Financing of Building Order: Accounting & Tax Insights

1. Lecture was elaborated with the help of grant project of Ministry of Education, Youth and Sports, FRVŠ n. 2005 „Innovation of Subject Financing of Building Order“ Building order returns and costs control

2. Function of Accounting • Provides information fro decision making and management of the company • Provides information about the company's economy • Enables the control of the property economy • Assurance of information for tax purposes • Serves as a proper evidence in disputes Basic legal document: Law n. 563/1991 Coll., about accounting The duty is to do accounting completely, in conclusive and right way Financing of Building Order

3. Ways of Business Activities Filing Tax evidence – defined by income tax law, used by physical persons having incomes from enterprise (traders, lawyers, consultants) that are not accounting entity. Accounting – defined by accounting law, used by corporations and by physical persons that became accounting entities. Physical person – accounting entity: • Revenues from last year higher then 25 mil. CZK • Voluntary decision of physical person • Registration in trade register Financing of Building Order

4. Basic Differences Between Tax Evidence and Accounting Tax evidence serves mainly for the right income tax base assessment, accounting provides more complex view of the company's management. Economic result is ascertained: In tax evidence – difference between incomes and expenditures In accounting – difference between revenues (returns) and costs Incomes – accepted money in cash or on bank account Expenditures – decrease of money in cash or on bank account Revenues – outputs expressed in CZK Costs – consumption of productive factors Financing of Building Order

5. Financial and Managerial Accounting Financial accounting Provides compact set of information about assets and liabilities of the company, about costs, revenues and economic result. Records financial relations of the company in the face of external surroundings. Managerial accounting Crates the set of information necessary for efficient management inside the company. Parts are e.g.: • Interplant accounting • Calculations • Budgeting Financing of Building Order

6. Financialaccounting Financial analysis Budgets Controlling OUTPUTS of managerial accounting Calculations Statistics

7. Accounts Distribution of balance sheet into particular items of assets and liabilities, for each of them is created individual „table“ = account. On accounts it is possible to monitor: • State at specific date – opening balance • Changes of items – increases and decreases and their additions (turnovers) • State at the end of accounting period – ending balance Scheme of the account – letter T Agreed denomination of account sides: • Left side Debits – debit side of account • Right side Credits – credit side of account Accounts created by distribution of the balance sheet are called „balance sheet accounts“ • Active • Passive Financing of Building Order

8. Scheme of Bookkeeping on Particular Types of Accounts a)Active accounts Debits Credits Opening balance decreases of actives increases of actives Ending balance OB + Td - Tc b) Passive accounts Debits Credits decreases of passives Opening balance increases of passives Ending balance OB + Tc - Td Financing of Building Order

9. Account Classification • Overview of all accounts used in the accounting system • It consists from ten account classes, each class is divided into groups, in the frame groups there are defined specific accounts • Account classes are following: • Account class 0 – Fixed assets • Account class 1 – Inventory • Account class 2 – Financial accounts • Account class 3 – Accounting relations • Account class 4 – Capital accounts and long-term payables • Account class 5 – Costs • Account class 6 – Revenues • Account class 7 – Closure accounts • Account classes 8, 9 – Interplant accounting Financing of Building Order

10. Balance Sheet is an Overview of Assets and Liabilities at Specific Moment Assets Liabilities A. Receivables from subscriptions B. Fixed assets A. Equity 1. Intangible fixed assets 1. Registered capital 2. Tangible fixed assets 2. Capital funds 3. Long-term financial assets 3. Reserve funds C. Current assets 4. Profit / loss previous years 1. Inventory 5. Profit / loss current year - materials B. Other sources - work in progress and semi-products 1. Reserves - merchandise 2. Long-term payables 2. Long-term receivables 3. Short-term payables 3. Short-term receivables - trade payables 4. Short-term financial assets - payables to social securities and social ins. - cash - tax liabilities - bank accounts - payroll - short-term financial asset acquired 4. Bank loans and financial accommodations D. Accruals C. Accruals Financing of Building Order

11. Example of Changes in Balance Sheet Items Actives Opening balance sheet Passives Cash 15 000 CZK Registered capital 130 000 CZK Computer 50 000 CZK Bank account 110 000 CZK Liabilities towards financial office 45 000 CZK Totally 175 000 CZK Totally 175 000 CZK • From bank account was paid tax to financial office Actives Ending balance sheet Passives Cash 15 000 CZK Registered capital 130 000 CZK Computer 50 000 CZK Bank account 65 000 CZK Totally 130 000 CZK Totally 130 000 CZK Financing of Building Order

12. Profit / Lost Account • Provides information about reproduction process in a company (about costs, revenues and the economic result creation) • From the profit and lost report it is possible to find out the creation of following economic results: • Economic result for the current company’s activity • Operational economic result • Financial economic result • Additional (exceptional) economic result • Profit and lost report includes the income tax creation • For the current company’s activity • For the additional (exceptional) company’s activity Financing of Building Order

13. Profit / Lost Account Revenues • Operational revenues (returns from sale of products and services) • Financial revenues (interest) • Extraordinary revenues Cost • Operational costs (material, wages) • Financial costs (paid interest) • Extraordinary costs Revenues - costs = profit / loss before tax • Corrections of profit Tax base Income tax Profit (after tax) Financing of Building Order

14. Cash Flow Statement • Describes the amount and the structure of cash-flows running during accounting period in the company • At the cash-flow report creation there are used data from the balance sheet and the profit and lost report • Separately there are described cash-flows in the frame of operational, investment and financial company’s activity Whole cash-flows it’s possible to find out by the addition of partial cash flows: • Operational • Investment • Financial Financing of Building Order

15. Cash Flow Statement – General Structure Net economic result • + depreciation of fixed (long-term) assets • +,- changes in the active assets state • +,- changes in the liability’s state Operational cash flows • + incomes from the fixed (long-term) assets sale • - purchase of fixed (long-term) assets Investment cash flows • + increasing of (bank) credits • - bank credits repayments • + increasing of long-term sources (liabilities) • + dotations • - payments of dividends Financial cash-flows Financing of Building Order

16. Revenues and Costs for Construction from the Aspect of Supplier • Are monitored from the reason of revenue and cost control for needs of management • From the aspect of supplier arise: • Revenues for: • Own products • Services • Merchandise • Costs for: • Consumption of materials • Wages • Social and health insurance • Services (sub-supplies, phone services, energy, projects) • Consumption of fuel Financing of Building Order

17. Monitoring of Costs on Building Order • Revenues – account class 6.. • Costs – account class 5.. • Account class 6.. • Account group 60 revenues for own production and goods • Synthetic account 602 returns from sale of services • Analytic account 602.1 Revenues from sale of services (order . 1) • Account class 5.. • Account group 50 consumed purchases • Account group 51 services • Synthetic account 512 traveling expenses • Synthetic account 518 Other services • Analytic account 518.1 Other costs for order n. 1 Financing of Building Order

18. Analytic Evidence of Costs and Revenues • Synthetic accout (costs) 5.. • Costs for material, order n. 1128 501.1128 • Costs for direct material, order n. 1128 501.1128.100 • Costs for overhead material, order n. 1128 501.1128.200 • Synthetic account (revenues) 6.. • Analytic evidence of revenues from sale of services, order n. 1128 602.1128 • Economic result – the difference between revenues and costs Financing of Building Order

19. Costs in Accounting System • The most frequent revenues according to the kind – synthetic accounts • Revenues for own products 601 • Revenues from sales of services 602 • Revenues from sale of merchandise 604 • The most frequent costs according to the kind – synthetic accounts • Consumption of material 501 • Consumption of energy 502 • Services 518 • Wage costs 521 • Social and health insurance 524 • Depreciation 551 • Financial costs 568 Financing of Building Order

20. Classification of Costs from the Intra-plant Aspect • Purpose classification of costs • Line of outputs – assignment of costs to specific outputs • Line of departments – assignment of costs from the aspect of their arising • Classification according to the capacity utilization • Fixed costs – in the frame of certain production capacity no dependence on amount of production • Variable costs – dependant on the amount of production • Classification according to the bookkeeping • Primary – kept on account just in the financial accounting • Secondary – arise as a result of co-operation with other departments • Classification according to the calculation • Direct – possible to express them on the calculation unit (m2, m3, order) • Indirect – no possibility to express them on the calculation unit Financing of Building Order

21. IFSR –Standards in the Area of Civil Engineering • It concerns about the international standard of financial reporting • For the civil engineering is in the frame of IFRS determined one standard IAS 11 – Building Contracts • Czech Accounting Standards do not have special standard for area of civil engineering • From the financial aspect costs in IAS 11 are classified in following way: • Acceptable • Directly related to the specific contract (material, wages, depreciation of machines, transport, repairs, sub-supplies, intra-plant costs …) • Generally related (overhead costs for construction, administration of building, costs for project, building overhead costs including administration and accounting of the construction) • Costs handed to the customer according to the special agreement (research and development specified in the agreement, concluded general administration) • Not acceptable • Costs, which is not possible to accept (general administration of a company, costs for sale, depreciation of buildings and machinery not used during the building order realization …) • Costs, which it is not possible to calculate (operational overhead costs of not finished constructions and not handed sub-supplies, costs for material and equipment not consumed in the production process, reserves for future costs …) Financing of Building Order

22. IFSR –Standards in the Area of Civil Engineering • IAS is related to contracts with the fixed price and contracts with the price created as an addition to costs • Revenues are defined as a percent share in the contracted price of finished part of construction (relationship between consumed costs and total costs or only consumed costs) • From the aspect of revenues IAS accepts only the revenues to that were in the same accounting period exerted costs relating with the specific order Financing of Building Order