Simplified (interim) standards of small-scale business’s accounting

FROM THE REDACTION

In the next issue important elements of the Standard’s remaining sections will be presented to our readers, which will help the interested persons to practically use the Standard and better understand it.

Section 9 of the Standard concerns selling of goods, rendering of services, and recognition of the derived gain in using of the enterprise’s assets by other persons, according to which the gain’s appraisal should be made based on the real cost of the obtained compensation.
It is necessary to meet the following conditions for recognition of the gain obtained as a result of selling of the goods: 1. The enterprise will hand over to the customer all considerable risks and profits related to possession of the goods; 2. Reliable determination of the gain sum is possible; 3. Obtaining of economic benefit from the given operations at the enterprise is expected, and reliable determination of the impending expenditures during the current or the future period is possible in connection with the given operation. As to the gain from services, it should be recognized while rendering the services during the corresponding accounting period if there is a possibility of a reliable appraisal of the services’ results.
Example
The enterprise bought a processing line. The deal was made on the following terms: the buyer pays the cost of the line in the amount of 4 000 GEL and VAT (720 GEL) within the following banking day after receiving of the line, according to the rules of money transferring to the supplier’s account. In case of breaching the terms the buyer pays the supplier a fine in amount of 0.2% for each overdue day. The cost price (in GEL) of buying of the processing line should be determined based on the obtained data.
The machine-tool received
from the supplier 4 000
Including VAT 720
Transportation expenses 200
Installation expenses 400
The cost price of the processing line will make up (4000 – 720 + 200 + 400) 3880 GEL (720 GEL VAT represents a tax liable to payment). If we suppose that the enterprise will transfer the money with 10 days delay, it will have to pay additional 80 GEL (4000 X0,02). But the cost of the fixed assets will not be increased by this sum.
In case when a reliable determination of the result of the operation related to rendering of services is impossible, the recognition of the gain takes place only within the sum of the incurred expenses that will be liable to compensation.
The gain obtained from using the enterprise’s assets by other persons should be recognized in the form of percentage rate, royalty and dividends, if it is expected that the enterprise will gain economic profits in future, and reliable appraisal of the gain is possible.
It is explained in the Standard that recognition of percentage rate takes place in proportion to the time during which obtaining of the actual final result envisaged by the corresponding assets takes place.
Recognition of dividend takes place as soon as the right of a shareholder to getting a dividend comes into force.
Royalty is recognized by means of extra charge method according to the content of the corresponding agreement.
It is noteworthy that if the gain is already reflected in the accounting report and after which taking out of the sum liable to payment will become dubious, the sum liable to taking out should be recognized in the form of expenses, but not as already reflected correction of the gain’s sum.
Explanatory notes concerning state grants and business accounting are considered in Section 10 of the Standard. According to the standard, the enterprise can obtain the state’s aid in different forms. State grants can be in the form of subsidies, subventions, or state premiums. The privilege given to the enterprise by the sate, tax remissions, and other types of aid whose cost is impossible to determine are not considered as a state grant.
A state grant should be recognized in the form of income, in proportion to the spending covered by the grant during the periods when corresponding expenses are made. Crediting of the grant directly in the owner’s capital is not allowed.
Recognition of state grants as income right after their receiving is not desirable. Recognition of a grant as income right after its receiving is possible only when the expenses covered by the grant have already been made and there are no grounds for redistribution of the grant for another accounting period.
State grants related to assets, including non-money grants with real cost, should be presented in the balance in the form of the grant’s overdue income.
Example
If we deal with money grants, their calculation should be made in the following way:
Debit – cash in the national currency (1110)
Credit – non-operational income (8190)
If the grant is recognized as overdue income, then
Debit – in national currency cash (1110)
Credit – overdue income (4410)
In recognition of a part of the grant as income
Debit – a pert of the overdue income (4410)
Credit – other operational incomes (6190)
Operations in foreign currency often take place in the activities of an enterprise, during which a difference between the exchange rates takes. As for the above-stated, it is noted in the 11th section of the standard that operations carried out in foreign currency should first of all be reflected in the account currency (GEL), taking into account the exchange rate between the account currency and the given foreign currency for the date of completion of the operation. At the end of each accounting period the balance sheet accounts appraised in foreign currency should be presented using the final exchange rate.
If the exchange rate existing for the moment of payment money balance sheet accounts or for the date of presentation by the enterprise of money balance sheet report differs from the initially reflected exchange rate, the arising exchange rate differences should be recognized in the form of incomes or expenses during the corresponding accounting period.
Example
The enterprise sold goods on credit to a foreign buyer on the terms of payment during 90 days. It was agreed upon the payment would be made in US dollars. The total cost makes up 1000. The delivery of goods was made on December 20, 20X3. The exchange rate of USD makes up 1.80 GEL.
Debit – supply and service requirements (1410) 1 800
Credit – income after selling (6110) 1 800
At the end of the accounting period the requirements related to foreign operations are adjusted in view of changes in the exchange rate. On December 31, 20X3 the exchange rate of USD makes up 1.90 GEL
Debit – supply and service
requirements (1410) 100
Credit – profit from the difference
between the exchange rates (8140) 100
Requirements related to foreign operations are adjusted. The sum of 1 000 USD is paid on February 15, 20X4. For this moment the exchange rate of 1 USD makes up 1.85 GEL. The sum was paid by transferring to the opened dollar account in Georgian bank
Debit – foreign currency
in resident bank (1220) 1850
Debit – loss from the difference
in exchange rates (8240) 50
Credit – supply and service requirements (1410) 1 900
In the explanatory notes of its financial accounts the enterprise should disclose information concerning the amount of exchange rate difference reflected in losses and incomes accounts during the accounting period.
Noteworthy are the articles of the Standard where peculiarities of recognition of conditional obligations and conditional assets are indicated. In particular, conditional obligation is reflected in the explanatory notes of financial accounts, with the exception of the case when transferring of materialized economic profit to economic profit is expected in the distant future.
Conditional assets can be formed as a result of unplanned or other unforeseen events, which stipulate the possibility of inflow of economic profit to the enterprise. Their recognition in the financial accounts does not take place, since this can cause recognition of the profit that will never be obtained. That is why conditional assets are reflected in the explanatory notes of the financial accounts.
As for non-material assets, their recognition should take place only when inflow to the enterprise of prospective economic profit related to the assets is expected, and reliable appraisal of the assets’ cost is possible.
Initial non-material appraisal of the assets should be made taking into account the cost price.
Example I
The enterprise bought a non-material asset for 20 000 GEL. It paid 120 GEL for registration of this operation, including 20 GEL VAT. The payment of the asset’s cost will take place within a year from the date of buying. The enterprise will pay 12% in connection with installments. If the enterprise does not carry out capitalization of interest on the debt, the cost price of the bought non-material asset will be 20 100 (20 000 + 100) GEL, and in the case of capitalization of interest – 22 500 (20 000 + 2 400 + 100) GEL
II
The non-material asset is bought for 1000 GEL
Debit – non-material assets (2500) 1000
Credit – cash in the national currency (1110) 1000
III
A non-material asset is obtained instead of the fixed assets. Calculation cost of the fixed assets is 10 000 GEL. Accumulated wear 1000 GEL. 100 GEL in cash was received along with the asset.
Debit – non-material assets (2500) 8900
Debit – cash in the national currency (1110) 100
Debit – wear of the machinery (2250) 1000
Credit – machinery (2150) 10 000
The goodwill created at the enterprise should not be recognized as asset. None of the non-material assets created as a result of research efforts should be recognized. The expenses incurred during the research efforts should be recognized as spending right away. The trade mark created at the enterprise, the names of newspapers, magazines, and publications, the list of customers should not be recognized as non-material asset.
The expenses made for a non-material item that does not represent a part of the cost price of the non-material asset, should be recognized as spending right away.
After the initial recognition the non-material asset should be reflected by the sum of its cost price which is reduced by any accumulated amortization sum.
The sum liable to amortization of the non-material asset should be systematically distributed for the useful service term determined by means of best appraisal. There is an admission that the useful service term of the non-material asset should not exceed 20 years from the date of starting of its use.
The enterprise which in its financial accounts separately reflects the current and long-term assets, represents the current investments in the form of the current assets, and the long-term investments in the form of long-term assets.
The investments that are classified as current assets, after recognition by the initial cost price, should be reflected in the financial accounts by the least sum between the market price and the cost price of the investment. At the same time it must be said that the book value should be determined based on individual investment.
The investments that are classified as long-term assets should be recognized in the balance by the cost price.
The enterprise, after recognition by the initial cost price, should use the accounting policy of book value’s increasing or decreasing with the purpose of reflection of the current investments in the balance. At the same time the sums of investments’ book value increasing and decreasing should be reflected in the form of incomes and expenses.
In selling of investment, the difference between the net profit and the investments’ book value should be reflected in the form of incomes or expenses.
Transferring of the long-term investments reclassified as the current investments should be made by the book value.
Transferring of the current investments to the reclassified investments should take place by the least sum between the cost price and the market price (in the next issue we will present special cases related to calculation of investments).
The following should be included in the income: interest, dividend: the profit obtained from selling the current investments and losses; decreasing of the market price and cancellation of such decreasing in accordance with the current investments that are reflected in the form of the least sum between the cost price and the market price.
The following should be reflected in the explanatory notes of the financial accounts: accounting policy (book value of investments, the method of reflection of changes of the investments’ market price); the sums included in the income (interest, dividends, the profit obtained from selling the current investments and losses, changes in the cost of such investments).