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CHAPTER 2
OBJECT OF ACCOUNTING – ASSETS
AND LIABILITIES
Key terms
Asset, liability, equity, not-own-capital, temporary accounts, intangible and tangible assets, net profit/loss of current period, fixed assets, inventory, depreciation policy.
Basic structure of assets
Assets consist from following separated segments:
A Receivables for subscription
Receivables of accounting unit to owners for subscribed unpaid capital.
B Fixed assets
a) their acquisition cost is high (according to the importance of such assets
from the view of the business or to national law), and b) usage of them (their economic lifetime) > one year. B1 Intangible fixed assets
Examples (in accordance with Czech accounting legislation): incorporation expenses, research and development, software, valuable rights (patents, licences, know-how), goodwill.
B2 Tangible fixed assets
B21 Depreciable tangible fixed assets
Examples: a) Unmovable: buildings, halls, structures, b) Movable:
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B22 Non-depreciable tangible fixed assets
Examples: land, works of art and collections. B3 Long-term financial assets (financial investments)
Examples: shares and ownership interests (long-term, purchased), intercompany loans (long-term), bonds (long-term, purchased).
C. Current assets
Assets with low acquisition cost (in accordance with Czech income tax legislation it means < or = 40 000/60 000 CZK) and/or usage of them < one year.
C1 Inventories C11 Materials
C12 Internally produced inventory (work-in-progress, semi-finished
products, finished products) C13 Merchandise (goods for re-sale)
C2 Receivables
Examples: trade receivables, receivables from partners and participants in an association, receivables from employees, tax receivables, state subsidy … C3 Financial assets(short-term)
C31 Cash on hand
C32 Bank account
C33 Short-term financial assets (shares and bonds for sale) D. Other assets – temporary accounts of assets
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Fixed assets
Fixed assets are 1) intangible fixed assets, 2) tangible fixed assets and, 3) financial
investments (long-term financial assets). Account class “Fixed Assets” is also used for: a) acquisition of fixed assets,
b) advance payments for fixed assets, c) accumulated depreciation of TIFA, d) adjustments to fixed assets.
Description of some items of intangible fixed assets:
• Incorporation expenses
They are expenses connected with the setting up of a new enterprise, e.g. court expenses, notary fees and other fees, travelling expenses, wages, commissions, rents, if their total exceeds certain amount. Acquisition of fixed assets or inventory shall not qualify as incorporation expenses!
• Research and development
They shall be such results of successfully completed projects-work not falling under intangible industrial and other valuable rights. They have been acquired separately or they have been developed by the accounting unit for the purpose of sale.
• Software
It has to be acquired as a separate item, i.e. it is not part of the acquired hardware and included in its valuation; or it has been produced internally for the purpose of sale, but it is not SW made to order or part of the delivery of HW.
• Valuable rights
Account is used to account particularly for production and technical know-how, licences, intangible industrial rights and other results of intellectual creative activities that may constitute valuable rights both acquired from, and provided to, other parties.
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• Goodwill
When the accounting unit buys another company and pays more than the fair value of its individual assets. Value of goodwill is the amount by which the purchase price exceeds the value of these assets. It is representing the value of the name, reputation, clientele, or similar intangible resources of the purchased company.
Depreciable tangible fixed assets are buildings, individual movable assets and sets
of movable assets, perennial crops, breeding and draught animals and others.
Non-depreciable tangible fixed assets consist from: • Land
• Works of art and collections
Account is used to account for works of the visual and plastic arts and other works of art in the meaning of the Copyright Act if such works of art are parts of buildings or if they are financial investments; or collections, e.g. a set of objects depicting historic or technical progress in business activities, movable cultural antiquities and objects - articles having a cultural value, unless they are financial investments.
Long term financial assets mean that accounting unit has invested into another
accounting unit in the form of:
• investment securities and ownership interests held by the acc. unit for longer
than one year, i.e. participation certificates and ownership interests in enterprises in which the accounting unit has a controlling influence (more than 50 %) or substantial influence (20-50 %) or minority interest,
• other investment securities and participations, such as bonds/debentures,
treasury bills, certificates of deposit and term deposits, which mature after one year.
Fixed assets could be acquired:
• by purchase,
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• received donation (gift),
• by having been invested by another person,
• by transfer from personal to business use.
Depreciation / amortization of fixed assets
Fixed asset is depreciated according to the depreciation / amortization policy; depreciation / amortization is accounted for in accordance with the rules which are set by the accounting unit. The net book value is determined by making use of the accumulated depreciation / amortization of TIFA calculated in accordance with the depreciation / amortization policy.
Depreciation / amortization is calculated from the cost at which the asset is valued in the accounting records; it may not exceed that amount. The depreciation rates are set by the accounting unit with regard to useful economic lifetime, or with regard to capacity.
Study case
AMORTIZATION POLICY
The company acquires new economic software. Acquisition cost for it is 96000 CZK, company decides to use it four years. It prepares following amortization policy:
Description of the asset: …
amortization yearly = acquisition cost / time of usage
= 96000 / 4 = 24000
amortization monthly = one year amortization / 12 = 2000
Year Acquisition cost
Amortization / year
Net book value
200X 96000 24000 72000
200X+1 X 24000 48000
200X+2 X 24000 24000
200X+3 X 24000 0
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Inventories
Inventory consists of:
1. purchased inventory (materials in store and merchandise in store),
2. internally produced inventory (work-in-progress, semi-finished products,
finished products and animals).
Materials are raw materials, auxiliary and operating materials, spare parts, packing
materials, etc., defined as follows:
• raw materials are those which, during the production process, are fully or
partially converted into products, and form their substance;
• auxiliary materials are materials which are also directly converted into a
product, but which do not form its substance (e.g. paints and dyes);
• operating materials are materials which are needed for the on-going
operations of the organization as a whole (e.g. lubricants, fuels, cleaning materials);
• spare parts are objects used to restore tangible fixed assets to their original
condition;
• packing materials are used for the protection and transportation of purchased
material, merchandise and own products. Non-returnable packing materials are delivered to a customer, or delivered internally within the accounting unit, together with their contents;
• small tangible fixed assets that accounting unit does not consider to be fixed
assets;
• movable assets whose useful economic lifetime does not exceed one year,
regardless of acquisition cost.
Work-in-progress represents products that have gone through one or more stages
of production and are no longer raw materials but are not yet finished products. Work-in-progress also includes other unfinished activities (i.e. non-production, such as services), where no tangible products are created.
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Internally produced semi-finished products are separately stored products that
have not yet gone through all the stages of production and have still to be finished by a further production process of the accounting unit.
Products are internally-produced objects designated for sale outside the accounting
unit.
Merchandise is everything that the organization purchases for the purpose of sale,
as well as own products that have been capitalized and transferred to own retail shop.
Basic structure of equities and other liabilities
Liabilities (equity and other liabilities) consist from following separated segments:
A. Equity
means claims of owners (description of how much value (amount) of assets is
owned by owners of the company). A1 Capital (legal, registered)
a) Public limited company (Joint stock company) – total amount of nominal value of issued shares – „common stock at par, Equity at par“.
b) Limited liability company – total amount paid in ownership interests. A2 Other equity accounts (Reserves)
A21 Additional paid in capital (share premium)
A22 Other paid in capital (gifts and subsidies of the capital – from outside
parties)
A3 Reserves created from net profit A31 Statutory reserve account
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A4 Retained earnings or accumulated losses (retained earnings deficit) from previous years
A5 „+“ Profit / “-„ Loss of current period – Net income / Net loss
This item is described in details in „Profit and Loss Account“ or „Income statement“.
Study case
LEGAL CAPITAL AND ADDITIONAL PAID INTO CAPITAL
Capital companies in the Czech Republic, minimal required capital:
• Plc. (Joint stock companies) – without public subscription: 2 000 000 CZK
• Plc. (Joint stock companies) – with public subscription: 20 000 000 CZK
• Ltd. - Limited liability companies: 200 000 CZK
The company is subscribing 1 000 pieces shares per nominal value 2 000 CZK for one piece. (So required capital is covered: 1 000 x 2 000 = 2 000 000 CZK.) But shareholders are opened to pay 2 500 CZK for every share; then:
2 000 000 CZK is legal capital registered officially by the judge court,
500 000 CZK is additional paid into capital – share premium.
B Not-own-capital (other, current liabilities)
are claims of outside parties, it means description of how much value
(amount) of assets is used by company but is owed (= “not owned” by a business) to the creditors (i.e. suppliers, banks, employees,…).
B1 Allowances (provisions)
amounts retained for planed future expenses: B11 Tax deductible allowances
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B2 Payables
B21 Long-term liabilities i.e. bonds issued, long term bills of exchange to be paid, intercompany long term liabilities, payables under lease contracts.
B22 Short-term – current liabilities, trade payables, payables to partners,
to employees, to social security, taxes payable.
B23 Bank loans, long-term and current bank loans, short-term financial assistance.
C Other liabilities – temporary accounts of liabilities
Accrued expences, Deferred (unearned) revenue
Study case ALLOWANCES *)
The businessman plans to repair the building. The needs for repair will take effect in the year 2012. The businessman is expecting the cost for this repair for 2500000 CZK. The business is able to make profit 2000000 CZK every year, so the risk of the loss is discovered for the year 2012.
For these reasons the businessman is preparing the policy of allowances:
Year Amount of allowance / yearly Accumulated amount of allowance
2007 500000 500000
2008 500000 1000000
2009 500000 1500000
2010 500000 2000000
2011 500000 2500000
Total in 2012 2500000 x
Businessman divides the total planned amount of repair cost to five portions which will reduce the profit for 500000 CZK every year (that means 2000000 minus 500000 is 1500000, but still profit!!!)
The effects:
1. Reduced profit (before taxation) is covered against the owners to outflow it (in
the form of dividends or interests).
2. Allowance is related liability to same value of asset (cash, bank account) which will be used for payment of the claim of the supplier of the repair in the year 2012.
*) According to Czech income tax and accounting law, it is possible to create allowances for repair the fixed assets).
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Temporary accounts of assets and liabilities
Accounting is focused on EXPENSE x REVENUE and their connection with the proper accounting period which does not depend on outflows and inflows of the money (payment made for the expense and payment received from the revenue).
Study case
TEMPORARY ACCOUNTS OF ASSETS AND LIABILITIES - LEASE OF THE OFFICE
Accounting
of the renter (leaseholder)
Accounting of the Lessor (owner of the office)
Rent paid/received
in advance
Rent is paid in current period for the expense (cost) of next
accounting period (in
December we pay for the January's rent).
DEFERRED EXPENSE (asset)
We receive payment for the January's rent in December,
that means received
payment from the next year revenue.
DEFERRED REVENUE (liability)
Rent paid/received
later
For the rent of this
accounting period (this year expense) we will pay next year.
ACCRUED EXPENSE (liability)
Revenue from this year rent will be received as a payment next accounting period.
ACCRUED REVENUE (asset)
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EXERCISE 2.1
Put the cross in the right box. Define item in details !!!
Item Fixed Assets Current
Assets Other Assets
Material
Buildings
Purchased licence
Semi-finished products
Bonds with 2 years maturity
Motor vehicles
Receivables to customers
Bank account
Work-in-progress
Ownership interests
Software (a.c. = 115000 CZK)
Finished products
Shares for sale
Receivables for subscription
Bills of exchange to be collected
Cash on hand
Deferred expenses
Valuable rights
Advance payments made
Merchandise in store
Receivables to employees
Accrued revenue
Land
PC (a. c. = 39 900,- CZK)
PC (a. c. = 74 300,- CZK)
Accumulated
depreciation-buildings
Stamps and vouchers
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EXERCISE 2.2
Put the cross in the right box. Define item in details !!!
Item Equity Not-own
capital
Other liabilities
Payables to suppliers
Short-term bank credit
Registered capital
Unpaid income taxes
Statutory reserve account
Bonds issued with 3 years
maturity
Payables to employees
Long-term bank credit
Retained earnings deficit
Dividend to be paid
Retained earnings from previous
years
Accrued expenses
Profit of current period
Deferred revenue
Other paid in capital - gift
Property tax to be paid
Allowance for enterprise risks
Amounts payable to partner
Share premium
Credits for discounted securities
VAT to be paid
Tax deductible allowances
Due to social security institutions
Advance payments received
Salaries and wages
Net income
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EXERCISE 2.3
Put the cross in the right box. Define item in details !!!
Item
ASSETS LIABILITIES
F. A. C. A. Other Equity
Not-Own Other
Lorry
Statutory reserve account
Payables to suppliers
Receivables to customers
Legal capital
Merchandise in store
Work-in-progress
Other equity accounts
Payables to employees
Allowances for repair of fixed
assets
Receivables to employees
Bank account
Deferred revenue
Receivables for subscription
Bonds issued with 6 months
maturity
Bills of exchange to be
collected
Deferred expenses
Retained earnings from prev.
years
Shares for sale
Accrued expenses
Material on stock
Other amounts payable to
partners
Loss of current period
Finished products
Personal computer,
a.c.=29900 CZK
Share premium
Equipment,
a.c. = 600000 CZK
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Income tax to be paid
Buildings
Accrued revenue
VAT to be paid
Cash on hand
Bank loans
Software, a.c. = 65 000 CZK
Dividends to be paid
Other reserves
Advance payments received
Ownership interests
Advance payments made
Credits for discounted
securities
Incorporation expenses
Accumulated amortization –
software
Semi-finished products
Subsidies from the state
budget
Due to health insurance
institutions
Sole proprietor's account
