a portfolio's performance.
Temporary new accounts are created to streamline and simplify the accounting and cash flow process to handle big cash flows better. Global Investment Performance Standards (GIPS), a collection of voluntary best practices created by the CFA Institute and intended to provide investors with more transparency when assessing investment managers, propose this procedure.
A fund may calculate how much cash will be disbursed to unitholders or roughly how much cash it will spend on buying more securities for the fund by setting up separate accounts.
The GIPS guidelines specify an external cash flow as "capital that enters or leaves a portfolio (cash or investments). The level at which the company decides that a client-directed external cash flow may momentarily hinder the company from implementing the composite strategy is referred to as substantial cash flow. Portfolios (collection of assets, stocks, etc.) cannot be temporarily removed from composites using manager-initiated flows or transfers of assets across asset classes within a portfolio."
Composites and Temporary New Accounts
Large cash inflows or outflows at once might cause problems with composite upkeep. The GIPS defines a composite as an amalgamation of one or more portfolios that are managed in accordance with a certain investing mandate, goal, or strategy.
Composites incorporate fee-paying discretionary portfolios but exclude non-discretionary ones. To minimize the impact on the composite that an investment manager would prefer to remain steady, a considerable projected inflow or outflow would need to create a temporary new account in compliance with GIPS advice.
Examples of Temporary New Accounts
Temporary new accounts are accounts that are created for a specific purpose and used for a limited period. These accounts are used to track transactions that are not part of the normal operating cycle of a business. Examples of temporary new accounts may vary depending on the type of business and its operations. In the following section, we discuss some common examples of temporary new accounts used in accounting:
Sales Discounts Account
A sales discounts account is used to track any discounts given to customers on sales. The amount of discount given is recorded as a debit in the sales discount account and a credit in the sales account. At the end of the period, the balance in the sales discount account is closed to the income statement.
Bad Debts Expense Account
Bad debts expense account is used to track unpaid debts that are not expected to be collected. This account is debited when the company realizes it will not receive payment from a customer. The bad debts expense is then closed to the income statement at the end of the period.
Rent Expense Account
A rent expense account is used to track any rent paid for a specific period. This account is debited when the rent is paid, and the balance is closed to the income statement at the end of the period.
Advertising Expense Account
An advertising expense account is used to track any advertising expenses for a specific campaign or event. This account is debited when the advertising expense is incurred, and the balance is closed to the income statement at the end of the campaign or event.
Income Tax Expense Account
An income tax expense account is used to track income tax paid for a specific period. This account is debited when the income tax is paid, and the balance is closed to the income statement at the end of the period.
Interest Expense Account
An interest expense account tracks any interest paid on loans or credit lines. This account is debited when the interest is paid, and the balance is closed to the income statement at the end of the period.
Depreciation Expense Account
The depreciation expense account is used to track the depreciation of fixed assets. This account is debited each period to record the amount of depreciation expense for that period, and the balance is closed to the income statement at the end of the period.
How to record transactions in Temporary New Account?
Temporary new accounts are created to track transactions that are not part of the normal operating cycle of a business. These accounts are used to record expenses or revenue that are specific to a particular period or purpose. Recording transactions in temporary new accounts follow the same principles as recording transactions in other accounts. Now we will discuss how to record transactions in temporary new accounts. The following are the steps:
1. Identifying the Account Title and Number
The account title and number must be identified to record a transaction in a temporary new account. The account title and number can be found in the chart of accounts or the general ledger. The account title and number should be entered in the journal entry to record the transaction accordingly.
2. Debit and Credit Entries
The next step in recording a transaction in a temporary new account is to determine whether the entry is a debit or credit. The type of entry depends on the transaction and the account being used. If the transaction increases the account balance, it is recorded as a debit, and if it decreases the account balance, it is recorded as a credit.
For example, if a business wants to record the rent paid for a specific period in the rent expense account, the entry would be:
3. Updating the Account Balance
Once the transaction has been recorded, the account balance must be updated. The balance of the temporary new account will change each time a transaction is recorded. The account balance can be calculated by adding the debits and subtracting the credits.
4. Closing the Account
Temporary new accounts are closed at the end of the period. When closing the account, the balance is transferred to another account. For example, if a business has an advertising expense account for a specific campaign, at the end of the campaign period, the balance in the advertising expense account is transferred to the general expense account.
Recording transactions in temporary new accounts is similar to recording transactions in other accounts. The account title and number must be identified, and the debit and credit entries must be determined. Once the transaction has been recorded, the account balance must be updated, and the account is closed at the end of the period. Keeping accurate records of transactions in temporary new accounts is essential to ensure that financial statements are accurate and reliable.
The Bottom Line
A temporary new account is a useful tool for individuals and businesses that require short-term access to banking services. By providing a range of features and benefits, temporary new accounts offer flexibility and convenience. However, it is important to carefully review the terms and conditions of these accounts before opening one.