Simplified Standards of Small-scale Enterprises’ Business Accounting
Lali Chagelishvili
This time in the Accounting Bulletin column we present you Simplified (interim) Standards of Small-scale Enterprises’ Business Accounting approved by the Georgian parliament.
On April 5, 2005 Commission on Business Accounting under the Georgian parliament passed a decision concerning the approval of “Simplified (interim) standards of small-scale enterprises’ business accounting” which will come into effect from January 1, 2006.
“Simplified (interim) standards of small-scale enterprises’ business accounting” are based on the following laws: “On private enterprise”, “On small-scale and medium scale enterprises”, and “On the regulation of business accounting and accounts”.
The adoption of the Standards was based on the recommendations of the experts work group taken at the 18th international session of accountants and auditors. The Standards represent a simplified version of international bookkeeping and auditing standards were worked out by the Georgian Federation of Accountants and Auditors.
If the rules envisaged in the Standards do not contain all aspects of enterprise’s economical activity, or an enterprise finds itself in a situation which is not regulated by the Standards, it should be guided by the corresponding international bookkeeping and auditing norms.
The Standards are not used for presentation to the National Commission on Securities by the accountable joint-stock companies or other enterprises which are issuers of securities, if their use is not allowed by the rules of the National Commission on Securities.
The main international bookkeeping and auditing concepts of financial accounts along with the acknowledgement and appraisal principles are preserved in the Standards. According to the presented standards, the accounting norms based on cash method are allowed for individual entrepreneurs.
The structural basis of the Standards is intended for the preparation of simplified general financial accounts. The main principles of the Standards are determined in the structural basis.
Financial accounting represents a picture of enterprise’s financial situation. Its purpose is to assist the customers to take economic decisions by means of financial information, for whom financial accounts are the main source of information.
In spite of the fact that it is impossible to meet information requirements of all customers, there are the kinds of requirements that are common for all customers.
The simplified financial accounting is being prepared based on the principles of preserving of original cost and nominal financial capital. Financial accounting should be prepared by means of accrual concept. According to this method, recognition of economic operations takes place at the moment of their accomplishment, and not at the moment of receiving of funds. The following still remain qualitative characteristics of the financial accounts: perception, compliance, reliability and comparability.
The appraisal of financial accounts’ elements (assets, liability, owned capital, incomes, expenditures) should be carried out by using the methods of original cost, current cost, selling cost, and discounted cost.
Financial accounts should accurately reflect the results of financial activities and money flows during the accounting period of the enterprise, as well as true financial situation by the end of the accounting period. In case of necessity, for provision of accuracy in the accounts, such additional explanatory notes can be introduced that are not required by these standards.
The management should implement the accounting policy of the enterprise so that it should meet all the requirements of the Standards. If there is no corresponding instruction confirmed by the financial accounts standards, the management of the enterprise should work out the kind of accounting policy that will provide the customers with most necessary accounts information concerning the enterprise. In the process of taking this kind of decisions the management of the enterprise should consider qualitative indicators of financial accounts and the main provisions determined in the structural foundations, as well as the criteria of financial accounts’ appraisal and acknowledgement, and also the norms established by the regulatory body for large enterprises.
In the preparation process of enterprise’s financial accounts it should be determined if the enterprise has the ability of continuing its production activities. If the management of the enterprise has plans concerning liquidation of the enterprise, or concerning the discontinuance of its operation, or there is no choice of acting otherwise, the financial accounts should be prepared on the basis of other norms. The management of the enterprise should disclose the following information: concerning the existing factors that cast doubt on the possibility of the enterprise’s further operation; an unforeseen fact in the process of financial accounts’ preparation; the norms based on which the financial account was prepared. Financial accounts of the enterprise, except the money flows accounts, should be prepared by means of accrual concept. In this case economic operations and events should be recognized at the moment of their implementation, and should be reflected in financial accounts and accounting reports, where the date of their implementation will be indicated. In the accounts of incomes and losses the acknowledgement of expenses should be made on the basis of direct connection between the concrete items. At the same time, the items that do not correspond to the notion of assets and liabilities should not be reflected in the balance.
Let us draw an example: after each financial operation carried out by the enterprise on balance equivalence (that is as soon as the operation has been carried out a corresponding balance is drawn up). Let us say that a firm implemented economic operations in 12 days’ period in the following consecution:
The 1st day – the firm begins activities and puts up 2000 GEL in business in the form of initial capital.
Balance – Money 2000 GEL – Capital 2000 GEL
The 2nd day – for its activities the firm buys a motor car for 500 GEL cash payment.
Balance – Money 1500 GEL (2000-500) – Capital 2000 GEL
Motor car 500
Total 2000
The 3rd day – the firm purchases 300 GEL worth of goods for cash payment
Balance Motor car 500 Capital 2000 GEL
Money (1500-300) 1200
Stock (goods) 300
Total 2000
The 4th day – the firm sells all the goods that it bought on the 3rd day for 400 GEL, the money was received in cash.
Balance – Motor car 500 – Capital 2000 GEL
Money (1200+400) 1600 Profit 100
Stock –
Total 2100 Total 2100
The 5th day – the firms buys 500 GEL worth of goods on credit (on terms of later payment)
Balance Motor car 500 Initial capital 2000
Money (1200+400) 1600 Profit 100
Stock 500 Total 2100
Total 2600 Creditors 500
Total 2600
The 6th day – the firm sell on credit for 350 GEL (with later payment) the half of the goods bought by it. That is on that day the 250 GEL worth of stock was sold for 350 GEL; profit 100 GEL, debit, that is the sum to be received, 350 GEL. By the end of the day 250 GEL worh of goods remained in the form of stock.
Balance Motor car 500 Initial capital 2000
Money (1200+400) 1600 Profit (100+100) 2000
Stock (500-250) 250 2200
Debitors 350 Creditors 500
Total 2700 Total 2700
The 7th day – the firm pays 200 GEL to its trade creditor.
Balance Motor car 500 Initial capital 2000
Stock (500-250) 250 Profit 200
Debitors 350 2200
Money (1600-250) 1350 Creditors (500-250) 250
Total 2450 Total 2450
The 8th day – the firm receives 120 GEL from its trade debitor.
Balance Motor car 500 Initial Capital 2000
Stock (500-250) 250 Profit 200
Debitors (350-120) 230 Creditors 250
Money (1350+120) 1470
Total 2450 Total 2450
The 9th day – the owner of the firm takes 70 GEL for personal needs.
Balance Motor car 500 Initial capital 2000
Stock (500-250) 250 Profit + 200
Debitors (350-120) Taken out – 70
Money (1470-70) 1400 Creditors 250
Total 2380 Total 2380
The 10th day – the firm paid the rent of 40 GEL.
Balance Motor car 500 Initial capital 2000
Stock (500-250) 250 Profit (200-40) 160
Debitors (350-120) 230 Taken out – 70
Money (1400-40) 1360 Creditors 250
Total 2340 Total 2340
The 11th day – the firm borrowed 600 GEL on terms of repaying it within 2 years.
Balance Motor car 500 Initial capital 2000
Stock (500-250) 250 Profit 160
Debitors (350-120) 230 Taken out – 70
Money (1360+600) 1420 Loans 600
Total 2940 Creditors 250
Total 2940
The 12th day – the firm paid 50 GEL of insurance expenses.
Balance Motor car 500 Initial capital 200
Stock (500-250) 250 Profit (160-50) 110
Debitors (350-120) 230 Taken out – 70
Money (1420-50) 1370 Loans 600
Total 2890 Creditors 250
Total 2890
Assets = capital+liabilities
2890 = 2040 + 850
An enterprise which uses classification of expenses according to the functions is obliged to disclose additional information on the content of the expenses, including the estimates of assets and amortization, as well as the expenses for personnel. Within the accounting period the enterprise should separately present the net profit and the losses (see the continuation in the next issue).