OBJECT OF ACCOUNTING ASSETS AND LIABILITIES

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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

Figure

Updating...

References