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ОглавлениеINTRODUCTION AND SURVEY OF THE CONTENTS
The textbook “Management Accounting.”, which forms the basis for the “Workbook 1 – Balance Sheet | Profit/Loss Account” wants to give a comprehensive overview of the topic accounting/controlling – the Big Picture which shows the central elements of accounting/controlling and their connections.
“Management Accounting.” deals with the contents of and the connections between balance sheet, profit/loss account, contribution margin costing, results statement, profit plan, finance plan and budgeted balance sheet. In the operating business these elements are often viewed at and analyzed in an isolated way, although they build on a common data basis, and although there is constant interaction between them. In “Management Accounting.” the mentioned elements are linked to each other.
The approach that is used in “Management Accounting.” focuses on two central connections which form the basic structure of presenting the economic activities in accounting/controlling of an enterprise:
The first of these two connections is the basic connection between balance sheet and profit/loss account which is presented in its concrete numerical effects here in the “Workbook 1 – Balance Sheet | Profit/Loss Account”.
The second decisive connection is based on the interaction of the components result (profit or loss respectively), liquidity (solvency) and balance sheet which – with a view to the future – are presented through the elements Profit Plan, Finance Plan and Budgeted Balance Sheet.
Under the aspect of communicating a total overview and of concentrating on connections, there are substantial differences between “Management Accounting.”, and also “Workbook 1 – Balance Sheet | Profit/Loss Account”, compared to classical textbooks on accounting/controlling or to standard literature in the field of accounting/controlling.
Like this, in “Management Accounting.” an approach has been chosen on purpose, to show the connections between balance sheet and profit/loss account, so that only the final effects of economic activities are considered – directly in balance sheet and profit/loss account; the usual presentation of detailed accounts and entry formulas is completely avoided.
For putting “Management Accounting. Workbook 1 – Balance Sheet | Profit/Loss Account” into the correct groups of contents and topics, it is of great importance that the reader is fully aware of the fact that “Management Accounting. Workbook 1 – Balance Sheet | Profit/Loss Account” does not deal with entry formulas, bookkeeping or balancing but with presenting accounting/controlling effects of business activities directly in and on balance sheet and profit/loss account.
The business activities are presented in form of case studies or numerical examples respectively, in which the concrete numerical effects in and on balance sheet and profit/loss account are presented and annotated step by step and in detail.
To do so, numerical examples which have been presented basically in the textbook “Management Accounting.” are now presented in more detail and in individual steps in the “Workbook 1 – Balance Sheet | Profit/Loss Account”; as well as additional numerical examples that present further business activities or business cases respectively.
BALANCE SHEET | PROFIT/LOSS ACCOUNT
Every business activity of an enterprise always affects the profit/loss account and/or the balance sheet of an enterprise. Certain business activities affect only the balance sheet of an enterprise, other business activities however, affect both: balance sheet and profit/loss account.
In the context of balance sheet and profit/loss account it is decisive that both can only be determined together, meaningful and correct, under consideration of all business effects. Neither can a balance sheet present all business activities of an enterprise, nor can a profit/loss account do so.
In a first step, in the “Workbook 1 – Balance Sheet | Profit/Loss Account” the basic contents of balance sheet and profit/loss account are annotated in an overview. After that, the central connection between balance sheet and profit/loss account on the profit or loss respectively, is presented. Subsequently, the procedure in the framework of compiling balance sheet and profit/loss account is described in principle, as well as the procedure in the course of creating the numerical examples or case studies respectively.
All the connections presented here can be understood as generally valid basic principles and connections and can be applied universally, independent of specific national or international regulations on trade or tax laws.
BALANCE SHEET
Figure 1: Balance Sheet
A balance sheet is always a look at the enterprise at a certain point in time. It contains permanently stock values.
The balance sheet presents – referring to a certain point in time – the goods or assets an enterprise has available at exactly this moment and in what way the enterprise is financed at this moment (with equity or debt capital / liabilities)
On the left side of the balance sheet, the assets side, the assets of an enterprise are presented, structured into fixed assets (non-current assets) and current assets. On the right side of the balance sheet, the liabilities side, the source of the financial means of the enterprise is presented, differentiating between equity and debt capital.
A balance sheet has the following basic structure:
Figure 2: Balance Sheet
In a more detailed presentation the following, more expanded structure of a balance sheet is created:
Figure 3: Balance Sheet, Presentation in Detail
The item Fixed Assets as well as the item Equity remain unchanged (of which only the Reserves are presented in an own, special item, in addition to the existing balance sheet items).
The items Current Assets and Debt Capital are presented in more detail; the items Deferred Charges and Deferred Income are presented as extra items in addition to the existing items of the balance sheet.
In Continental-European accounting, the order of the presentation or the structure of the balance sheet items on both sides, usually happens from long-term to short-term, which means from the items that have been fixed for a long-term period in the enterprise to the short-term items that can be changed immediately.
So, on the assets side of the balance sheet the order starts with the fixed assets (long-term or permanently existing assets in the enterprise) and goes on to the current assets (short-term changeable items or constantly changing assets such as bank account or cash).
On the capital side | liabilities side of the balance sheet the structure begins with equity capital (long-term capital provided by the owners), goes on to debt capital and also within the debt capital from long-term to short-term, which means from a long-term bank loan to a short-term daily changing bank account | bank loan.
In contrast to the structure of the balance sheet described which is normally used in Continental-European Accounting, the balance sheet items Fixed Assets and Current Assets as well as Equity Capital and Debt Capital are presented in the reverse order in Anglo-American or International Accounting – according to the decreasing liquidity which means beginning with the assets bound for the shortest time (cash, short-term bank account) and capital items (short-term liabilities) to the long-term items which have been existing for a long time in the enterprise (fixed assets and equity capital).
These diverse structures have no effect on the contents in principal or on the basic information respectively of balance sheets or the items of the balance sheet. The numerical examples presented subsequently also affect the respective items of the balance sheet in the same way, independent of the form of their presentation.
Profit/Loss Account
Figure 4: Profit/Loss Account
The profit/loss account, in contrast to the balance sheet, is a period of time-oriented reflection of an enterprise, a consideration of the economic development of an enterprise in the course of time. The profit/loss account contains permanently flow values.
In the profit/loss account the result of the business activity (the profit or loss of the enterprise respectively) is presented – in form of the difference between expense and income. The income or turnover/sales which are achieved by selling products, goods or services are compared to the arising expense in the enterprise and the result of the comparison leads to the profit or loss of the enterprise.
The profit/loss account contains a list of all expense and income items which arise during a settlement period of an enterprise.
The difference between expense and income results in the profit or loss of the settlement period.
In its simplest form, the profit/loss account in the so called account form has the following structure and leads to the following result:
Figure 5: Profit/Loss Account, Account Form
As an alternative to the account form, the profit/loss account can also be presented in the so called report form. Again in its simplest form the report form follows the following structure:
Figure 6: Profit/Loss Account, Report Form
The resulting profit or loss is identical in both versions. The difference between the two versions happens like that:
In the profit/loss account in the account form, a list of all expenses is compiled which is contrasted to all income (turnover). The difference between the total income (turnover) and the total expenses results in the profit or loss.
The profit/loss account in the report form, however, starts with the turnover/sales in the first line from which – step by step – the individual expense items are taken off in the following lines, until finally a profit or loss remains.
In the numerical examples which are presented in the “Workbook 1 – Balance Sheet | Profit/Loss Account”, for presenting the profit/loss account, the presentation in form of accounts has been chosen on purpose, in contrast to the presentation in a report form, as the effects of business activities in the context of profit/loss account and balance sheet (which is also presented in the account form) can be more easily presented and can be better and more easily understood in the form of accounts.
BALANCE SHEET | PROFIT/LOSS ACCOUNT – CONNECTION
Figure 7: Balance Sheet and Profit/Loss Account
The connection between balance sheet and profit/loss account can be seen in the result of the profit/loss account – in the profit or loss.
The basis for the presentation of the economic connections in an enterprise is the opening balance sheet at the beginning of the business year. When an enterprise is founded, it is the opening balance sheet, in an existing enterprise it is the closing balance sheet of the previous year that is taken as the opening balance sheet for the subsequent year.
The development or the result of the business year respectively is presented in the profit/loss account. All expenses and all income which have occurred in the course of a business year in an enterprise are incorporated into the profit/loss account. Like that, the profit/loss account summarizes the result or the profit respectively of the business activity of an enterprise.
The balance sheet at the end of a business year (the closing balance sheet) presents how the enterprise is structured at the end of the business year, how the assets are composed whether of fixed or current assets and how the capital is composed, of equity or debt capital. It must be considered however, that the equity capital was changed by the profit or loss that was transferred from the profit/loss account.
So, the profit or loss are the central elements in connection between the profit/loss account and the balance sheet, and this in two ways:
The profit or loss are the central result of the profit/loss account.
However, the profit or loss also form the central connection between profit/loss account and balance sheet: a profit from the profit/loss account increases the equity in the balance sheet, a loss reduces the equity in the balance sheet.
BALANCE SHEET | PROFIT/LOSS ACCOUNT – procedure
In its simplest form the compilation of balance sheet and profit/loss account follows the following procedure:
After presenting all business activities in balance sheet and profit/loss account, balance sheet and profit/loss account are closed.
In a first step, the sum total of the total expenses and the sum total of the total income are compiled. If the income exceeds the expenses for the business year, it results in a profit. If, however, the expenses exceed the income, it leads to a loss.
This profit or loss from the profit/loss account now affect the balance sheet: a profit from the profit/loss account increases the equity in the balance sheet, a possible loss reduces the equity in the balance sheet.
After allocating the profit or loss from the profit/loss account to equity capital in the balance sheet, the two sums on the left and on the right side are compiled finally. These two sums of the balance sheet must now match, if all business cases have been presented correctly and fully in the profit/loss account.
It is crucial for the numerically correct compilation of the balance sheet together with the profit/loss account to follow a quite simple rule: every figure that has been entered into a profit/loss account or a balance sheet respectively, must affect balance sheet or profit/loss account a second time.
Only like that, you can make sure that the balance sheet matches, that both sides of the balance sheet result in the same balance sheet total in the end.
In this connection it must be taken into account that certain business activities only affect the balance sheet of an enterprise, others however, affect the balance sheet and the profit/loss account.
Balance Sheet | Profit/Loss Account – Numerical Examples
The following numerical examples presented in the “Workbook 1 – Balance Sheet | Profit/Loss Account” are designed for making the context between Balance Sheet and Profit/Loss Account clear.
As explained at the beginning, the “Workbook 1 – Balance Sheet | Profit/Loss Account” contains no bookings or entry formulas – on purpose – to present the connections between balance sheet and profit/loss account. Instead, the content-oriented relationship of the business activities and their direct effects on balance sheet and profit/loss account are presented.
The numerical examples presented are based on a simplified structure of the balance sheet and a simplified structure of the profit/loss account.
The simplified balance sheet structure of the numerical examples contains the following items – according to the design of the examples:
Figure 8: Balance Sheet, Structure for Numerical Examples
In the simplified structure of the profit/loss account used for the numerical examples, there are five central types of expenses which typically show up in the profit/loss account of an enterprise: material expenses, personnel expenses, depreciation, other expenses, interest paid.
The presentation is simplified in so far, as items such as Other Income, Income from Participations and Taxes are not taken into account. In the numerical examples presented, Other Income is added to the above mentioned expense items and to Turnover/Sales in the profit/loss account, if needed.
The simplified structure of the profit/loss account in the numerical examples contains the following items – according to the design of the example:
Figure 9: Profit/Loss Account, Structure for Numerical Examples
The following numerical examples are each based on an existing balance sheet and an existing profit/loss account. The profit/loss accounts which form the basis for the examples are always based on a profit/loss of 0. A possible profit or loss is only compiled when the respective economic activity is incorporated into balance sheet and profit/loss account.
After each numerical example – immediately after the assignment of tasks and the basic data – an empty answer sheet is added for entering the answers.
Please, incorporate the respective business activities (that have been described in the assignment of tasks) into the existing balance sheet and profit/loss account by supplementing their numerical effects on the respective item of balance sheet and profit/loss account, into the so far empty answer sheet.
Please, always follow the simple rule that every figure must have a double effect in the context of balance sheet and p/l.
In the next step, supplement the respective items of the basic balance sheet and basic p/l which have not changed through the presentation of the business activity.
Then compile the sum total of the total expenses, the sum total of the total income in the p/l, and subsequently compile the profit or loss that has arisen through the business activity by comparing expenses and income.
Please transfer the profit or loss into the balance sheet and increase the existing equity in case of a profit or reduce the existing equity in case of a loss.
After this conversion of profit or loss into the item Equity, the balance sheet must now lead to the same sum totals on the left side, the assets side, and on the right side, the capital side.
All kinds of taxes – taxes on income (income tax, corporate income tax, trade tax) as well as value added tax VAT – are not to be taken into account in the numerical examples.
On the following pages, after the empty answer sheet, the individual answer steps with exact annotations to the respective answer steps are presented. All answer steps are summarized and presented in a comprehensive (overall) answer.
The following numerical examples which represent typical business activities or business cases respectively, are presented in the “Workbook 1 – Balance Sheet | Profit/Loss Account”:
- Example 1: Foundation of an Enterprise
- Example 6: Investment and Financing
- Example 7: Purchase/Use of Goods, Turnover/Sales, Bank Account
- Example 8: Purchase/Use of Goods, Turnover/Sales, Receivables, Liabilities
- Example 10: Deferred Charges, Subsequent Year
- Example 11: Deferred Charges, Subsequent Year, Continuation
- Example 13: Deferred Income, Subsequent Year
- Example 14: Deferred Income, Subsequent Year, Continuation
- Example 15: Provision, Formation
- Example 16: Provision, Reversal
- Example 17: Provision, Payment
