Accounting (Basics) - Lecture 8 CHARACTERISTIC OF CLEARING RELATIONS. ACCOUNTING PROCEDURES CONCERNING RECEIVABLES AND LIABILITIES (PAYABLES) FROM BUSINESS RELATIONSHIPS. Content nCharacteristic of clearing relations nAccounting procedures concerning receivables and liabilities (payables) from business relationships 2 Debtors and Creditors nDebtors and creditors mean the liabilities (payables) and receivables of the entity towards other entities. nDebtors and creditors include trade payables and liabilities, accounting with employees, partners, institutions and financial bodies, accounting of short-term loans and credits and accounting on temporary accounts of assets and liabilities. n 3 Debtors and Creditors nDebtors and creditors include: nReceivables (short-term and long-term). Here, mostly the receivables from clients, advanced paids to suppliers, complaints towards suppliers and bills for collection submitted to the bank are accounted. nLiabilities (short-term). In this group short-term liabilities (payables) to suppliers, accepted short-term advances from clients, liabilities from complaints and notes payable are accounted. 4 Debtors and Creditors nAccounting with employees and institutions. Here the liabilities from labour relations including health insurance and social security, other payables to employees, receivables from employees from advances paid for travel expenses and compensation claimed by employees are accounted. 5 Debtors and Creditors nAccounting for taxes and subsidies. In this group advances paid for income tax during the year and withholding income tax for income taxed with a special tax rate in cases where, under the income tax law, withheld tax may be accounted as the total tax liability are covered. nAs of the balance sheet day, the liability of the entity is accounted from the tax due for the tax period based on the tax return. nAlso, withheld income tax to be paid by the entity as the payer of taxes collected from tax payers. nValue added tax, other taxes and fees are also included in this group. 6 Debtors and Creditors nReceivables from partners, cooperative members and group entities. Here short-term loans to entities of the consolidation unit, receivables from shareholders, partners, cooperative members, etc are covered. nPayables to partners, cooperative members and group entities. Here, e.g. short-term liabilities to entities within the consolidation unit, payables to shareholders, partners, cooperative members, etc. are accounted. 7 Debtors and Creditors nOther receivables and liabilities. In this group receivables and liabilities from sale of the business, receivables and payables from fixed term deposits, receivables and payables upon issue and purchase of short-term bonds, etc. are accounted. 8 Debtors and Creditors nTemporary accounts of assets and liabilities. In this group transitional accounts of assets and liabilities, accrued expenses and revenues, income and expenditures are accounted. nAdjusting entry to debtors and creditors and internal settlement. Here is where adjusting entries to receivables, the reduction and/or cancellation thereof, are accounted. n 9 Mutual compensation nReceivables and liabilities in accounting and financial statements must not be mutually compensated (calculated against each other or set off), with the exception of: qAdditionally assessed tax and refunds for income taxes, indirect taxes and fees (under conditions agreed upon in advance), compensation of credit notes and refunds. qReceivables from and liabilities to the same individual person or corporate entity may be compensated if accounted in the same currency and mature within one year. n 10 Allowances, adjusting entries and asset amortization nBusinesses are allowed to include into financial statements only profit actually reached and must take into account all foreseeable risks and possible losses relating to their assets and liabilities that they are aware of at the moment of preparing the financial statements, including all asset depreciations. nTo this end, allowances, adjusting entries and asset amortization are used. 11 Valuation of Receivables and Liabilities nReceivables are valued: qupon emergence of receivables through nominal value, qupon acquisition against payment or by means of deposit through purchase price, qas of the balance sheet day transitional reductions of receivables are expressed through an adjusting entry. 12 Valuation of Receivables and Liabilities nLiabilities are valued: qupon emergence through nominal (face) value, qupon takeover through purchase price, qif discovered during inventory that the value of liabilities is higher (and/or lower) than the value thereof named in accounting, the liabilities are accounted in the books and financial statements in this valuation, as discovered. 13 Valuation of Receivables and Liabilities nReceivables and liabilities reported upon emergence in a foreign currency are converted to the reference currency (in the Czech Rep. it is the Czech crown) by the foreign exchange rate. nWhen collecting receivables or paying liabilities, exchange rate differences are investigated and posted to profit and loss (as exchange rate profit and/or loss). n 14 Accounting Receivables nA receivable can be characterised as the right of an individual person or legal entity (creditor) to require the other party (debtor) to deliver a certain amount of currency based on a certain liability. n 15 Accounting Receivables nTrade receivables qThis account is where receivables from clients are accounted for. qReceivables from clients are credited to the supplier upon delivery under the respective contractual provisions in the contract. n 16 Accounting Receivables - example 17 nAccounting operations: qIssued invoice – value of delivery (goods supply, service) qAccounting of VAT qCurrent account statement, collection of receivables n Accounting Receivables - example 18 nAccounting operations - solution: qIssued invoice – value of delivery (goods supply, service): Trade receivables / Revenues qAccounting of VAT: Trade receivables / VAT qCurrent account statement, collection of receivables: Bank accounts / Trade receivables n Complaints from supplies nIf the client complains about a supply, one of the accounting methods is to account on the other side of accounts on which it was originally accounted. 19 Complaints from supplies - example nFor the invoice issued in the amount of the 120 client files a complaint in the amount of 20. The entity (not registered for VAT) acknowledged the complaint. The client will pay a lower amount. 20 Operation Text Amount Debit Credit 1 Invoice issued for services 120 Trade receivables Revenues from services 2 Defects identified complaint 20 Revenues from services Trade receivables Bill of exchange nA trade receivable may be paid by a bill of exchange. nThe bill of exchange is a security. nIf the bill of exchange fulfils the function of a security, it is viewed in accounting as a bill receivable, bill for collection. nBills for collection are valued by the purchase price resulting from the price of the receivable and interest. 21 Bill of exchange nBills of exchange may be: qpaid during their maturity periods, qsubmitted to the bank for discount (the discount of a bill of exchange means the purchase or sale of the bill prior to maturity date, with corresponding interest deduction (discount). n 22 Bill of exchange - example nThe receivable from example worth 120 was paid by a bill of exchange with a 10-percent interest. The bill of exchange was discounted at the bank with a 5-percent discount. The debtor paid the bill of exchange within the maturity period. n 23 Bill of exchange - example Operation Text Amount Debit Credit 1 Starting state of receivable 120 Trade receivables 2a Payment of receivable from client by bill of exchange 120 Bills for collection Trade receivables 2b Interest 12 Bills for collection Interest 3 Discount of bill of exchange 132 Receivables from discounted securities Bills for collection 4a Provision of discounted loan – credit to account 125 Bank accounts Discount loans 4b – discount 7 Interest Discount loans 5 Advice note of bank on payment of bill of exchange 132 Discount loans Receivables from discounted securities 24 Bill of exchange 25 nIf the debtor fails to pay the bill of exchange, the bank returns the bill of exchange to the original owner who must pay the discount loan. n Payment of operating advances - example nThe client provided to the supplier an advance payment of 50 for goods. Later on, the client received the goods ordered, including invoice for the amount 120. n n 26 Payment of operating advances - example n n 27 Operation Text Amount Debit Credit 1 Account statement – operating advance paid by an entity not registered for VAT 50 Payment of operating advances Bank accounts 2 Invoice from supplier for goods 120 Purchase of goods Trade payables 3 Accounting of operating advance paid 50 Trade payables Payment of operating advances 4 Account statement – payment of invoice to supplier 70 Trade payables Bank accounts Other receivables nIn this account other trade receivables are accounted, e.g. complaints at goods takeover from a supplier. n 28 Other receivables - example nAfter receiving an invoice, the client files a complaint for the amount of 15 which was acknowledged by the supplier. n 29 Other receivables - example Operation Text Amount Debit Credit 1 Invoice for material received from supplier 95 Purchase of material Trade payables 2 Identification of defects, filing of complaint 15 Other receivables Purchase of material 3 Acknowledgement of complaint by supplier 15 Trade payables Other receivables 30 Liabilities nA liability can be characterised as the duty of the individual person or legal entity to pay (deliver) to the other person (creditor) for goods, services, loans, damages, etc. n 31 Trade payables nIn this account short-term liabilities to suppliers emerging upon delivery of assets or services are accounted. 32 Trade payables - example nAn entity received an invoice from a supplier for services for 200 excl. VAT with a 21-percent VAT rate. It paid this liability from its current account. qA) the entity is registered for VAT qB) the entity is not registered for VAT n 33 Trade payables – example – A) registered for VAT Operation Text Amount Debit Credit 1 Invoice received from supplier for services – price excl. VAT – VAT Total 200 42 242 Other services VAT Trade payables 2 Account statement – payment of liability 242 Trade payables Bank accounts 34 Trade payables – example – B) not registered for VAT 35 Operation Text Amount Debit Credit 1 Invoice received from supplier for services – price excl. VAT 242 Other services Trade payables 2 Account statement – payment of liability 242 Trade payables Bank accounts Notes payable nThe liability to a supplier may be paid by a bill of exchange. nThe bill of exchange is a security, but becomes a bill payable, note payable, when the trade liability is paid. nNotes payable are valued by their purchase price created from the price of the liability and interest. n 36 Notes payable - example nAn accounting entity registered for VAT received an invoice for services from a supplier for 200 excl. VAT with a 21-percent VAT rate. It paid the liability by a bill of exchange with a 10-percent interest. The entity paid the bill of exchange from its bank account within the maturity period. n 37 Notes payable - example Operation Text Amount Debit Credit 1 Invoice received from supplier for services – price excl. VAT – VAT Total 200 42 242 Other services VAT Trade payables 2a Payment of liability 242 Trade payables Notes payable 2b Interest 24 Interest Notes payable 3 Current account statement – payment of bill of exchange 266 Notes payable Bank accounts 38 Operating advances received nIn this account advances paid by the consumer which are a liability for the entity are tracked. n 39 Operating advances received - example Operation Text Amount Debit Credit 1 Account statement – operating advance received, entity not registered for VAT 50 Bank accounts Operating advances received 2 Invoice issued for sale of goods 120 Trade receivables Revenues from sales of goods 3 Accounting of received operating advance 50 Operating advances received Trade receivables 4 Current account statement – collection of receivable 70 Bank accounts Trade receivables 40 Other liabilities nIn this account other trade payables are recorded, such as complaints filed by consumers. n 41 Other liabilities - example Operation Text Amount Debit Credit 1 Invoice issued for sale of goods 180 Trade receivables Revenues from sale of goods 2 Identification of defects, filing of complaint 30 Revenues from sale of goods Other liabilities 3 Acknowledgement of complaint 30 Other liabilities Trade receivables 42