Significant Differences Between Accounting and Oil and Gas Operations and the Conventional Accounting for Manufacturing or Mechanize Operation.

SIGNIFICANT DIFFERENCES BETWEEN ACCOUNTING AND OIL AND GAS OPERATIONS AND THE stodgy ACCOUNTING FOR MANUFACTURING OR MECHANIZE OPERATION. By Demoore Suleman Conventional Manuf chipuring answer for 1. comment Manufacturing throwaway, the terminal I use to describe business organizations engaged in the manufacture of goods for sale. These compevery maintain a manufacturing cover. 2. Cost Method Expenses atomic number 18 the price of unsold harvest-homes and argon describe as as defines.These expenses allow in wages, electricity in offices outside of the factory (sales and marketing, general administrative offices) be reported immediately as expenses in the accountancy closure that they ar use price outside of the factory do not become diverge o the product greet. Under the accrual method of accounting, period approach much(prenominal) as selling, general and administrative expenses are reported in the income disceptation in the accounting period in which they ar e use up or explore. Variances from purchase are recorded at that quantify the raw materials are purchased and re classified into raw materials inventory, chronicle for fossil embrocate and gas operation 1. Definition Oil and Gas Account The term is used to describe the books of account of companies involved in the exploration an using of crude cover and natural gas. 2. Cost Method Accounting for inunct and gas operations follow one of two methods of fiscal accounting. a. extensive Cost Method entirely property attainment exploration and victimisation exist, even dry hole personify are capitalized as crude anoint and gas properties. These speak to represent fixed plus, amortized on a unpolished by country basis using a unit of doing method based on volume produced and emaining proved militia. Acquisition and learning activities are capitalized expenses irrespective of whether or not the activities resulted in the discovery of reserve. b. The undefeated effort (SE) method allows a company to capitalize only those expenses associated with booming locating new oil and natural gas reserves. automotive, electrical, agricultural, medical and smelling(p) industries. Stocks are recorded as current assets and are classified into i. naked materials and consumables ii. Work in give iii. Finished goods and goods awaiting sale v. Pre defrayal for stock in transit The Financial Accounting stock Board issued it concept line No 6 Element of monetary statements which defines terms as expenses, loses, revenues, assets e. t. c 3. Accounting Policies Goodwill is not subject to amortisation instead the companies mustiness conduct occasional(a) impairment testing. The Net unauthorized capitalized costs are also amortized on unit of outturn method whereby property acquisition cost are amortized over proved reserves and property cultivation cost are amortized over proved developed reserves.The Net Unamortized capitalized cost of oil and gas propert ies less related deffered income taxes may not happen a ceiling consisting primarily of a computed present value of communicate future cash fertilises, after income taxes , from the proved reserves. Amortization is computed by take on or property) or field. Accounting standard disclose for the petroleum chain reactorstream activities engaged in a. Refining and petrochemical b. Marketing and Distribution c. Liquefied ingrained Gas Accounting Policies are captioned alternatively than as notes in the monetary statements. ork in process inventory, finished goods inventory, and cost of good sold. Profit margins set are Standardized cost and represented graphically as retard even point analysis. 3. Accounting Policies a. divine revelation requirement for balance flat solid- Goodwill are reported in the balance public opinion poll as deffered charges and are long term asset. Accounting policies prominently disclose as note to individual items in the financial statement of conve ntional manufacturing accounting. disclosure requirement refers to the minimum amount of information which should be presented on financial statement.The disclosure requirement for balance sheet and derive and bemused account is regulated by the second schedule of the company And Allied Matters work out in Nigeria (CAMA) 1990 trance for the other(a)s fragmentise of the financial statement, it is regulated by the statement of accounting standard issued by the Nigerian Accounting Standard Board. They act nether Section 335 sub-section 1 provides For unsuccessful or (dry hole) results, the associated ope come in cost are immediately changed against revenue for that period. Acquisition and Mineral RightProspecting cost associated with pre licensing are incurred in the period prior to the acquisition of legal right-hand(a) to explore for oil and gas in a particular location, such cost include the acquisition of speculative seismic data and exp breakitures on the subsequent geol ogical and geophysical analysis of the data. Other licensing faces are oil exploration license, oil mining lease license. Oil prospecting license (OPL). In the course of acquiring the right to explore, develop and produce oil or natural gas, expenses relating to either purchase or lease to the right to withdraw the oil and gas from a property not owned by the company.Acquisition costs also includes any lease bonus payment to the property owner along with legal expenses, and title search, broker and enter cost. Under both SE and FE accounting methods acquisition cost are capitalized The financial statement of a company civilised below section 334 of this ordination shall comply with the requirement of schedule 2 to the Decree (so far as applicable) with respect to their form and content, and with the accounting standards laid down in the statement of accounting standards, issued from time to time by the Nigerian Accounting Standard Board..Provided such accounting standards do no t difference with the provision of this Decree or Schedule 2 to this Decree. 4. operations The manufacturing process result in the continuous flow of intermediate product which serve as industrial input for the yield of wide varieity of end product in building, textile, packaging, automotive, electrical, agricultural, medical and aromatic industries. Stocks are recorded as current assets and are classified into i.Raw materials and consumables ii. Work in Progress iii. Finished goods and goods awaiting sale iv. Prepayment for stock in transit The Financial Accounting Standard Board issued it concept statement of Exploration Costs characteristic of exploration costs are changes relating to the collection and analysis of geo-physical and Seismic data involved in the initial examination of a targeted area and later on used in the decision of whether to drill at that location.Other cost involved those associated with bore a surface, which are bring forward considered as beingness impalpable or tangible. Intangible cost in general are those incurred to ready the site prior to the installation of the drilling equipment whereas tangible drilling cost are those incurred to install and operate that equipment. Treatment All intangible cost will be charged to the income statement as part of the periods operating expenses for a company following the successful method .All tangible drilling cost associated with the successful discovery of new reserves will be capitalized while those incurred in an unsuccessful effort are also added to the operating expenses for that period. Capitalized means being added to the balance sheet as a long term assets. Development Cost Involved in the preparation of discovered reserves for production such as those incurred in the construction or Disclosure Requirement for look upon Added Statement Value Added simply refers to the difference between input value and output value. S. 35 (4) of the CAMA 1990 requires that the value added st atement shall report the wealth created by the company during the social class and its distribution among various interest groups such as the employees, the government, creditors, proprietors and the company, while emphasizing on the importance of the statement as apart of the financial statement, SAS 2 pointed out that the statement will enable companies to ensure the reality that they do not exist for the length of their owners only but rather for the society at large. Possible uses to which the statement could be put include i.Predicting managerial efficiency ii. Indicating the companys wage paying capability iii. Evaluating the relative rewards of shareholders and other claimants against the company. the construction or improvement of roads to door the well site, with additional drilling or well completion work, an with pose other needed infrastructure to extract (e. g. pumps), gather (pipelines and store tanks) the oil or natural gas reserves both ST and FC allow for the capitalization of all development costs Production cost Ensured costs in extracting oil or natural gas from the reserves are considered production costs.Typical of these cost are wages for workers and electricity for operating well pumps. Production cost are considered part of periodic operating expenses and are charged directly to the income statement under both accounting methods. in force(p) cost accounting provides more meatful financial statement. The primary asset of an oil company are the underground oil and gas reserves but not the individual well drill (expenses) in producing the oil. Its been further argued that the amortization of full cost over time produces more meaning income statement through improved matching of cost is to be released revenue.No 6 Element of financial statements which defines terms as expenses, loses, revenues, assets e. t. c Disclosure Requirement for Profit and Loss Account The Profit and Lost Account is an account which report the revenue and ex penses of an enterprise for a given accounting period. The objective of the profit and breathing out account as stated under S. 335 (2) of CAMA 1990 is to give a true(a) and fair view of the profit and loss account of the company for the financial year. The minimum information are disclosed in the profit an loss account are disclosed in schedule 2 paragraph 13 of CAMA 1990.Disclosure Requirement For computer memory/Cash Flow Statement Statement of Accounting Standard (SAS) 2 defined a funds flow statement as a statement which provides information on the derivation and utilization of funds during the period covered by the financial a statement. A funds flow statement show the movement in net current assets of a company Companies are required by law under S. 335(3) of CAMA 1990 to prepare and publish such statements and to give a detailed information on the various sources of funds on its disposition during the accounting period covered. 4. routine in the oil and Gas companies are refining which is simply the breach down of the hydrocarbon mixture of crude oil into useful petroleum products. This is through with(p) through distillation cracking, reforming and extraction process these operations can be subdivided into i. Crude oil acquisition, ii. Crude oil storage iii. Processing iv. intermix v. Finished products stages Oil and gas companies are affected by periodic changes for depreciation depletion and amortization (DD &A) of costs relating to expenditures for the acquisition and development of new oil and natural gas reserves.They include the depreciation of certain long lived operating equipment, the depletion of costs relating to the acquisition of property or properly mineral rights, and other amortization of tangible non drilling cost incurred with developing the reserves. The periodic depreciation, depletion and amortization expense charged to the income statement is determined by the unit of production method in which the percent of total produc tion for theNote to the account does not become necessary if the balance sheet profit and lost account provides sufficient disclose in the accounts to give a true and fair view of the companys state of affairs and the profit and loss position. This is however contained in S. 335 (7) of the CAMA 1990 which states as follows if the balance sheet or profit and loss account drawn up in consonance with these requirements would not provide sufficient information to comply with subsection (2) of this section, any necessary additional information shall be provided in that balance sheet or profit and loss account or in a note to the accounts.Total production for the period to total proven reserves are the beginning of the period is applied to the gross total of cost capitalized on the Balance Sheet. Depletion is the means of expending the cost incurred in acquiring and developing oil and gas using unit of production method. Depletion rate per barrel is completed as- Capitalized Cost / outpu tDepletion expense is computed as- Depletion Rate x No of Out-put Produced Accounting treatment of cost SE FC Acquisition Capitalized Capitalized Geolog & Geophy Expense Capitalized Explorating dry hole Expense Capitalized Development change hole Capitalized Capitalized Production cost Expense Expense Expense is associated with income statement, capitalization is associated with Balance sheet extract. References J. Vitalome , Accounting for Differences in Oil and Gas Accounting,http//www. investopedia. com S. Abubakar (2007), tease Note Oil and Gas Accounting Department of Accounting qualification of Administration Ahmadu Bello University Zaria. Federal Government of Nigeria (1990), Company and Allied Matters Act, Lagos Government Printers NASB(1985), instruction to be Disclosed in Financial Statement, Statement of Accounting Standard 2