Baltzer FIAC WS2223 Income

Financial Accounting
Winter Semester 2022/23

Prof. Dr. Björn Baltzer
Financial Accounting Winter Semester 2022/23 Prof. Dr. Björn Baltzer 1

STATEMENT OF COMPREHENSIVE
INCOME
Source: Collis (2016), p. V.

Study Objectives of the Chapter „Statement
of Comprehensive Income“
• Learn about the Income Statement.
• Learn about activities at the end of the accounting period.

The Financial Accounting Process
Ongoing during the Accounting Period
„Booking“
Adjustment Bookings At the end of the Accounting Period
(Auditing and)
Publication of After the Accounting Period
Financial Statements
Source: cf. Collis (2016), p. 17.

Recording Transactions by Accounting
Labour market • Services, Infra-
• manpower State
structure
• Materials • Salaries
• Taxes, dues, contributions
• Machinery
• Buildings Company
• Services • Products and Services
• Consumption of materials
Procurement • Usage of machinery
• Production of finished goods Sales market
market
• Purchase prices, • Sales prices, usage fees

usage fees
• Dividend payments • Equity
• Interest payments • Loans
• Payback of loans
Capital market

Question: Depreciation
• Why is the loss in value of machinery due to usage (depreciation) not
booked ongoing during the accounting period, but only at the end?

Transaction: Usage of Machinery
• John’s production machine has been used continuously over the past month. The corresponding
loss in value amounts to 2.500 €.
Balance Sheet Profit & Loss Statement

Assets: Equity: Expenses: Income:
Liabilities:
Account name Account type Dr (€) Cr (€)

Depreciation
• Tangible long-term assets (e.g.
machines) do not lose value at a
specific point in time (purchase,
installation, de-installation etc.), but
continuously due to usage over their
finite lifetime.
• The (Allowance for) Depreciation
thus represents the consumption of
the economic benefits embodied in
the asset due to its regular usage.
Source: Collis (2016), p. 72.

Parameters of Depreciation: Overview
€
Depreciable amount
„systematic allocation“ = Depreciation method
Useful life
time
year 1 year 2 year 3 year 4 year 5

Parameters of Depreciation: Depreciable
Amount
• Starting point of the depreciable amount is the cost of the asset, i.e.
• acquisition cost (net purchase price plus additional purchase costs like
transport, installation etc.)
• production costs in case the asset was self-generated plus installation cost
• In case a residual value is expected to be material and can be reliably estimated,
the depreciable amount is reduced by that residual value. The residual value
equals the net selling price minus any selling costs at the end of the asset’s useful
life.

Parameters of Depreciation: Useful Life
• The useful life of an asset is the best estimate of the number of years it will be
used by the company before scrapping or re-selling.
• The useful life of the same machine might differ between two companies:
• Company A aims at producing high end products. Therefore, they replace
their machines as soon as there is an advance in technology.
• Company B aims at producing standard products at low costs. Therefore, they
use their machines as long as possible or economically reasonable.
• Unless the company has a better estimate, the useful life of assets should be set
in accordance with the so called “Afa-Tabellen” published by the German tax
authorities.

Afa-Tabellen
Source:
https://www.bundesfinanzministeriu
m.de/Content/DE/Standardartikel/T
hemen/Steuern/Weitere_Steuerthe
men/Betriebspruefung/AfA-
Tabellen/Ergaenzende-AfA-
Tabellen/AfA-
Tabelle_AV.pdf?__blob=publication
File&v=3, 11.11.2022.

Parameters of Depreciation: Overview of
Depreciation Methods
• The following depreciation methods exist:
• Straight Line Depreciation: the allowance for depreciation is constant over the
useful life
• Reducing (diminishing, declining) Balance Depreciation: the allowance for
depreciation is highest in the first year of usage and then declines year by year
• Units of Activity Depreciation: the allowance for depreciation can be different
for every year, depending on the actual usage of the asset in that year
• The method shall be applied that comes closest to reality for the consumption of
economic benefits of the asset.
• For similar assets, the same depreciation method shall be applied.
• The depreciation method shall only be changed if the conditions of usage change
so that another depreciation method becomes more suitable.

Parameters of Depreciation: Comparison of
Depreciation Methods
€
Straight Line
Depreciation
time
year 1 year 2 year 3 year 4 year 5 year 6
€
Reducing Balance
Depreciation
time
Units of Activity €
Depreciation
(example) time

Question: Carrying Amount
• The carrying amount (book value) of the asset equals cost minus cumulated depreciation. Please draw
the development of the carrying amount of an asset depending on the depreciation method:
• Straight Line €
Depreciation
• Reducing Balance
Depreciation
• Units of Activity
Depreciation
time
Parameters of Depreciation: Calculating
Straight Line Depreciation
• The straight line depreciation is easy to calculate because the same depreciation
amount is charged to every period of the useful life.
𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 − 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉

𝑌𝑌𝑌𝑌𝑌𝑌𝑌𝑌𝑌𝑌𝑌𝑌 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 =
𝑌𝑌𝑌𝑌𝑌𝑌𝑌𝑌𝑌𝑌 𝑜𝑜𝑜𝑜 𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈𝑈 𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿
• Example: Company X purchases a machine for 60.000 €. The expected useful life
of the machine is 5 years and the estimated residual value is 10.000 €.
60.000 − 10.000
𝑌𝑌𝑌𝑌𝑌𝑌𝑌𝑌𝑌𝑌𝑌𝑌 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 = = 10.000 € 𝑝𝑝. 𝑎𝑎.
5

Parameters of Depreciation: Example for
Straight Line Depreciation
• The development of the carrying amount in this example can be seen from the
following table:
Year of Book value Depreciation Book value
Useful Life at beginning of FY Expense at end of FY
1 60.000 * 10.000 50.000
2 50.000 10.000 40.000
3 40.000 10.000 30.000
4 30.000 10.000 20.000
5 20.000 10.000 10.000 **
* (Acquisition/ ** Residual Value
Production) Cost

Reducing Balance Depreciation
• The year-by-year decreasing allowance for depreciation in the Reducing Balance Method is
achieved by applying a constant percentage depreciation rate (PDR) to the book value of the
asset at the beginning of the period:
𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦 = 𝐵𝐵𝐵𝐵𝐵𝐵𝐵𝐵 𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉 𝑎𝑎𝑎𝑎 𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏 𝑜𝑜𝑜𝑜 𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦 × 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅
• In order to ensure that the book value at the end of the useful life (n = years of useful life) equals
the residual value, the PDR needs to be set as follows:
n residual value
PDR = 1 −
cost
• In case there is no residual value, the residual value in above formula needs to be set to 1 € (not
to 0 € !!!).

Reducing Balance Depreciation
• Company X purchases a machine for 60.000 €. The expected useful life of the machine is 5
years and the estimated residual value is 10.000 €.
5 10.000
PDR = 1 − ≈ 0,3012
60.000
Year of Book value Depreciation Book value

Useful Life at beginning of FY Expense at end of FY
1 60.000 18.070,37 41.929,63
2 41.929,63 12.628,07 29.301,56
3 29.301,56 8.824,84 20.476,72
4 20.476,72 6.167,03 14.309,69
5 14.309,69 4.309,69 10.000

Units of Activity Depreciation
• The units of activity depreciation method calculates depreciation on the basis of an expected
total activity level. Activity level can be measured in output units, usage hours etc.
• The allowance for depreciation of a year is calculated as follows:
𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿 𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦

𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦 = × 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴
𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿
• Example: Company X purchases a machine for 60.000 € and the estimated residual value is
10.000 €. The expected total production volume is 15 million units. Over the expected useful
life of the machine of 5 years, it is planned to produce the following number of units:
• Year 1: 2 million units

Units of Activity Depreciation
Year of Production units Book value Depreciation Book value
Useful Life (millions) at beginning of FY Expense at end of FY
1 2 60.000 6.666,67 53.333,33
2 3 53.333,33 10.000 43.333,33
3 5 43.333,33 16.666,67 26.666,66
4 4 26.666,66 13.333,33 13.333,33
5 1 13.333,33 3.333,33 10.000
Sum 15

• Company Z purchases a motorbike for fast product deliveries at a net
purchase price of 13.000 €.
• The useful life of the motorbike is 4 years. At the end of the useful life, the
estimated residual value is 1.000 €.
• The motorbike has an estimated total mileage of 60.000 km. The company
plans to use the motorbike as follows: year 1: 12.000 km, year 2: 15.000
km, year 3: 17.000 km, year 4: 16.000 km
• Please calculate the allowances for depreciation for all years of usage by
a) straight line method
b) reducing balance method
c) units of activity method

Special Cases of Depreciation:
Overview
1. Low-Value assets
2. Purchase during fiscal year
3. Impairment Loss
4. Infite Life Assets
5. Amortization

Special Case of Depreciation:
Low-Value Assets
• The administrative efforts for calculating allowances for depreciation for low-value
assets over their useful life would be quite high.
• Therefore, assets whose net purchase price stays below a certain threshold are
allowed to be written off immediately in the year of purchase.
• Following German tax regulations, that threshold value is 800 €.

Purchase during Fiscal Year
• If the asset is purchased at some point during the fiscal year, then in the first and the last year of
usage the depreciation needs to be calculated based on months.
• Example (using straight line depreciation):
Company X purchases a machine for 60.000 € on April 1st. The expected useful life of the machine
is 5 years and the estimated residual value is 10.000 € .
Year of Useful Book value Depreciation Book value

Life at beginning of FY Expense at end of FY
1 (3 months) 60.000 2.500 57.500
2 (12 months) 57.500 10.000 47.500
3 (12 months) 47.500 10.000 37.500
4 (12 months) 37.500 10.000 27.500
5 (12 months) 27.500 10.000 17.500
6 (9 months) 17.500 7.500 10.000

Impairment Loss
• If an unexpected event (e.g. fire, flood) occurs at some point during the useful
life of the asset which results in a material reduction in value of the asset, then an
impairment loss needs to be booked with a respective amount.
• Booking (with example for Impairment Loss of 10.000 €):

Impairment Loss Expense 10.000
Machinery (special ledger account) Asset 10.000
• After that, the regular depreciation has to be continued, however all depreciation
parameters need to be checked (esp. useful life and residual value) and the
allowances for depreciation need to be recalculated for the remaining years of the
useful life.
Infinite Life Assets
• While most of a company’s assets have a finite lifetime, some assets (e.g.
property) have an infinite lifetime. In this case, no allowance for depreciation is
made (but impairment losses might happen).
• Not only does property not lose value over time, quite the contrary is true,
typically property gains value. However, according to the prudence principle,
acquisition cost is the maximum value for the valuation of property.

Amortization
• While depreciation is the term used for loss in value of tangible assets, a loss in
value of intangible assets (e.g. patents) is called amortization.

Balancing the Accounts
Dr Cr • At the end of the accounting period (here: end of July), the
accounts are balanced.
• First, all debit records and all credit records are summed up.
• If there is an imbalance (here: Bank Account, but not Patel &
Co account), the balance value („Saldo“) is added on the
smaller side (here: credit side: 3.500). This balance value is
then carried forward (c/f) to the Trial Balance.
• In case of asset, equity and liabilities accounts (but not for
expense and income accounts), the balance value is also
noted on the larger side (here: debit side 3.500), as this
value is brought forward (b/f) as opening value of the
account at the beginning of the next accounting period.
• Typically:
• asset and expense accounts carry forward a credit record
(debit balance)
Dr (Trade Payables) Cr
• liabilities, equity and income accounts carry forward a debit
record (credit balance)
Source: Collis (2016), pp. 32- 33.

Constructing the Trial Balance
• Similarly, a trial income statement is prepared with the balance

values carried forward from all expense and income accounts.
• However, unlike the trial balance, the trial income statement rarely
has matching debit totals and credit totals, because this would
mean zero profit. Typically, there either is a profit or a loss.

Adjustment Bookings: Overview
• Before being able to prepare the final balance sheet and income statement,
typically several adjustment bookings are necessary.
• Like the allowance for depreciation, those adjustment bookings are not performed
during the accounting period, but only at the end of the accounting period.
• Important cases for adjustment bookings are the following:
1. stock taking
2. accruals
3. prepayments
4. doubtful receivables (and bad debts)
5. provisions

Adjustment Bookings:
Stock Taking
• Depending on the material controls system used by the company, material expenses
• can already be booked during the accounting period (e.g. material requisition
notes in combination with continuous weighted average price)
• need to be booked at the end of the accounting period (e.g. bill of materials in
combination with first in first out-method)
• At the end of the fiscal year, the inventory amounts that the material controls system
shows needs to be verified by physical counting (stock taking, § 240 HGB).
• if stock taking confirms the amount, no additional booking is necessary
• if stock taking shows a different amount (inventory differences), the difference
needs to be booked

Bookings due to Stock Taking
• Stock Taking shows a lower inventory amount than the material controls system (e.g. due to theft).
The value of the difference is 500 €.

Other expenses Expenses 500
Materials Assets 500
• Stock Taking shows a higher inventory amount than the materials control system (e.g. because the
supplier presumably sent more materials than ordered). The value of the difference is 1.000 €.

Other income Income 1.000
Materials Assets 1.000

Accruals
• When services have already been consumed, but the corresponding invoice has
not been received from the service provider before the cut off date, then an
accrual with a corresponding amount needs to be shown for the accounting
period. If necessary, the amount needs to be estimated.
• This is an example of an anticipated transaction.

Anticipated Transactions
Balance Balance Balance

Sheet Sheet Sheet
Business Year 1 Business Year 2
Profit & Loss Profit & Loss

Statement Statement
• Anticipated transactions need to be performed due to the accrual principle: Transactions need
to be recognized in the correct accounting period.

Transaction: Missing Telecommunications
Invoice
• The monthly invoice from John’s telecommunication provider is typically received a couple of
days into the next month. So the invoice for the month of December is only received in the next
fiscal year. The average of John’s invoices for the months of January to November was 200 €.

Liabilities:

Transaction: Receipt of Telecommunications
Invoice
• On January 4th, John receives the invoice from the telecommunication provider for the month of
December. As he called many customers to convey Season’s Greetings, the invoice amounts to
215 €. John pays the invoice immediately by bank transfer.

Liabilities:

Prepayments
• When the company has already received an invoice and booked the expenses,
but some of the services have not been provided before the cut off date, then the
expenses of the current accounting period need to be adjusted and the open
service portion needs to be transferred into the next accounting period.
• While the invoice amount is typically known, the portion of services that has not
been delivered yet might have to be estimated.
• This is called a transitory transaction.

Transitory Transactions
Balance Balance Balance

Sheet Sheet Sheet
Business Year 1 Business Year 2
Profit & Loss Profit & Loss

Statement Statement
• Transitory transactions need to be performed due to the accrual principle: Transactions need to
be recognized in the correct accounting period.

Transaction: Receipt of Insurance Invoice
• The invoice from John’s fire insurance company is received annually in October
in advance for the next 12 months, i.e. for the months of October to September.
The current invoice amounts to 1.800 € and is paid immediately by bank
transfer.
Liabilities:

Transaction: Insurance at End of Current
Fiscal Year
• Today is December 31st, the last day of the current fiscal year. The insurance
expenses need to be adjusted to the correct amount.

Liabilities:

Transaction: Insurance at Beginning of Next
Fiscal Year
• Today is January 1st, the first day of the new fiscal year. The prepaid insurance
expenses need to be transferred into the new fiscal year.

Liabilities:

Bad Debts and Doubtful Receivables
• In case of a bad debt (“Einzelwertberichtigung”), a specific trade receivable is fully or partially

irrecoverable. The receivable is written off with the full amount or with the difference to the payment that will be
received.
• Allowance for doubtful receivables (“Pauschalwertberichtigung”) follows the experience that among many
existing trade receivables, there will always be some that are fully or partially irrecoverable – however we do not
know which ones as of today. So following the prudence principle and based on historical values, a certain
percentage of the value of all trade receivables is written off.
• Bad debts and allowance for doubtful receivables can be combined.

Transaction: Bad Debt without Doubtful
Receivables
• John has a trade receivable of 1.000 € against Customer A. Today, John is
informed by the insolvency trustee that the insolvency quota will be 40%. John
has no allowance for doubtful receivables.

Liabilities:

Example for Calculation of Allowance for
Doubtful Receivables
Source: cf.
Collis (2016),
p. 96.

Transaction: First Time Doubtful Receivables
• John estimates the amount of doubtful receivables at 3.800 € (see calculation)
at the end of the accounting period. This is the first time John does this kind of
calculation.

Liabilities:

Transaction: Bad Debt with Doubtful
Receivables
• John needs to write off completely the trade receivable against Customer B at
the amount of 600 €. At the end of the last fiscal year, John had booked an
Allowance for Doubtful Receivables of 3.800 €.

Liabilities:

Transaction: Updated Doubtful Receivables
• John estimates the amount of doubtful receivables at 4.500 € at the end of the
current accounting period. At the end of the last accounting period, doubtful
receivables were estimated at 3.800 €. During the current accounting period,
John had written off a trade receivable of 600 €.
Liabilities:

Provisions
• Depending on the probability that resources embodying economic benefits are
expected to flow out of the company, liabilities fall into the following categories:
• (regular) liability: outflow is certain (probability = 100%)
→ liability needs to be booked (e.g. trade payable, loan, other current liability)
• provision: outflow is “more likely than not” (50% < probability < 100%)
→ provision needs to be booked
• contingent liability: outflow is possible (10% < probability < 50%)
→ no booking, but contingent liability needs to be mentioned (if material) in notes
to balance sheet and income statement
• neither booking nor mentioning in case probability is below 10%

Transaction: Provision
• A customer is sueing John for compensation of damages that are allegedly
caused by the malfunctioning of a product that John had delivered to the
customer. The decision by the judges is still pending, however John’s lawyers
predict that he will lose the case and need to pay a compensation of 1.500 €.
Liabilities:

Transaction: Use of Provision
• Indeed, John has lost the court case and even needs to pay a compensation of
1.800 €, which John settles immediately by bank transfer.

Liabilities:

Income Statement by Nature and by Function
• According to § 275 HGB, the Income Statement can be presented in two ways:
• by Nature (Gesamtkostenverfahren, GKV)
• takes a production perspective, i.e. it includes income from sold products
and from (un-)finished products that have been produced but not yet sold
• expenses are presented by type of expense
• by Function (Umsatzkostenverfahren, UKV)
• takes a sales perspective, i.e. it only includes income from sold products
• expenses are presented by business function
• The amount of Profit/Loss is unaffected by the two methods!
• In Germany, traditionally GKV has been used, while internationally UKV is more
common.

Income Statement by Nature
Changes in inventories of finished goods 10,000
Material expenses (70,000)
(example for Other Income)
(example for Other Expenses)

Income Statement by Function
(also Sales)
(also Costs of Goods Sold CoGS or Cost of
Revenues)
(together called S&GA Sales &

also R&D expenses (if relevant) General Administration)

Expenses by Function and by Nature
Expenses by Function → Cost of
Sales
↓ Expenses by Nature
2,000
600 5,650
50
4,600
2,850
Source: adapted from Collis (2016), p. 74.

Example for Income Statement by Function
https://appeconomyinsig
hts.substack.com/p/appl
e-warrens-favorite,
13.11.22

Review Questions of the Chapter „Statement
of Comprehensive Income“
• Know the parameters of depreciation and how to book depreciation.
• Be able to calculate the yearly allowance for depreciation using the straight line,
the reducing balance and the units of activity methods.
• Know how to deal with the special cases of depreciation.
• Know how accounts are balanced at the end of the accounting period.
• Understand the 5 types of adjustment bookings.
• Be able to calculate the allowance for doubtful receivables.
• Know the difference between liability, provision and contingent liability.
• Know the structure of income statements by nature and by function.

Solution
• The incremental loss in value due to every single usage would be minimal,
so the booking efforts were very high.

Transaction: Usage of Machinery
Solution
• John’s production machine has been used continuously over the past month. The corresponding
loss in value amounts to 2.500 €.

Liabilities:

(Allowance for) Depreciation Expenses 2.500
Machinery (special ledger account) Assets 2.500

Question: Carrying Amount
Solution
Straight Line
Depreciation
Units of Activity
Depreciation
(example)
Reducing
Balance
Depreciation
time
Solution a)
13.000 −1.000
• 𝑌𝑌𝑌𝑌𝑌𝑌𝑌𝑌𝑌𝑌𝑌𝑌 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 = = 3.000
4
Year Book value Depreciation Book value

at beginning of FY Expense at end of FY
1 13.000 3.000 10.000
2 10.000 3.000 7.000
3 7.000 3.000 4.000
4 4.000 3.000 1.000

Solution b)
4 1.000
• PDR = 1 − ≈ 47,34%
13.000
Year Book value Depreciation Depreciation Book value

at beginning of FY Rate Expense at end of FY
1 13.000 47,34% 6.153,67 6.846,33
2 6.846,33 47,34% 3.240.77 3.605,56
3 3.605,56 47,34% 1.706,72 1.898,84
4 1.898,84 47,34% 898,83 1.000

Solution c)
Year Mileage (km) Book value Depreciation Book value

at beginning of Expense at end of FY
FY
1 12.000 13.000 2.400 10.600
2 15.000 10.600 3.000 7.600
3 17.000 7.600 3.400 4.200
4 16.000 4.200 3.200 1.000
Sum 60.000

Transaction: Missing Telecommunications
Invoice - Solution
• The monthly invoice from John’s telecommunication provider is typically received a couple of
days into the next month. So the invoice for the month of December is only received in the next
fiscal year. The average of John’s invoices for the months of January to November was 200 €.

Liabilities:

Telecommunication Expenses Expense 200
Other Current Liabilities Liability 200

Transaction: Receipt of Telecommunications
Invoice - Solution
• On January 4th, John receives the invoice from the telecommunication provider for the month of
December. As he called many customers to convey Season’s Greetings, the invoice amounts to
215 €. John pays the invoice immediately by bank transfer.

Liabilities:

Telecommunication Expenses Expense 15
Other Current Liabilities Liability 200
Bank Asset 215

Transaction: Receipt of Insurance Invoice
Solution
• The invoice from John’s fire insurance company is received annually in October
in advance for the next 12 months, i.e. for the months of October to September.
The current invoice amounts to 1.800 € and is paid immediately by bank
transfer.
Liabilities:

Insurance expenses Expense 1.800
Bank Asset 1.800

Transaction: Insurance at End of Current
Fiscal Year - Solution
• Today is December 31st, the last day of the current fiscal year. The insurance
expenses need to be adjusted to the correct amount.

Liabilities:

Prepaid Expenses Asset 1.350
Insurance Expenses Expense 1.350

Transaction: Insurance at Beginning of Next
Fiscal Year - Solution
• Today is January 1st, the first day of the new fiscal year. The prepaid insurance
expenses need to be transferred into the new fiscal year.

Liabilities:

Insurance expenses Expense 1.350
Prepaid Expenses Asset 1.350

Transaction: Bad Debt without Doubtful
Receivables - Solution
• John has a trade receivable of 1.000 € against Customer A. Today, John is
informed by the insolvency trustee that the insolvency quota will be 40%. John
has no allowance for doubtful receivables.

Liabilities:

Bad Debts Expense 600
Trade Receivables (special ledger account Customer A) Asset 600

Transaction: First Time Doubtful Receivables
- Solution
• John estimates the amount of doubtful receivables at 3.800 € (see calculation)
at the end of the accounting period. This is the first time John does this kind of
calculation.

Liabilities:

Allowance for doubtful receivables Expense 3.800
Doubtful receivables (subaccount to trade receivables) Asset 3.800

Transaction: Bad Debt with Doubtful
Receivables - Solution
• John needs to write off completely the trade receivable against Customer B at
the amount of 600 €. At the end of the last fiscal year, John had booked an
Allowance for Doubtful Receivables of 3.800 €.

Liabilities:

Doubtful receivables (subaccount to trade receivables) Asset 600
Trade Receivables (special ledger account Customer B) Asset 600

Transaction: Updated Doubtful Receivables
Solution
• John estimates the amount of doubtful receivables at 4.500 € at the end of the
current accounting period. At the end of the last accounting period, doubtful
receivables were estimated at 3.800 €. During the current accounting period,
John had written off a trade receivable of 600 €.
Liabilities:

Allowance for doubtful receivables Expense 1.300
Doubtful receivables (subaccount to trade receivables) Asset 1.300

Transaction: Provision
Solution
• A customer is sueing John for compensation of damages that are allegedly
caused by the malfunctioning of a product that John had delivered to the
customer. The decision by the judges is still pending, however John’s lawyers
predict that he will lose the case and need to pay a compensation of 1.500 €.
Liabilities:

Other expenses Expense 1.500
Provisions Liability 1.500

Transaction: Use of Provision
Solution
• Indeed, John has lost the court case and even needs to pay a compensation of
1.800 €, which John settles immediately by bank transfer.

Liabilities:

Other expenses Expense 300
Provisions Liability 1.500
Bank account Asset 1.800

Baltzer FIAC WS2223 Income

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Financial Accounting

Winter Semester 2022/23

Financial Accounting Winter Semester 2022/23 Prof. Dr. Björn Baltzer 1

Source: Collis (2016), p. V.

Financial Accounting Winter Semester 2022/23 Prof. Dr. Björn Baltzer 2

Financial Accounting Winter Semester 2022/23 Prof. Dr. Björn Baltzer 3

Ongoing during the Accounting Period

Adjustment Bookings At the end of the Accounting Period

Financial Accounting Winter Semester 2022/23 Prof. Dr. Björn Baltzer 4

• Purchase prices, • Sales prices, usage fees

Financial Accounting Winter Semester 2022/23 Prof. Dr. Björn Baltzer 5

Financial Accounting Winter Semester 2022/23 Prof. Dr. Björn Baltzer 6

Balance Sheet Profit & Loss Statement

Account name Account type Dr (€) Cr (€)

Financial Accounting Winter Semester 2022/23 Prof. Dr. Björn Baltzer 7

Source: Collis (2016), p. 72.

Financial Accounting Winter Semester 2022/23 Prof. Dr. Björn Baltzer 8

„systematic allocation“ = Depreciation method

Financial Accounting Winter Semester 2022/23 Prof. Dr. Björn Baltzer 9

Financial Accounting Winter Semester 2022/23 Prof. Dr. Björn Baltzer 10

Financial Accounting Winter Semester 2022/23 Prof. Dr. Björn Baltzer 11

Financial Accounting Winter Semester 2022/23 Prof. Dr. Björn Baltzer 12

Financial Accounting Winter Semester 2022/23 Prof. Dr. Björn Baltzer 13

Financial Accounting Winter Semester 2022/23 Prof. Dr. Björn Baltzer 14

𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶 − 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉

Financial Accounting Winter Semester 2022/23 Prof. Dr. Björn Baltzer 16

Financial Accounting Winter Semester 2022/23 Prof. Dr. Björn Baltzer 17

Financial Accounting Winter Semester 2022/23 Prof. Dr. Björn Baltzer 18

Year of Book value Depreciation Book value

Financial Accounting Winter Semester 2022/23 Prof. Dr. Björn Baltzer 19

𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴𝐴 𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿 𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦

Financial Accounting Winter Semester 2022/23 Prof. Dr. Björn Baltzer 20

Financial Accounting Winter Semester 2022/23 Prof. Dr. Björn Baltzer 21

Financial Accounting Winter Semester 2022/23 Prof. Dr. Björn Baltzer 22

Financial Accounting Winter Semester 2022/23 Prof. Dr. Björn Baltzer 23

Financial Accounting Winter Semester 2022/23 Prof. Dr. Björn Baltzer 24

Year of Useful Book value Depreciation Book value

Financial Accounting Winter Semester 2022/23 Prof. Dr. Björn Baltzer 25

Account name Account type Dr (€) Cr (€)

Financial Accounting Winter Semester 2022/23 Prof. Dr. Björn Baltzer 27

Financial Accounting Winter Semester 2022/23 Prof. Dr. Björn Baltzer 28

Source: Collis (2016), pp. 32- 33.

Source: Collis (2016), p. 33.

• Similarly, a trial income statement is prepared with the balance

Financial Accounting Winter Semester 2022/23 Prof. Dr. Björn Baltzer 30

Financial Accounting Winter Semester 2022/23 Prof. Dr. Björn Baltzer 31

Financial Accounting Winter Semester 2022/23 Prof. Dr. Björn Baltzer 32

Account name Account type Dr (€) Cr (€)

Account name Account type Dr (€) Cr (€)

Financial Accounting Winter Semester 2022/23 Prof. Dr. Björn Baltzer 33

Source: Collis (2016), p. 70.

Financial Accounting Winter Semester 2022/23 Prof. Dr. Björn Baltzer 34

Balance Balance Balance

Business Year 1 Business Year 2

Profit & Loss Profit & Loss

Financial Accounting Winter Semester 2022/23 Prof. Dr. Björn Baltzer 35

Balance Sheet Profit & Loss Statement

Account name Account type Dr (€) Cr (€)

Financial Accounting Winter Semester 2022/23 Prof. Dr. Björn Baltzer 36

Balance Sheet Profit & Loss Statement

Account name Account type Dr (€) Cr (€)

Financial Accounting Winter Semester 2022/23 Prof. Dr. Björn Baltzer 37

Source: Collis (2016), p. 70.