Internal equity sources of finance

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Internal financing
Internal financing (self-financing) can be understood: - in the strict sense self-financing resulting from profit as a positive difference between the profit and the volume of its distribution outside a business - in the broader sense self-financing resulting also from the depreciation or other internal sources of a business

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Internal financing

Forms of self-financing: - open financing achieved profit is left in a business (as retained earnings) and used to expand production and operating capacities, i.e. to finance development of a business - hidden financing creation of hidden reserves when the profits are achieved, increased value of assets is not shown in the balance sheet or the reserves are hidden in the claims items (for example undervaluation of the assets by means of depreciation)

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Profit as an internal source of finance

Profit the most important internal source of finance Accounting point of view an item of retained earnings which represents a residual item of the process of the profit distribution Profit = revenues expenses

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Profit as an internal source of finance

The process of the profit distribution: Profit for a current period - income tax - allocation to the reserve fund - allocations to other funds - payments of directors fees and similar fees to members of statutory bodies - dividend payments or profit shares = retained earnings for a current period Retained earnings for a current period + retained earnings of previous (past) periods = retained earnings to the balance sheet date

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Profit as an internal source of finance

Factors influencing profit: the amount and structure of costs (fixed and variable costs, calculating categories of costs etc.) the volume of realized (sold) production tax policy dividend policy generation of reserve funds (compulsory funds, voluntary funds)

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Income tax

Income taxes are regulated by the Act no. 595/2003 Coll. of acts in wording of further regulations on income taxes. This act regulates the personal income tax and the corporate income tax. The current tax rate in the Slovak Republic is 19% of the tax base.

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Personal income tax

The income from dependent activities, the income from business activities, the income from other independent gainful activities and tenancy, the income derived from capital and sundry income is liable to the personal income tax.

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Personal income tax

The tax base the amount by which the taxable income provably exceeds the tax expenses used to achieve this income. Income from business activities, other gainful activities and tenancy lump-sum expenses equal to 40% of the aggregate income or 60% of such income (in case of crafts defined by special legislation)

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Personal income tax

The tax base shall be reduced by the following tax allowances: - a yearly amount corresponding to 19,2 times the living wages in force as of January 1 of the relevant tax period with respect to the taxable party (NEW 22,5 times from 1 March 2009!), - a yearly amount with respect to the spouse sharing a common household with the taxable party, if he/she does not have his/her own income

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Personal income tax

Tax bonus - any taxable party who earned taxable income equal to not less than 6 times the minimum wage may claim a tax bonus with respect to each maintained child, - the tax bonus shall be deducted from the tax payable.

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Tax calculation 2008 physical entity (a small trade)

Tax base (receipts expenditures) 300 000 Sk - a yearly amount per tax-payer 98 496 Sk = 201 504 Sk Income tax 19% ... 38 285 Sk Tax bonus (2 children... 555x6x2+582x6x2=13644 Sk) Income tax payable for 2008 is 24 641 Sk.

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Corporate income tax

The tax base is the accounting profit adjusted for tax purposes (for companies using double-entry bookkeeping) or the difference between the income and expenses (for businesses using single-entry bookkeeping).

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Tax calculation 2008 legal entity (a joint-stock company)

Tax base (revenues costs) 300 000 Sk 19% ... 57 000 Sk

Income tax payable for 2008 is 57 000 Sk.

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Depreciation

a term used in accounting, economics and finance with reference to the fact that assets with finite lives lose value over time, a newly generated source of finance within a business, it is a non-cash expense, a measure of wearing out, consumption or other reduction in the useful economic life of a fixed asset, the amount of depreciation that has cumulatively been charged to the profit and loss account from the date of its acquisition = depreciation provision (accumulated depreciation)

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Depreciation

fixed assets are stated in the balance sheet at their net book value, companies are not obliged to dispose of depreciated assets, many depreciated assets continue to generate income, often it is the main and stable source of cash flows.

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