FinancialAccounting Book 2022

Financial Accounting
Why financials matter

and how to master double-entry
bookkeeping
Dr. Simon Pfister

September 2022
Table of Contents II
Table of Contents
Table of Contents ....................................................................................................................................... II
List of Figures ............................................................................................................................................ IX
List of Tables.............................................................................................................................................. XI
List of Abbreviations ............................................................................................................................... XV
Introduction .......................................................................................................................................... XVII
Why Financials Matters ....................................................................................................... 20

0.1 Introduction ................................................................................................................... 20
0.2 An introduction to companies ....................................................................................... 21
0.3 Division of labor within organizations and ideas of success within collaboration ....... 23
0.4 The four building blocks for financially modeling organizations: assets, liabilities,
expenses and revenues.................................................................................................. 24
0.4.1 Introduction to the mechanics behind the financials: bookkeeping ................. 24
0.4.2 Basic definitions related to bookkeeping ......................................................... 26
0.4.3 Linking bookkeeping back to the business transactions: example .................. 27
0.4.4 Linking bookkeeping to hierarchical levels ..................................................... 28
0.5 The history of financials ................................................................................................ 29
0.5.1 The beginning: Mesopotamia........................................................................... 29
0.5.2 The contribution of the Roman empire ............................................................ 29
0.5.3 The start of the double-entry bookkeeping system .......................................... 30
0.5.4 Developments after the 15th century ................................................................ 30
0.6 The reality of financials for today’s organizations........................................................ 31
0.6.1 Small companies .............................................................................................. 32
0.6.2 Mid-sized companies ....................................................................................... 33
0.6.3 Multinational corporations ............................................................................... 34
0.6.4 Summary .......................................................................................................... 36
0.7 Accounting software for SMEs ..................................................................................... 37
0.7.1 United States of America ................................................................................. 38
0.7.1.1 QuickBooks ...................................................................................... 39
0.7.1.2 AccountEdge .................................................................................... 40
0.7.2 Switzerland....................................................................................................... 41
0.7.2.1 Abacus .............................................................................................. 41
0.7.2.2 Banana Accounting .......................................................................... 42
0.7.2.3 Run my Accounts / Accounto .......................................................... 43
0.7.3 Germany ........................................................................................................... 44
0.7.3.1 bexio ................................................................................................. 44
0.7.3.2 DATEV ............................................................................................ 44
0.8 The future of financials ................................................................................................. 45
0.9 The limitations of financials: sustainability .................................................................. 46
0.10 Summary ....................................................................................................................... 48
Financial Accounting - Why financials matter for organizations and how to master double-entry bookkeeping
Table of Contents III
Starting a small Business and Cash Book........................................................................... 49

1.1 Introduction ................................................................................................................... 49
1.2 Feeling well with Tom – starting a business ................................................................. 49
1.2.1 The business idea ............................................................................................. 49
1.2.2 Financial representation of business activities: Cash Book ............................. 51
1.2.3 Cash effect vs. Profit effect .............................................................................. 52
1.2.4 Managing the complexity of profitability details: T-Accounts ........................ 58
1.2.5 Compiling Revenue and Expenses T-Accounts: Statement of Profit or Loss . 59
1.3 Examples Statement of Profit or Loss ........................................................................... 61
1.3.1 Service company: Ryanair ............................................................................... 61
1.3.2 Trading company (retail): Walmart (grocery stores) ....................................... 62
1.3.3 Trading company (wholesales): Advanced Auto Parts .................................... 63
1.3.4 Production company: Hilti (solutions for construction and building
maintenance).................................................................................................... 64
1.3.5 Production company: DormaKaba (security systems) ..................................... 65
1.3.6 Charity NGO: Helvetas (international development cooperation and
emergency aid) ................................................................................................ 66
1.4 Summary ....................................................................................................................... 67
1.5 Exercises........................................................................................................................ 69
1.5.1 Business transactions of «Leo»: Revenues ...................................................... 69
1.5.2 Business transactions of «Leo»: Expenses....................................................... 69
1.5.3 Business transactions of «GBau»: Revenues ................................................... 70
1.5.4 Business transactions of «GBau»: Expenses ................................................... 71
1.5.5 Business transactions of «SMW»: Revenues ................................................... 72
1.5.6 Business transactions of «SMW»: Expenses ................................................... 72
1.5.7 Industry-specific expenses and revenues ......................................................... 74
1.5.8 Statement of Profit or Loss: Hotel and Restaurant .......................................... 74
1.5.9 Statement of Profit or Loss: Printing Shop ...................................................... 74
1.5.10 Statement of Profit or Loss: Financial Service Company ................................ 75
1.5.11 Statement of Profit or Loss: Insurance Company ............................................ 75
Asset Accounts ...................................................................................................................... 76

2.1 Introduction ................................................................................................................... 76
2.2 New year – new business ideas: need for asset accounts .............................................. 76
2.2.1 Need to multiply profit..................................................................................... 76
2.2.2 Financial consequences of revenue initiatives ................................................. 77
2.2.3 Account types: time period vs. point in time ................................................... 78
2.2.4 Financial Development of a Company in a Nutshell ....................................... 80
2.2.5 Account left-side (debit side) and right-side (credit side)................................ 81
2.2.6 Full structure of double-entry bookkeeping ..................................................... 83
2.2.7 Tom is growing ................................................................................................ 84
2.2.8 Year-end bookings ........................................................................................... 85
2.2.9 Year-end financial statements .......................................................................... 87
2.2.10 Additional Background and Recommendations for Financial Statements ...... 88
2.2.11 Legal obligation to keep records, and legal accounting principles .................. 90
2.3 Example: Schlecker ....................................................................................................... 92
2.4 Summary ....................................................................................................................... 93
2.5 Exercises........................................................................................................................ 95
2.5.1 Business transactions of «Leo» ........................................................................ 95
2.5.2 Business transactions of «GBau»..................................................................... 96
2.5.3 Business transactions of «SMW» .................................................................... 98
2.5.4 Account “Cash” of children day-care nursery ............................................... 100
Table of Contents IV
2.5.5 Accounts “Cash” and “Bank” of an advertising agency ................................ 101

2.5.6 Account and financial statements of Job Center ............................................ 102
Financing and Statement of Financial Position ............................................................... 103

3.1 Introduction ................................................................................................................. 103
3.2 Starting point of Tom’s year 3 .................................................................................... 103
3.3 Expansion of Business ................................................................................................ 104
3.3.1 Options for the third year ............................................................................... 104
3.3.2 Financing and investing ................................................................................. 106
3.3.3 New potential thanks to new venture – what about profit?............................ 108
3.3.4 Cash-oriented financial ratios (liquidity)? ..................................................... 110
3.3.5 Security-oriented financial ratios ................................................................... 112
3.3.6 Profitability-oriented financial ratios ............................................................. 113
3.4 Examples ..................................................................................................................... 114
3.4.1 Statement of financial position of a retail company: H&M Group................ 114
3.4.2 Statement of financial position of a bank: Julius Baer Group ....................... 115
3.4.3 Statement of financial position and statement of profit or loss of Hewlett-
Packard Enterprise ......................................................................................... 116
3.5 Summary ..................................................................................................................... 118
3.6 Exercises...................................................................................................................... 120
3.6.1 Asset types statement of financial position .................................................... 120
3.6.2 Statement of financial position of an amusement park .................................. 121
3.6.3 Statement of financial position of a manufacturing firm ............................... 121
3.6.4 Statement of financial position of an electronics shop .................................. 122
3.6.5 Formulation of booking entry ........................................................................ 123
3.6.6 Closing booking entries ................................................................................. 123
3.6.7 Comparison between manufacturing company and trading company ........... 124
3.6.8 Interpretation of booking entry ...................................................................... 125
3.6.9 Financial ratios service company ................................................................... 125
3.6.10 Coherent exercise for an esport training center ............................................. 126
3.6.11 Financial ratios trading company ................................................................... 129
3.6.11.1 Initial financial ratios ..................................................................... 129
3.6.11.2 Restatement of assets ..................................................................... 129
3.6.11.3 Personal opinion ............................................................................. 129
Sole Proprietorship and Trading Company ..................................................................... 130

4.1 Introduction ................................................................................................................. 130
4.2 Starting the new year ................................................................................................... 130
4.3 Tom’s private transactions in a Sole Proprietorship ................................................... 131
4.3.1 Tom’s private transactions ............................................................................. 133
4.4 Business Transactions and Booking Entries for Trading Company............................ 134
4.4.1 Tom’s purchasing of trading goods ............................................................... 136
4.4.2 Tom’s selling of trading goods ...................................................................... 137
4.4.3 Tom’s inventory correction ............................................................................ 139
4.5 Summary ..................................................................................................................... 143
4.6 Exercises...................................................................................................................... 145
4.6.1 Increase in inventory ...................................................................................... 145
4.6.2 Decrease in inventory..................................................................................... 145
4.6.3 Booking entries .............................................................................................. 146
4.6.4 Product calculation ......................................................................................... 146
4.6.5 Missing values................................................................................................ 147
Table of Contents V
4.6.6 Entrepreneur’s income ................................................................................... 147

4.6.7 Booking entries for a trading company .......................................................... 147
4.6.8 Mixed business transactions........................................................................... 148
4.6.9 Booking entries for mixed business transactions ........................................... 149
4.6.10 Coherent exercise ........................................................................................... 150
Payment Transactions and Production ............................................................................ 154

5.1 Introduction ................................................................................................................. 154
5.2 Cash difference and Petty Cash ................................................................................... 154
5.2.1 Cash difference .............................................................................................. 155
5.2.2 Levels of Cash ................................................................................................ 155
5.3 Payment types and anticipatory tax ............................................................................. 156
5.3.1 Credit card payments from customers ........................................................... 157
5.3.2 Prepayments paid to suppliers........................................................................ 158
5.3.3 Invoice and payment automation: ISO 20022................................................ 159
5.3.4 Bank account interest and Anticipatory Tax (in Switzerland) ....................... 160
5.4 Production company .................................................................................................... 161
5.4.1 Purchasing side .............................................................................................. 162
5.4.2 Selling side ..................................................................................................... 163
5.4.3 Produced goods in stock ................................................................................ 163
5.4.4 Tom starts production .................................................................................... 164
5.5 Compiling the year-end financial statements .............................................................. 165
5.6 Introductory example “Work in process” (not yet invoiced services) ........................ 168
5.6.1 Year 2_01 ....................................................................................................... 168
5.6.2 Year 2_02 ....................................................................................................... 169
5.6.3 Year 2_03 ....................................................................................................... 170
5.6.4 3-year Comparison ......................................................................................... 170
5.7 Summary ..................................................................................................................... 171
5.8 Exercises...................................................................................................................... 173
5.8.1 ETools Ltd...................................................................................................... 173
5.8.2 YouGoSolar Engineers .................................................................................. 174
5.8.3 BestView lakeside hotel ................................................................................. 174
5.8.4 BestClimate .................................................................................................... 175
5.8.5 Case study BevBeverage Inc.......................................................................... 176
Value Adjustments.............................................................................................................. 179

6.1 Introduction ................................................................................................................. 179
6.2 Depreciation ................................................................................................................ 179
6.2.1 Value adjustment............................................................................................ 180
6.2.2 Depreciation overview ................................................................................... 180
6.2.3 What is the right annual depreciation amount? .............................................. 181
6.2.4 What is the right depreciation booking technique? ........................................ 183
6.2.5 Selling of non-current assets .......................................................................... 185
6.2.6 Loss from receivables from customers .......................................................... 186
6.2.6.1 Expected losses of receivables from goods & services.................. 186
6.2.6.2 Reminding customers ..................................................................... 186
6.2.6.3 Debt collection process (according to Swiss law).......................... 187
6.2.6.4 Actual loss of receivables from goods & services ......................... 187
6.2.6.5 Cashing certificate of debt ............................................................. 188
6.2.7 Tom’s transactions and closing ...................................................................... 189
6.2.8 Reversal of an incorrect entry ........................................................................ 192
Table of Contents VI
6.3 Summary ..................................................................................................................... 193

6.4 Exercises...................................................................................................................... 195
6.4.1 Sale of an old vehicle, different scenarios ..................................................... 195
6.4.2 Expected losses from receivables .................................................................. 195
6.4.3 Debt collection process .................................................................................. 195
6.4.4 AlpineCamper ltd. .......................................................................................... 196
6.4.5 Booking entries for depreciation and inventory............................................. 196
6.4.6 Mixed business transactions........................................................................... 197
6.4.7 Year-end addenda for ModernBuilding Ltd................................................... 197
Land + building, accruals, provisions ............................................................................... 199

7.1 Introduction ................................................................................................................. 199
7.2 Patents ......................................................................................................................... 199
7.3 Land + building ........................................................................................................... 201
7.3.1 Tom purchases land + building ...................................................................... 203
7.3.2 The transactions for seller of land + building ................................................ 205
7.3.3 Tom partially uses the land + building for private and business purposes .... 205
7.4 Accruals ....................................................................................................................... 206
7.4.1 Tom’s operating business............................................................................... 208
7.4.2 The effect of cross-year-end-transactions ...................................................... 210
7.5 Provisions .................................................................................................................... 211
7.6 The profit and cash effect of the year 2_07 ................................................................. 213
7.7 Summary ..................................................................................................................... 216
7.8 Exercises...................................................................................................................... 218
7.8.1 Mixed exercises.............................................................................................. 218
7.8.2 Mixed exercises.............................................................................................. 219
7.8.3 Land and buildings accounts .......................................................................... 219
7.8.4 Selling land and buildings transactions above and below book value ........... 220
7.8.5 Purchase of a property.................................................................................... 220
7.8.6 Provisions for litigation (legal court case) ..................................................... 221
7.8.7 Accrual of rents .............................................................................................. 221
7.8.8 Various accruals in a trading company .......................................................... 222
7.8.9 Accrual of loan interests ................................................................................ 222
Marketable securities ......................................................................................................... 223

8.1 Introduction ................................................................................................................. 223
8.2 The second part of accruals and bonus payment ......................................................... 223
8.2.1 Reversing accrual bookings ........................................................................... 223
8.2.2 Disbursement of the share in last year’s profit .............................................. 224
8.3 Marketable securities ................................................................................................... 225
8.3.1 Financing companies and capital markets ..................................................... 225
8.3.1.1 Financing companies with equity................................................... 226
8.3.1.2 Financing companies by debt ......................................................... 226
8.3.2 Investment on the capital market ................................................................... 227
8.3.3 Tom’s investment on the capital market ........................................................ 228
8.3.4 Bond interest and share dividend ................................................................... 229
8.3.5 Valuation of marketable securities ................................................................. 230
8.4 Summary ..................................................................................................................... 234
8.5 Exercises...................................................................................................................... 236
8.5.1 Purchase and sale of securities ....................................................................... 236
8.5.2 Securities accounts ......................................................................................... 237
Table of Contents VII
8.5.3 Marketable securities or financial assets ........................................................ 239

8.5.4 Security portfolio valuation in the statement of financial position ................ 239
8.5.5 Financial accounts .......................................................................................... 239
8.5.6 Value and closing of a security portfolio ....................................................... 240
8.5.7 Closing securities ........................................................................................... 240
8.5.8 Securities accounting ..................................................................................... 241
8.5.9 Closing financial assets .................................................................................. 242
Joint-stock Companies ....................................................................................................... 243

9.1 Introduction ................................................................................................................. 243
9.2 Founding B&S Ltd. as joint-stock company ............................................................... 243
9.3 Profit distribution in joint-stock companies ................................................................ 244
9.3.1 B&S Ltd. profit distribution in the year 2_11 ................................................ 246
9.3.2 Profit distribution in case of a loss ................................................................. 248
9.3.3 Essential legal basis in Switzerland ............................................................... 249
9.3.4 Excerpt from the Swiss Auditing Manual concerning reserves of joint-stock
companies ...................................................................................................... 250
9.4 Summary ..................................................................................................................... 251
9.5 Exercises...................................................................................................................... 253
9.5.1 Formation of a joint-stock company on the basis of contributions in kind.... 253
9.5.2 Nominal value repayment .............................................................................. 254
9.5.3 Profit distribution ........................................................................................... 254
9.5.3.1 Case A ............................................................................................ 254
9.5.3.2 Case B ............................................................................................ 255
9.5.3.3 Case C ............................................................................................ 256
9.5.3.4 Case D ............................................................................................ 257
9.5.4 Statute-barred dividends ................................................................................ 257
9.5.5 Loss entry ....................................................................................................... 258
9.5.5.1 Cass: loss ........................................................................................ 258
9.5.5.2 Case: significant loss ...................................................................... 258
9.5.5.3 Case: excessive loss ....................................................................... 259
9.5.5.4 Case: after the loss, profit again ..................................................... 259
9.5.6 Adding a new shareholder.............................................................................. 260
9.5.7 Increase in capital and subsequent profit distribution .................................... 260
9.5.7.1 Case: increase in capital ................................................................. 260
9.5.7.2 Case: profit distribution.................................................................. 260
9.5.8 Profit distribution after loss............................................................................ 260
9.5.9 Dividends versus nominal value repayment .................................................. 261
9.5.10 Comparison of different profit distributions .................................................. 261
Valuation Reserves ............................................................................................................. 262

10.1 Introduction ................................................................................................................. 262
10.2 Valuation reserves ....................................................................................................... 262
10.2.1 Arguments for and against valuation reserves ............................................... 263
10.2.2 Legal basis in Switzerland ............................................................................. 263
10.2.3 Generating valuation reserves ........................................................................ 264
10.2.3.1 Generation through undervaluing assets ........................................ 264
10.2.3.2 Generation through overvaluing liabilities..................................... 264
10.2.3.3 Generation through immediate one-off depreciation ..................... 264
10.2.3.4 Valuation reserves generated willy-nilly ....................................... 264
10.2.3.5 Summary of valuation reserves by different positions of the
statement of financial position ....................................................... 265
Table of Contents VIII
10.2.4 Dissolving valuation reserves ........................................................................ 266

10.2.4.1 Dissolving through devaluation in the course of time – without an
inflow of money ............................................................................. 266
10.2.4.2 Accounting dissolving – without an inflow of money ................... 266
10.2.4.3 Dissolving through an outflow of assets ........................................ 266
10.3 Summary ..................................................................................................................... 267
10.4 Exercise ....................................................................................................................... 269
10.4.1 Actual and reported profit of the year ............................................................ 269
10.4.2 Adjustment of valuation reserves................................................................... 269
10.4.3 Dissolution of valuation reserves and adjustment of the statement of financial
position .......................................................................................................... 270
10.4.4 Buying into valuation reserves....................................................................... 271
10.4.5 Existing valuation reserves and changes to them........................................... 272
10.4.6 Questions concerning valuation reserves ....................................................... 273
10.4.7 Adjustment of valuation reserves................................................................... 274
10.4.8 Valuation reserves booking entries ................................................................ 275
10.4.9 Dissolution of valuation reserves through devaluation over time.................. 276
10.4.10 Statement of financial position after disclosing valuation reserves ............... 276
10.4.11 Valuation reserves decision ........................................................................... 276
10.4.12 Depreciation method, valuation reserve, and profit ....................................... 277
Multi-year Perspective ....................................................................................................... 279

11.1 Introduction ................................................................................................................. 279
11.2 Business transactions with multi-year consequences, previously introduced ............. 279
11.3 Decisions under stable operating business .................................................................. 280
11.4 Exercise ....................................................................................................................... 282
11.4.1 Marketable Securities over multiple years ..................................................... 282
11.4.2 Sales and depreciation over multiple years .................................................... 284
11.4.3 Make of Buy................................................................................................... 285
11.4.4 CapEx or Leasing ........................................................................................... 287
11.4.5 Automation or Customization ........................................................................ 289
Annex I: Chart of Accounts................................................................................................................... 290
Annex II: Statement of profit of loss in reporting format .................................................................. 292
Annex III: Description of Accounts ...................................................................................................... 293
Bibliography ............................................................................................................................................ 303
List of Internet sources ........................................................................................................................... 304
List of Figures IX
List of Figures
Figure 1: Input-Output business model ............................................................................................... 21
Figure 2: St. Gallen Management Model, 1st generation .................................................................... 22
Figure 3: Companies of Nestlé Group (excerpt) ................................................................................. 34
Figure 4: Companies of Nestlé Group by division (excerpt) .............................................................. 35
Figure 5: general ledger document entry in SAP ................................................................................ 38
Figure 6: QuickBooks main page ........................................................................................................ 39
Figure 7: QuickBooks user permissions.............................................................................................. 40
Figure 8: QuickBooks reporting page ................................................................................................. 40
Figure 9: AccountEdge main page ...................................................................................................... 41
Figure 10: Abacus booking entry screen ............................................................................................. 42
Figure 11: Banana Accounting booking entry screen ......................................................................... 42
Figure 12: Run my Accounts screen with invoices to be paid ............................................................ 43
Figure 13: Accounto screen with invoices to be paid ......................................................................... 43
Figure 14: E-banking integration to bexio .......................................................................................... 44
Figure 15: Journal of booking entries, allowing access for external partners to selected bookings ... 45
Figure 16: Sustainability and GRI reporting of Nestlé 2015 (excerpt) ............................................... 47
Figure 17: calculation of profit or loss ................................................................................................ 53
Figure 18: Cash and Profit effect of Tom’s Business Transactions in the first year 2_01.................. 54
Figure 19: T-accounts of Tom’s Business Transactions in the first year 2_01 ................................... 58
Figure 20: Examples of accounting general ledger stamps ................................................................. 60
Figure 21: Tom’s 10 lesson value card ............................................................................................... 77
Figure 22: Timeline of Financial Statements ...................................................................................... 79
Figure 23: Graphical overview account type debit and credit side in T-accounts .............................. 82
Figure 24: Graphical overview account type debit and credit side in T-accounts .............................. 83
Figure 25: T-accounts of Tom’s Business Transactions in the second year 2_02 .............................. 85
Figure 26: main cash cycle for trading company ................................................................................ 90
Figure 27: Magical triangle of financial ratios .................................................................................. 110
Figure 28: Cash Ratio ........................................................................................................................ 111
Figure 29: Quick Ratio ...................................................................................................................... 111
Figure 30: Current Ratio ................................................................................................................... 111
Figure 31: Equity Ratio ..................................................................................................................... 112
Figure 32: Long-term Debt and Equity to Non-Current Asset Ratio ................................................ 112
Figure 33: Return on Equity .............................................................................................................. 113
Figure 34: Return on Assets .............................................................................................................. 113
List of Figures X
Figure 35: Return on Sales ................................................................................................................ 113

Figure 36: General Model of Trading Company ............................................................................... 134
Figure 37: Entries in Trading company accounts (approach without perpetual inventory) .............. 135
Figure 38: Tom’s expenses for trading goods account 2_04 ............................................................ 137
Figure 39: Examples for order confirmation and delivery note ........................................................ 137
Figure 40: Examples for order confirmation and delivery note ........................................................ 138
Figure 41: Tom’s sales from trading goods account 2_04 ................................................................ 139
Figure 42: Calculation of mark-up vs. calculation of margin ........................................................... 140
Figure 43: Excerpt of Tom’s bank statement of year 4 ..................................................................... 156
Figure 44: Process of credit card sales to customer .......................................................................... 157
Figure 45: Example of a QR payment slip and comparison to old payment slip .............................. 159
Figure 46: Process of anticipatory withholding tax in Switzerland .................................................. 160
Figure 47: Comparison of trading activity accounts and production activity accounts .................... 162
Figure 48: Entries in Production company accounts, purchasing ..................................................... 162
Figure 49: Entries in Production company accounts, selling ............................................................ 163
Figure 50: Entries in Production company accounts, production ..................................................... 163
Figure 51: 4 cases for accruals .......................................................................................................... 207
Figure 52: 4 bookings for different accrual cases ............................................................................. 208
Figure 53: comparison of accruals and provisions ............................................................................ 212
Figure 54: primary and secondary market for securities ................................................................... 226
List of Tables XI
List of Tables
Table 1: Business Model components ......................................................................................................... 22
Table 2: business transactions and effects on account types ....................................................................... 27
Table 3: Accounting requirements by company size .................................................................................. 36
Table 4: Tom’s Cash Book entries start ...................................................................................................... 51
Table 5: Tom’s Cash Book entries for the first year 2_01 .......................................................................... 51
Table 6: Statement of Profit or Loss in Reporting Format .......................................................................... 56
Table 7: Tom’s Cash Book entries with profit accounts for the first year 2_01 ......................................... 57
Table 8: Statement of profit or loss for the year 2_01, in T-account format............................................... 59
Table 9: Statement of profit or loss for the year 2_01, in reporting format ................................................ 59
Table 10: Booking entries A, year 2_02 ..................................................................................................... 78
Table 11: Elements of Financial Statements ............................................................................................... 79
Table 12: Financial Development of a Company in a Nutshell .................................................................. 80
Table 13: Overview account type debit and credit side .............................................................................. 81
Table 14: Generic types of transactions ...................................................................................................... 82
Table 15: Booking entries B, year 2_02 ...................................................................................................... 84
Table 16: Booking entries C, year 2_02, year-end bookings ...................................................................... 86
Table 17: Booking entries year-end bookings............................................................................................. 86
Table 18: Statement of profit or loss for the year 2_02, in reporting format .............................................. 87
Table 19: Statement of financial position per December 31, 2_02 ............................................................. 87
Table 20: Statement of financial position per January 1, 2_03 ................................................................. 103
Table 21: Statement of profit or loss per beginning of the year 2_03, in reporting format ...................... 104
Table 22: Financing and Investment plan for bicycle business................................................................. 106
Table 23: Booking entries A, year 2_03 ................................................................................................... 106
Table 24: Statement of profit or loss for January to June 2_03, in reporting format ................................ 107
Table 25: Statement of financial position per June 30, 2_03 .................................................................... 107
Table 26: Booking entries B, year 2_03 .................................................................................................... 108
Table 27: Booking entries C, year 2_03, year-end bookings .................................................................... 109
Table 28: Statement of profit or loss for January to December 2_03, in reporting format ....................... 109
Table 29: Statement of financial position per December 31, 2_03 ........................................................... 109
Table 30: Booking entries year-start: opening entries............................................................................... 131
Table 31: Tom’s booking entries A, 2_04, opening entries ...................................................................... 131
Table 32: Calculation of Sole Proprietor’s Income ................................................................................... 132
Table 33: Sole Proprietorship Private and Equity accounts ...................................................................... 132
Table 34: Tom’s booking entries B, 2_04 ................................................................................................. 133
Table 35: Tom’s booking entries C, 2_04 ................................................................................................. 133
List of Tables XII
Table 36: Comparison of Trading Business booking approaches ............................................................. 135

Table 37: Tom’s booking entries D, 2_04................................................................................................. 136
Table 38: Tom’s booking entries E, 2_04 ................................................................................................. 138
Table 39: Tom’s booking entries F, 2_04 ................................................................................................. 139
Table 40: Tom’s booking entries G, 2_04, year-end bookings ................................................................. 141
Table 49: Tom’s booking entries G, 2_05, closing entries ....................................................................... 167
Table 50: Statement of profit or loss for January to December 2_05, in T-account format ..................... 167
Table 53: Work in process, Year 1 ............................................................................................................ 169
Table 57: Comparison of Depreciation Amount Calculation Methods..................................................... 182
Table 58: comparison of depreciation method .......................................................................................... 183
Table 59: Booking entries for sales of non-current assets......................................................................... 185
Table 61: Bookings for successful debt collection.................................................................................... 187
Table 62: Bookings for un-successful debt collection .............................................................................. 188
Table 63: Bookings for un-successful debt collection .............................................................................. 188
Table 67: Tom’s booking entries F, 2_06, including closing bookings .................................................... 189
List of Tables XIII

Table 74: Aspects relevant when buying and selling land + building ...................................................... 201
Table 75: Tom’s booking entries D, 2_07, purchase of land + building................................................... 204
Table 76: Booking entries for selling of land + building .......................................................................... 205
Table 77: Tom’s booking entries E, 2_07, land + building used by his business and by himself ............ 205
Table 78: Tom’s booking entries F, 2_07, operational business ............................................................... 208
Table 79: Statement of profit or loss for January to December 2_07, in reporting format, before accruals
................................................................................................................................................................... 210
Table 80: Anja’s consideration of accruals 2_07 ...................................................................................... 211
Table 81: Tom’s booking entries G, 2_07, accruals ................................................................................. 211
Table 82: Tom’s booking entries H, 2_07, provision ............................................................................... 212
Table 83: Tom’s booking entries I, 2_07, year-end bookings .................................................................. 213
Table 88: Tom’s booking entries B, 2_08, reversing accrual bookings .................................................... 224
Table 89: Tom’s booking entries C, 2_08, final part of the accruals ........................................................ 224
Table 90: Tom’s booking entries D, 2_08, bonus for last year’s profit .................................................... 225
Table 91: Shares: equity financing ............................................................................................................ 226
Table 92: Shares: equity financing ............................................................................................................ 227
Table 93: Booking accounts for borrower’s marketable securities ........................................................... 228
Table 94: Purchase of marketable securities: Bank information............................................................... 228
Table 96: Sales of marketable securities: Bank information..................................................................... 229
Table 98: Valuation alternatives for marketable securities ....................................................................... 231
Table 99: Tom’s booking entries G, 2_08................................................................................................. 231
Table 100: Tom’s booking entries H, 2_08............................................................................................... 232
Table 101: Tom’s booking entries I, 2_08, interim closing ...................................................................... 232
Table 102: Statement of profit or loss for January to June 2_08, in T-account format ............................ 232
Table 103: Statement of profit or loss for January to June 2_08, in reporting format .............................. 233
Table 104: Interim statement of financial position per June 30, 2_08 ...................................................... 233
Table 105: B&S Ltd. booking entries A, 2_08 founding entries .............................................................. 244
Table 106: Founding statement of financial position per July 1, 2_08 ..................................................... 244
Table 107: Profit distribution calculation scheme (with fictive example) ................................................ 246
Table 108: Statement of financial position before profit distribution per December 31, 2_11 ................ 246
Table 109: Profit distribution calculation scheme (with fictive example) ................................................ 247
List of Tables XIV
Table 110: B&S Ltd. booking entries A 2_11, profit distribution ............................................................ 247
Table 111: Statement of financial position after profit distribution per December 31, 2_11 ................... 248
Table 112: Example statement of financial position before profit distribution ........................................ 248
Table 113: Booking entries loss distribution............................................................................................. 248
Table 114: Example statement of financial position after profit distribution ........................................... 249
Table 115: Introduced Multi-year business transactions........................................................................... 280
Table 116: Indicators regarding multi-year decisions need and options ................................................... 281
List of Abbreviations XV
List of Abbreviations
AD anno domini (Latin: in the year of our Lord)
AHV Alters- und Hinterbliebenenversicherung
AI Artificial Intelligence
B Balance of T-account
BC Before Christ
BVG Berufliches Vorsorge Gesetz (Swiss law for retirement saving)
C Credit side of T-account
CHF Swiss francs
CPA Certified Public Accountant
CSR Corporate Social Responsibility
CSV Creating Shared Value
D Debit side of T-account
e.g. exempli gratia
EB Ending Balance of T-account
EDI Electronic Data Interchange
EDIFACT Electronic Data Interchange for Administration, Commerce and Transport
ERP Efficient Resource Planning
ESR Einzahlungsschein mit Referenznummer
etc. et cetera
EU European Union
f following
ff forth following
GAAP Generally Accepted Accounting Principles
GPS Global Positioning System
GRI Global Reporting Initiative
HR Human Resources
i.e. id est
IBAN International Bank Account Number
IFRS International Financial Reporting Standards
Inc. incorporated
ISO International Organization for Standardization
IT information technology
LCD Liquid-crystal display
ltd limited
List of Abbreviations XVI
NGO Non-governmental Organization

NPO Not-for-profit Organization
OB Opening Balance of T-account
P&L Profit & Loss Statement
plc. public limited company
pp pages
QR-code Quick Response Code
R&D research and development
SEPA Single Euro Payments Area
SFP Statement of Financial Position
SME small and mid-sized enterprises
SMI Swiss Market Index
TV Television
US United States
US-GAAP United States Generally Accepted Accounting Principles
VA Value adjustment
VAT Value Added Taxes
Introduction XVII
Introduction
The book combines theory with definitions, an evolving story of the student Tom who starts and grows his own
business in order to pay for his study, examples, as well as exercises. The book also asks for personal opinions, indi-
cating that many decisions have a subjective element and depend on the specific situation in which they must be
taken.
Examples and exercises are in separate sub-chapters. The theory, the story of Tom, and the personal opinions are
built up to best support the learning experiences. The following elements are used to indicate theoretical back-
ground, definitions, as well as questions for personal opinions.
Theory explanation
Start of Theory Part

End of Theory Part
Definition
Accounting Accounting is a set of rules how to map all aspects of an organization as well as all the different tasks of the di-
vision of labor within the organization into a financial frame. It is also understood as the discipline to apply.
Personal Opinion
How do you assess the financial statements of Tom?
Positive aspects Critical aspects
Exercises
Each chapter offers a number of exercises to strengthen/broaden the theoretical knowledge with practical examples.
Summary
This book discusses financial accounting in 11 chapters. The following 2 pages summarize the content and learning
of the book. These two pages are repeated at the end of each chapter, indicating the new learning of the chapter as
well as the overall progress of learning.
Introduction XVIII
Assets Statement of financial pos. Liabilities

1 Statement of financial position
Cash
• Assets: things that a company uses for production of goods & services Current liabilities
• Liabilities: rights that others can execute Receivables
• Equity: money provided by the owners and non-distributed profits
• Opening and closing entries Inventories
Non-current
liabilities
• Analysis
o Quick ratio
o Current ratio Non-current
o Long-term debt and equity to asset ratio assets Equity
o Equity ratio
2 Statement of profit or loss Statement of profit or loss in reporting format

Account Designation
• Income: contribution from customers for goods & services 30 - 39 Sales from goods and services
40 - 49 - Material and goods expenses
• Expenses: consumption of resources for production of goods & services Gross income
• Difference between income and expenses: profit (or loss) 50 - 59 - Personnel expenses
• Booking of profit: to equity 60 - 67 - Other operating expenses
EBITDA
• Summary of profit-relevant bookings 68 - Depreciation
• Operating result vs. accessory operating/extraordinary result EBIT
• Analysis 69 -/+ Financial profit/loss
Profit/loss, core business
o Return on equity 70 - 79 -/+ Accessory operating income
o Return on investment -/+ Extraordinary and non-operating
o Return on sales 80 - 88 income and expenses
EBT
89 - Taxes
3 Sole proprietorship and trading Profit of the period
• Sole proprietorship: private account as sub-account of equity account

o Frequent transactions with owner (salary, payments, ...) Private
o Disclosed as equity in the closing statement (i.e. elimination Withdrawals Claims (salary, ...)
of private account)
o Owner‘s income: salary, interest, lease, and profit
o Booking of private consumption: Private / Captive consumption
Inventory, trading goods Expenses for trading goods Sales from trading goods
Decrease in in- Returns to supplier Returns by clients
ventory Purchases Trade discounts Trade discounts
(cash/invoice) Quantity discounts Quantity discounts
Opening balance Sales
Transport costs
Closing balance Balance (cash/invoice)
Transport costs
= purchase value of Balance
Decrease in inven-
goods sold = net sales
tory
• Increase in inventory trading goods Decrease of expenses for trading goods (booked at year end only)
• Decrease in inventory trading goods Increase of expenses for trading goods (booked at year end only)
• Gross profit Net sales – Purchase value of goods sold
• Margin (gross profit margin) Gross profit / Net sales * 100%
• Mark-up (gross profit mark-up) Gross profit / Purchase value of goods sold * 100%
4 Payment transactions
• Delivery (to customer or from supplier): against cash or invoice (for invoice: «Receivables» or «Payables»)
• Operational/daily invoices: «Receivables from Goods and Services» / «Payables from Goods and Services»
• Other/one-time invoices: «Other receivables » / «Misc. current liabilities»
• Credit card payments and alike: intermediary charges a commission which is financial expenses (e.g. 3%)
o Sales transaction: Receivables, card organization / sales 100%
o Payment from card organization: Financial expenses / Receivables, card organization 3%
Bank / Receivables, card organization 97%
• Bank account may allow for short term loans (temporary right-side surplus); interest as financial income
• Prepayments: Liability (prepayments received from customers) or assets (prepayments paid to suppliers)
Introduction XIX
5 Production
• Inventory raw material and supplies: «Expenses for raw material and supplies» (same as for trading)
• Inventory semi-finished and finished goods: «Changes in inventory» (income account)
• «Goods and services on own account» (income account): for assets produced and used by itself
6 Value adjustments
• For non-current assets: depreciation as systematic, planned value reduction over the planned useful life
o Direct (reduction of asset account) or indirect (book to VA account, a negative asset account)
o Straight line (x% of purchase value) or declining balance (x% of current book value) method
• Receivables: typically a certain percentage of invoices (receivables) are not paid by customers
o Expected losses (e.g. 10% of the receivables at year end): booked as «Sales» / «VA, receivables»
o Debt collection proceeding: payment to government as asset (increases receivables), late payment interest
disclosed as financial income («Receivables from Goods and Services» / «financial income»)
o Effective loss/default of receivable: booking as «Losses from receivables» (negative revenue)
7 Land and building, accruals and provisions

• Land and building: mixed use, i.e. partly for the business, partly for non-operating purposes
o Asset account: «Land and building» (including costs for purchasing)
o Income account: «Income from land and building» (including lease of production rooms for itself)
o Expense account: «Expenses for land and building» (all expenses, incl. Depreciation, electricity, ...)
o Profit from sale: book as profit from sale of non-current assets
o Lease of own production rooms: «Lease expenses» / «Income from land and building»
• Accruals and provisions: diverting transactions (partly) into the following or followings years
o Booking of accruals (for transactions that span over 2 years, e.g. insurances paid): on Dec 31
o Automatic booking for accruals: Jan1 of the next year reverse booking
o Provisions: existing obligation, but time and amount uncertain but likely
8 Marketable securities
• Disclosed as «Securities», «Financial asset» or «Investment »(3 different asset classes), based on objective.
• Valuation: at market value or purchase value (direct or indirect), to be decided for each asset class
• Disclosure: direct or indirect, to be decided for each asset class
• Purchase/ sales: price, accruals and commissions may apply (purchase statement of banks sums it all up)
• Information for bonds: nominal value, current value, interest rate, maturity date and accrued interest
• Information for shares: market price (on the stock market), nominal value (for dividend calculation), annual
dividend payment (only 65% is paid to share holder, 35% is «Receivables, anticipatory tax»)
• Year-end: book accrued income and total change in value (as «Financial income» or «Financial expenses»)
9 Joint-stock company
• Founding: «Non paid-in share capital» / «Shareholders’ capital» (i.e.: non-current assets / equity)
• Profit should/may be distributed to owners (shareholders) through profit distribution process/suggestion:
o Amount: profit (loss) and profit (loss) brought forward
o Eligible: paid-in capital only («Shareholders’ capital» - «Non paid-in share capital»)
o Swiss law: legal reserves (structure: first allocation and second allocation, based on existing level of legal
reserves, amount/level of dividend (base vs. surplus dividend) and profit sharing bonus)
o Payment of dividend: anticipatory taxes (only 65% to the shareholder, 35% to the government)
10 Valuation reserves
• Disclose assets externally with a too low value (external book value lower than internal actual value)
• Disclose liabilities externally with a too high value (external book value higher than internal actual value)
• Disclosure oftentimes without any decision by the company, i.e. the reserves are not available when needed
Chapter 0:
Why Financials Matters 20
Why Financials Matters

Simple forms of organizations, i.e. informal grouping of individuals collaborating to achieve common objectives,
exist maybe since thousands of years. Over time, different forms of organization evolved, and they became more
formal. Today we typically distinguish between governments and private organizations. Governments typically
serve citizens and inhabitants based on rules and regulations (i.e. constitution, laws, edicts, enactments, by-laws,
etc.) based on majority interests and direct or indirect votes. On the other side, individual persons (or legal entities)
found private organizations in order to fulfill a certain objective. Typically, the legal frame of a country defines what
legal forms organizations can choose from, e.g. share companies, cooperatives, associations, etc., including sub-
forms, e.g. private limited company (plc.), limited company (ltd), or incorporated (Inc.) for share companies.
The many definitions and forms of organizations that do exist have some key aspects in common. From a financial
perspective the two most important aspects are first the division of labor for a broad variety of different tasks, i.e.
different people, departments or organizations are performing certain tasks to achieve the overall objective. Second-
ly, these various tasks have different definitions of success, i.e. in a football team ‘run fast’ only applies to the for-
warder, for defenders the right approach to success might be ‘form a line with your co-defenders’. For companies
for example, the sales department would like to produce and sell what customers actually need, but the production
department would like to produce what best fits the existing production capacity.
This chapter introduced companies as a sub-form or organizations, their division of labor, ideas of success, and how
financials have supported their success in the past as well as how they might do so in the future.
0.1 Introduction
Reflective questions
1. Why are organizations concerned about finance and accounting, how and what does it serve them?
2. How does finance interrelate with other aspects of organizations?
3. What tools and software are used for effective and efficient finance and accounting?
Chapter 0:
0.2 An introduction to companies

First, the terms organization and company are defined, whereas companies are a subset of organizations (Heer,
2015). Based on these definitions, further consequences and legitimation of financials as unifying language will be
discussed and derived.
Organization An organization is a structured, planned, and administered collaboration of people as well as other
organizations, using various resources and value adding processes to achieve a common goal.
Company A company is an organization with the objective to serve customers with value adding products and
services, i.e. to fulfill their needs.
Following this general definition, different company models may be derived. As with every model, they represent
reality in a certain, abstract and therewith easy to understand way. They never represent all of the reality, and specif-
ic models might be required for different situations. The St. Gallen Management Model is a perfect example, how
management and therewith company models evolved over time, and how they mapped the complexities of different
times. So the older models might still being perfectly fine for somewhat easier, smaller or evolving situations.
One of the most generic, oldest and most simple management model is the Input-Output model with the company as
a ‘Black-Box’ (see Figure 1). The model looks at the customers that the company might serve, it then calls to under-
stand their differences, expectations, needs, and thirdly to align the internal capacities and capabilities, including the
respective collaboration with suppliers (e.g. buy the right products, components, or materials to meet the quantities
and/or qualities required, etc.). Typically, there is not ‘right’ combination of customers, capabilities and suppliers,
rather the company must find a combination that adds a lot of value to the customer and that it can serve easily.
Figure 1: Input-Output business model
Note. Own depiction
Chapter 0:
Starting from the 1980ies, business models try to list the specific areas, activities, and tasks that the company must
find solutions for and answers to. So the business model is like a recipe that the company must follow. The first
generation of the St. Gallen Management Model, published in 1991, is one such example, see Figure 2.
Figure 2: St. Gallen Management Model, 1st generation
Customer)offering)concept) Financial)concept) Social)concept)

Means) Objec7ves) •  Markets( •  Cash( •  Employee;oriented(
•  Products( •  Profit( •  Society;related(
•  Shareholder(value(
•  Efficiency(
•  Employees( •  Level(of(capital( •  Personnel(
•  Produc<on(machines( •  Structure(of(capital( •  Financial(means(
•  installments(
•  Strategy(for(research(&( •  Ensuring(approaches( •  Behavior(towards(
Procedures)
development( •  Secure(financing( employees(

•  Strategy(of(purchasing( •  Op<ons(for(profit( •  Behavior(towards(
•  Strategy(of(produc<on( distribu<on( society(
•  Strategy(of(marke<ng( •  Payment(transac<ons(
•  insurances(
Note. Own depiction
The latest development in business models is offering a helicopter perspective approach. Instead of listing tasks that
must be considered and decided. Such models ask many questions that must be considered comprehensively in order
to build a successful business, see Table 1.
Table 1: Business Model components
Value aspect Business task Components Description

Value Product Value Proposition Gives an overall view of a company’s bundle of prod-
Proposition ucts and services.
Value Customer Target Customer Describes the segment of customers a company wants
Delivery Interface to offer value to.
Distribution Channel Describes the various means of the company to get in
touch with its customers.
Relationship Explains the kind of links a company establishes be-
tween itself and its different customer segments.
Value Infrastructure Value Configuration Describes the arrangement of activities and resources.
Creation Management Core Competency Outlines the competencies necessary to execute the
company’s business model.
Partner Network Portrays the network of cooperative agreements with
other companies necessary to efficiency offer and
commercialize value.
Value Financial Cost Structure Sums up the monetary consequences of the means
Capture Aspects employed in the business model.
Revenue Model Describes the way a company makes money through a
variety of revenue flows.
Note. Osterwalder et al., 2005, pp. 10ff
Should organizations use business models and if yes which one? There is not clear answer to this question. The sec-
ond best answer is ‘as little as possible but as much as necessary’. Meaning: if an entrepreneur is not using any busi-
ness model at all, if he does not thoroughly think through customers, production processes and supplier interactions,
he might make mistakes that will hinder him from growing fast and growing in the right direction. However, many
questions only arise if you actually start dealing with customers, production and suppliers, i.e. regardless how much
Chapter 0:
you plan and think ahead, only going the way shows what is rather easy and needs little considerations, and what is
difficult and needs high levels of consideration and planning. So the question is rather: what model is the right one
for a certain business idea, what level of complexity, size, and particularities does the business have and what model
prepares well for these exact challenges?
0.3 Division of labor within organizations and ideas of success within collabo-
ration
By definition, organizations and companies include division of labor. Taking the example of a car manufacturer, the
research and development department has to come up with car concepts for the next 10 years, they must include
technology and develop required competencies and maybe form new alliances. Once the specific model has been
decided upon, the production department must define the required production processes, the construction department
must align with different engineering companies and construction experts for building the required infrastructure for
production. The marketing department must define target audiences and assess sales number, which then serves the
sales planning, advertising strategy and pricing. The supply department then uses the sales numbers to negotiate
supply details and prices with suppliers. And all along the way, so called support processes must ensure the availa-
bility of the right employees (right qualifications, right place of work, at an appropriate salary), smooth underlying
IT systems, and sufficient financial resources to pay all the invoices. This example also indicated the need for suffi-
cient money upfront because companies typically must pay many invoices before they start receiving money from
the customers. Financing deals with bridging this time gap and ensuring sufficient money.
Thinking about the differences of each department’s objectives and what makes it successful, conflicts between de-
partments seem likely. Examples may include the research trying to include latest technology such as machine learn-
ing or artificial intelligence to appeal the millennium customers in the future, but the production department is look-
ing for simple, known approaches in order to prevent production delays, and the sales department would like to sell
updates for the vehicle software which to a certain extend contradicts with the very essence of machine learning.
So in a situation with division of labor, it may well be that different departments have specific and different ideas of
success. However, the sum of these ideas does not necessarily lead to a maximum success for the overall organiza-
tion. And in such a situation, finance may offer a common language to describe the added value of each department
to the overall success of the company. So each transaction of the departments is valued in financial terms and then
the effective financials are compared to the planned financials, or any other references such as previous year, com-
petitors, or best in class. Therewith, the financials become the objective basis bridging the various departmental ide-
as of success into an overall idea and success. A unified idea of success still requires management and leadership,
but the financials play an important role in making the activities of different departments comparable as well as to
objectively communicate contributions and dependencies of different departments. Financials as a language allow
organizations to operate smoother and more objectively focused.
As with every language, it took a long time to evolve and find the useful application that financials enjoy today. The
following paragraph will introduce the evolution of financials and bookkeeping.
Chapter 0:
0.4 The four building blocks for financially modeling organizations: assets, li-
abilities, expenses and revenues
Financials allow bridging the differences within organizations, which originate from using various resources as well
as from the division of labor. Therewith, financials become a universal language to describe all the transactions that
apply within an organization, they allow a comprehensive assessment of all the transactions with their differences
and then take decisions to bring the organization’s goal forward. In order to accommodate for the differences, rules
must apply how the differences and specifics of each transaction and/or division are taken into account. Accounting
defines and deals with these rules and therewith sets the quality level of the available financial information.
Bookkeeping is the methodology, techniques, and tools that are used to fulfill the rules set out by the accounting.
Below, the two terms are defined.
Accounting Accounting is a set of rules how to map all aspects of an organization as well as all the different tasks of the di-
vision of labor within the organization into a financial frame. It is also understood as the discipline, i.e. the or-
ganizational unit, to apply the rules and therewith ensure proper implementation and follow-up of accounting.
Bookkeeping Bookkeeping is the methodologies, techniques, and tools that are used to implement the accounting rules and
ensure ongoing compliances with the accounting rules.
0.4.1 Introduction to the mechanics behind the financials: bookkeeping
The following paragraphs offer an introduction to bookkeeping. The double-entry bookkeeping system was devel-
oped over several centuries and the version that applies today is somewhat complex and abstract. So this introduc-
tion aims to present the most important terminologies and link them back to the organizational models, required re-
sources and division of labor.
In essence, double-entry bookkeeping requires application of the following concepts (for details see Chapter 2):
• Documents: for each transaction, a document is required. This can be an agreement/contract, an invoice, a
bank statement, or any form of confirmation proving that the transaction actually took place.
• Journal: list of all transaction in the accounting language, typically in timely order. Each list entry is called
booking entry. E.g. for withdrawing CHF 1 000.- money from the company bank account on January 10,
2017 and put it to the cash register, the booking entry is: Jan 10, 2017 cash / bank 1 000
• General ledger: the general ledger is a set of accounts (i.e. aspects of the business that management is inter-
ested in and wants to have financial data for), and the entries from the journal are brought forward into these
accounts. Accounts have a left side and a right side (i.e. graphically they are T-shaped), indicating increases
and decreases of the respective financial information such as cash, vehicles, salaries, etc. So the booking en-
try Jan 10, 2017 cash / bank 1 000 would lead to an entry of 1 000 on the left side of the T of the account
‘cash’ (which indicates an increase in available cash) and an entry of 1 000 on the right side of the T of the
account ‘bank’ which indicates a decrease in available money on the bank account).
Chapter 0:
Over the years, bookkeeping has developed a methodology which describes each transaction of an organization as
affecting two accounts (always exactly two, never one only, never three or more accounts). This system has been
developed in the 15th century and it is called double-entry bookkeeping. In essence, the accounts are divided into
four types. First, the organization must define all accounts that apply for the organization, i.e. what level of financial
details should be recorded and therewith should be available for analyses and are necessary for decision making.
This list of applicable accounts is called chart of accounts, oftentimes a predefined standard list is used, especially
by small and mid-sized enterprises (SME). Such lists may be provided by the software applications, by country
business law or tax authorities, or by professional societies.
Each account is then assigned to one of the following four account types:
• Asset accounts: hold the financial information regarding the assets that an organization owns.
• Liability & equity accounts: hold the financial information regarding the obligations that an organization
has entered into.
• Expense accounts: record the resources that have been used, i.e. consumed, to serve the customers.
• Revenue accounts: record the financial value that was created for the customers, i.e. what the customer is
willing to pay for the product or service.
All these accounts are graphically represented with a T, but left-side and right-side have different meanings. For as-
set accounts and expense, left-side entries mean ‘more’ assets or expenses (i.e. right-side entries mean ‘less’ assets
or expenses). For liability & equity and revenue accounts, the opposite applies: left-side entries mean ‘less’ liability
& equity or revenues (i.e. right-side entries mean ‘more’ liabilities & equity or revenues).
For all accounts, at the end of the period (e.g. monthly, quarterly and at least annually which is typically required by
governments for public reporting and tax purposes), the balance of each account will be calculated. Again, these
balances have different meanings. For asset accounts and liability & equity accounts, the balances represent the cur-
rent, i.e. as of today, level of resources available and obligations to fulfill in the future. These accounts have opening
balances, i.e. the ending balance of the previous period. In contrast, expense and revenue accounts list the consump-
tion of resources to serve the customers during the period (i.e. month, quarter or year) and the value created for the
customers respectively. Every new period they start at 0 and all resource consumption and value creation is added.
At the end of the period all asset accounts are then listed on the left side of the statement of financial position (also
referred to as balance sheet) and all the liability & equity accounts on the right side. This allows the comparison of
current resources that the company owns with the obligations that must be fulfilled in the future.
The expense accounts are listed on the left side of the statement of profit or loss (also referred to as P&L statement
of income statement) and the revenues on the right side. This allows to compare what value was created in the eyes
of the customers and how many resources had to be consumed by the company in order to achieve the added value
for the customer. The difference is called profit (or loss in case that expenses are higher). The profit increases the
equity, so the surplus customer value is also recorded in the statement of financial position.
Accounting looks at transactions from a financial perspective only, i.e. resources are only disclosed as assets if a
value can be reasonably calculated and it is calculated in a similar way by many experts. An example of resources
that are not an asset are key employees such as customer advisory experts in private banking or key R&D master-
Chapter 0:
minds in pharmaceutical companies (because key employees may leave the company almost any day, it is impossi-
ble to assess their value for the company).
If organizations have additional or different goals, e.g. schools may strive to support children to grow into responsi-
ble adults, then the respective definition of success is not represented in accounting. Many such ‘added values’ can-
not be disclosed as revenue because they cannot be financially valued. For respective organizations, profit is not the
goal but rather a necessity (i.e. not consuming too many resources when serving the beneficiaries). So from a finan-
cial perspective the objective may actually be to have a profit of 0, which is often used as one of many definition cri-
teria for Non-Profit organizations (NPOs).
0.4.2 Basic definitions related to bookkeeping
After having introduced the account types as well as the two main statements at the end of the period in the para-
graphs above, the following definitions shall apply for these terms:
Asset Asset accounts financially represent the resources that a company owns to serve customers (money, inventory,
accounts vehicles, machines, real estate, etc.). The balance of each asset account shows the level of resources as per the
end of the period, e.g. December 31, 2020. The balance may fluctuate significantly during the period, e.g. buy-
ing new vehicles and selling old ones.
Liability & Liability & equity accounts financially represent the obligations that the company has entered into, typically
equity who has provided capital to purchase the assets that the company owns. Liabilities are obligations towards out-
accounts side parties, e.g. banks or suppliers. Equity is capital provided by owners or capital that was built up (over sev-
eral years) through profits. Equity is not an obligation to pay back money, but an obligation for offering deci-
sion/voting power as well as for consideration in case of profit distribution.
Expense Expense accounts financially represent the consumption of resources during a period (e.g. January to December
accounts 2020) to serve the customers. They show the resources that were required in order to achieve the added value
for the customers. .
Revenue Revenue accounts financially represent the added value that customers see in the products and services of a
accounts company during a period (e.g. January to December 2020), i.e. what they are willing to pay.
Statement of The statement compares the balances of the asset accounts and the liability & equity accounts as per a certain
financial po- point in time (e.g. December 31, 2020). As the profit from the statement of profit or loss increases equity, the
sition sum of all balances of assets accounts and liability & equity accounts must be equal. The statement can also be
explained as showing where the capital is coming from, i.e. who has provided the money (liabilities from out-
side such as banks and equity from owners such as shareholders as well as from profits) and how the capital is
used (assets such as inventories, vehicles, machines, real estate, etc. that have been bought).
Statement of The statement of profit or loss compares the total expenses (i.e. consumption of resources) of a period, e.g. Jan-
profit or loss uary to December 2020, with the total revenues (i.e. value added for customers) of the same period. If revenues
are higher then expenses, the balance is called profit (otherwise it is called loss). The profit shows how finan-
cially effectively and efficiently the company has served the customers.
Chapter 0:
The technical details of how to record different increasing and decreasing transaction for each account type, as well
as the computation of balances, bringing these balances into the statement of financial position as well as the state-
ment of profit or loss, will be discussed in Chapter 2.
0.4.3 Linking bookkeeping back to the business transactions: example
In reality, the account types are not independent. Instead, through a sequence of transaction, they roll into one an-
other. The following table lists a potential sequence of business transactions for setting up a new fashion store and
their effect on the account types.
Table 2: business transactions and effects on account types
Business transaction Effect on account types
• Lending money from a bank to buy new store • More money on the bank account (increase of the as-
shelves, lighting and other fittings set account ‘bank’)
• More obligation to banks (increase of the liability &
equity account ‘Loans’)
• Buying new shelves, lighting and fittings, paying by • More equipment (increase of the asset account ‘ma-
bank transfer chines & equipment’)
• Less money on the bank account (decrease of the as-
set account ‘bank’)
• Signing employment contracts with store staff • (No financial effect, only upon salary payments)
• Signing contract for renting a store • (No financial effect, only upon lease payments)
• Buying cloths from a wholesaler, receiving an in- • More items hanging in the store (increase of the ex-
voice pense account ‘expenses for trading goods’)
• More obligation to pay the invoice of the supplier
within the next 30 days (increase of the liability &
equity account ‘accounts payable’)
• Customers buy different clothes and pay in cash • More money in the cash register (increase of the as-
set account ‘cash’)
• More revenue from selling (increase of the revenue
account ‘sales from produced goods’)
• In the evening, deposit most of the money from the • More money on the bank account (increase of the as-
customers in the bank account set account ‘bank)
• Less money in the cash register (decrease of the as-
set account ‘cash’)
• Pay the wholesaler’s invoice by bank transfer • Less obligation to pay the supplier (decrease of the
liability & equity account ‘accounts payable’)
• Less money on the bank account (decrease of the as-
set account ‘bank’)
Chapter 0:
• Pay salaries to the employees by bank transfer • More expenses for personnel (increase of the ex-
pense account ‘expenses for wages and salaries’)
• Less money on the bank (decrease of the asset ac-
count ‘bank’)
• Pay the rent for the workshop and store by bank • More expenses for renting (increase of the expense
transfer account ‘expenses for leases’)
• Less money on the bank (decrease of the asset ac-
count ‘bank’)
• At the end of the year: reduce the remaining value of • More expenses for depreciation (increase of the ex-
the shelves, lighting and fitting because it has be- pense account ‘depreciation’)
come somewhat old and therefore depreciation must
• Less value of the machines (decrease of the asset ac-
be considered
count ‘machines & equipment)
Note. Own depiction
This example shows that the money that has been received from the bank is used to buy equipment, as well as to buy
trading goods (clothes) from wholesalers/suppliers. With the newly hired staff and rented store room (both of which
do not have any financial impacts yet, only at the time when the respective salary and lease payments apply) cus-
tomer can be attracted, the customers take home the clothes and pays money. With this money, supplier invoices,
salaries and lease must be paid. And at the end of the year, depreciation of equipment must be considered which re-
duces the value of the assets, i.e. the resources that are available to serve the customers in the future. So cash from
the bank converts into resources (equipment) and consumption of resources (trading goods, salary, lease), and then
into payment from customers (revenues). This cash contribution from customers must be high enough to ensure on-
going business (buying more cloths from the wholesaler as well as pay future salaries and leases), and it must allow
piling up enough money to pay back the initial bank loan after the agreed period (maybe 3 or 5 years). So in other
words, the price charged to the customers must be higher than the expenses, i.e. the added value perceived by the
customer and what he is therefore willing to pay must be higher than the consumption of resources that is required to
serve the customer. This example demonstrates, how the four account types are related and depend on one another.
0.4.4 Linking bookkeeping to hierarchical levels
Another important advantage of the double-entry bookkeeping is that it can be applied at lower organizational units
and then easily rolled up into higher managerial levels and into the overall company. For a grocery chain, this allows
to record (most) transaction at store level, then assess efficiency and effectiveness for each store, as well as at re-
gional, country, area and then worldwide-company level. Therewith managers have data available for their respec-
tive area of responsibility and can take decisions based on this data, e.g. try to negotiate lower prices from suppliers,
i.e. reduce expenses which leads to increased profit and decreased cash being paid out.
After this introduction of accounting and bookkeeping as common language for the financial perspective of organi-
zations, the following paragraphs will look at the history of accounting and bookkeeping and show, how many steps
and year were required to develop and establish the well thought-trough but also somewhat complex and abstract
methodology that organizations use today.
Chapter 0:
0.5 The history of financials

The following paragraphs describe the historical development of accounting and bookkeeping. It shall demonstrate,
how accounting developed parallel to the complexities of underlying business transactions, the need for transparen-
cy, and the responsibility of leaders. The double-entry bookkeeping that we use today was developed in Italy during
the 15th century in order to accommodate the complexities arising from international trade. This already indicates,
that for some small, local organizations, the full blown system of double-entry bookkeeping might not be required
because the system offers solutions to questions that those SMEs might not even face.
0.5.1 The beginning: Mesopotamia
The history of financials may date back over 7 000 years to the ancient kingdoms of Mesopotamia. Henio concludes
that money, numbers and accounting are interrelated and inseparable in their origins: all emerged in the context of
controlling goods, stocks and transactions in the temple economy of Mesopotamia (Henio, 1992, pp. 685ff). Other
civilizations of the same period such as Babylon, Assyria and Sumerian also used accounting methods, which were
less advanced than the Mesopotamian approaches. They used the natural seasons to herd animals and grow crop, and
after the season they calculated the surplus (Henio, 1992, pp. 685ff). Later these systems were developed further to
record individual transactions (especially for checking movements in and out of storehouses), calculate taxes, and
recording tax payments. By the 4th century BC, the Egyptians and Babylonians used such improved methodologies,
and they also introduced oral audit reports (from audire, to hear in Latin). Also first tax revolts can be traced back to
the same time, at last no older historical prove has been found yet (New York State Society of CPAs, 2003).
0.5.2 The contribution of the Roman empire
The Roman Empire further developed accounting and Oldroyd found that Emperor Augustus (63 BC – 14 AD)
listed and quantified his public expenditure over a period of about forty years. According to Oldroyd, the scope and
details of the accounting information, which differentiated between distributions to the people, grants of land or
money to army veterans, subsidies, building of temples, religious offerings, and expenditures on theatrical shows
and gladiatorial games, suggests that Augustus’ use of information included planning and decision-making (Ol-
droyd, 1995). Later, around 110 AD, accounts for the Fort of Vindolanda (North England) show that the fort com-
puted cash revenues on a daily basis, from sales of surplus supplies or goods manufactured in the camp, items such
as beer or nails for boots, as well as commodities bought by individual soldiers (Bowmann, 1998, p. 41). Later,
around the 3rd century AD, according to documents found in the Heroninos Archive (archive of around a thousand
papyrus documents found near the Egypt city of Harit) relating to running of a large private estate, the manager used
a complex and standardized system of accounting which was followed by all local farm managers (Rathbone, 1991,
p. 4). Each local farm managers recorded the day-to-day running of the estate, such as workforce payment, produc-
tion of crops, the sale of products, the use of animals, as well as general expenditure. The daily recordings were then
summarized into one big yearly account (Cuomo, 2001. p. 231). In summary, the late Roman Empire already used
the core elements of today’s accounting:
• Assets and stocks

• Liabilities and obligations
• Revenues including details
Chapter 0:
• Expenses including details

• Application at different level including to reporting to higher management for planning and decision making
0.5.3 The start of the double-entry bookkeeping system
The origin of double-entry bookkeeping as we know and use it today is seen in Italy. Between 1299 and 1494 differ-
ent companies in Florentine, Genoa, and Venice developed the single-entry bookkeeping to the double-entry
bookkeeping (Heeffer, 2009, p. 11; Lauwers, Willekens, 1994, p. 300; Sangster, Stoner, McCarthy, 2007, pp. 1f).
The first known manuscript describing double-entry bookkeeping was written by Benedetto Cotrugli in the year
1458, however, it was only published in 1573 (Chatfield, Vangermeersch, 2014, p. 183). The first 27-page reference
text for double-entry bookkeeping was published in 1494 by Luca Pacioli, with Pacioli knowing the manuscript of
Cotrugli and crediting him with the origination of double-entry bookkeeping (Sangster, Stoner, McCarthy, 2007, p.
2). Pacioli’s treatise was mainly written for and used by merchants, for whom it gave instructions on recording
transactions, including transactions in a variety of currencies and barter transactions, as well as allowing them to au-
dit their own books. As bookkeepers made the entries in the accounting, such audits ensured that the records com-
plied with the method set out by the merchant (i.e. by Pacioli). Merchants who used the Pacioli system, i.e. who
maintained records of their transactions as well as who had the possibility of audits, lowered their risk of theft by
employees and agents (Sangster, 2009, p. 9). Two main aspects define the methodology of double-entry bookkeep-
ing: first, there is a debit and a credit entry for every business transaction (whereas debit and credit are terminologies
from single-entry bookkeeping and originate from Latin: debit means ‘he owes’, and credit means ‘he trusts’). Sec-
ondly, the following three different books are required: transaction documents (invoices, memorandums, bank
statements, etc.), journal (list of booking entries), and ledger (a set list of individual accounts for different assets, li-
abilities, expenses and revenues). This recording allows evaluating of how the business is going and act accordingly
(Lauwers, Willekens, 1994, p. 296). The details of double-entry bookkeeping will be described in the following
chapters.
0.5.4 Developments after the 15th century
Since 1500 the accounting methodology did not change much. However, one important development was the sepa-
ration of financial accounting and management accounting. This separation originated in the upcoming of joint-
stock companies starting around 1600. With joint-stock companies, investors became an important stakeholder who
required financial information. So financial accounting serves the external needs for financial information, while
management accounting serves the internal needs. Both disciplines use the same basic information, i.e. financial
records of transactions, but they use it for different purposes: for external financial reporting and for internal cost al-
location, planning and deviation analysis respectively. The engagement of investors subsequently also led to grow-
ing need of external independent attestation by auditors (Lauwers, Willekens, 1994, p. 302). A second development
was in the 19th century the separation of accounting from legal services, i.e. accountants versus solicitors. This was
partly fueled by the industrial revolution and resulted in founding of societies of accountants such as the Institute of
Chartered Accountants in England and Wales, established in 1880, or the American Institute of Certified Public Ac-
countants, established in the united States of America in 1887 (Perks, 1993, p. 16). A third development is related to
the development of information technology in the second half of the 20th century where financial accounting, espe-
Chapter 0:
cially payroll calculation, was a key driver for automation and data exchange. Spreadsheet applications like Au-
toplan and VisiCalc allowed for new levels of financial analysis, modeling and planning and therewith became an
important early milestone for the success of personal computers.
In summary, the accounting as we know and use it today started with listing of assets, i.e. amount of crop in the
Mesopotamian warehouses. The Roman Empire added details of governmental cash-expenses as well as cash-
revenues. And the international merchants of medieval Italy added the idea of multitude of assets, including differ-
ent currencies, as well as obligations, e.g. bank loans that must be paid back to the bank in the future. For each of the
four aspects, assets, liabilities, expenses and revenue, different accounts exist. Each account is for an important unit,
e.g. for the expense type ‘vehicle expenses’, and it lists increases and decreases (of the respective expenses). The
double-entry bookkeeping is a methodology to record each business transaction in two accounts (every transaction,
in exactly two accounts).
0.6 The reality of financials for today’s organizations

Financial accounting is a reality for every organization, not matter what size or what business. The unifying lan-
guage of finance and the importance of information for management decision is only one reason for this importance
of accounting. A second reason is the government rules that build on financial information, such as company regis-
tration or tax returns. And thirdly, some suppliers and/or customers require disclosure of financial information, e.g.
if a company asks a supplier to invest significantly in new production machines for a long-term business collabora-
tion, the supplier might be interested to see prove for financial stability of the customer. Or if a company wants to
hand over a key part of the production to a supplier, the company wants to see great stability of this supplier, which
is partly proved by financials.
The role of governments regarding the financials of organizations is rooted in respective laws. The most important
such law, which every country applies, is the company law, which typically defines some basic structures for ac-
counting and bookkeeping. These rules are called Generally Accepted Accounting Principles (GAAP) and they are
typically accompanied by accounting best practices, which are oftentimes governed and further developed by socie-
ties of accountants. The fundamentals of GAAPs are similar for all countries, partly because all use the concepts of
double-entry bookkeeping, but GAAPs also have country-specific rules, e.g. depreciation of intangible assets. In ad-
dition to the company law, other aspects of a country’s legal system also influence accounting, e.g. handling of so-
cial security (how it is calculated, who is paying what part, by whom the pension fund is managed, and where the
pension fund is disclosed, e.g. in Switzerland the fund is managed and disclosed in an independent foundation), or
taxation such as value added taxes, taxation on financial transactions, anticipatory withholding taxes, etc. Some of
these aspects are also subject to political change and development, e.g. taxation of financial transactions is on the
political agenda of different European countries since the financial crisis in 2009.
Regardless of the country’s GAAP and accounting best practices, the importance and application of financials is al-
so related to the size of an organization. Therefore, the follow paragraphs introduce how financials apply for small,
mid-sized and large companies.
Chapter 0:
0.6.1 Small companies
Very small organizations may apply single-entry bookkeeping only, i.e. they only use a cash book or a bank ac-
count. Examples include small sports associations or special interest association that only facilitate and coordinate
respective activities, without having own assets or facilities. Also the income might be narrow, e.g. membership
contributions only, and so are expenses, e.g. contributions to street kitchen. Success might be rather defined by im-
pact/change than by profit, e.g. number of meals served. Typically, companies do not operate in such a limited way
(by definition they use resources, i.e. assets, to serve customers). Never the less, exceptional companies may exist,
e.g. personal training services that a student offers (as a part time engagement to finance his or her studies).
Some countries allow companies to use accounting on cash basis instead of accrual basis. Using the concept of cash
basis, business transactions are only recorded upon payment. In contrast, using the accrual basis, business transac-
tions are recorded upon their contractual fulfillment (e.g. services have been fully provided, somewhat related to the
legal concept of contractual fulfillment), whereas the payment of the service is a second, subsequent transaction. In
the countries where cash based accounting is allowed, it would theoretically also be open for mid-sized and larger
companies. In practice, only small companies apply cash based accounting
Small companies typically have diverse operations, maybe even some business activities in foreign countries, as
well as long-term obligations. So double-entry bookkeeping and accrual based accounting is applied to map the
business realities of such companies. However, small companies tend to have a limited number of different types of
business transactions only, one tax location only, one or few bank contacts only, and a limited number of different
VAT applicable transactions (VAT-effect of transactions being one of the most often asked questions by account-
ants). Therefore, the bank statement typically mirrors the majority of the business transactions. The financial state-
ment of small companies, i.e. statement of financial position and statement of profit or loss, maybe also a statement
of cash flows, holds a few positions only, and only one version of the statements are prepared. This one version is
then used for all purposes, e.g. for tax reporting, for reporting to the company register, as well as for reporting to in-
vestors, banks, customers and suppliers. The only exception might be the information for tax returns for which
amendments to the statements might be necessary in cases when the government has offered investment, innovation
or relocation benefits in the form of tax advantages or tax breaks.
From a process and human resource perspective, accounting at small companies is done by one person only, e.g. by
the owner, a secretary or a finance person who typically holds other responsibilities as well. An annual audit applies,
so an external expert (also called auditor) is checking the documents and the bookings (however the auditor only
looks if the transactions are recorded and disclosed correctly, it does not look at the nature of the transactions, if they
are necessary for the business, or if the negotiated price for the transaction was good or not). Auditors typically also
consult the company regarding financial recording of complex transactions and they make suggestions of how to
improve efficiency and effectiveness of accounting procedures or software to use. Nowadays all countries have ex-
tensive rules for social security related to salary and wage payments. Therefore even small companies oftentimes
engage professional services companies to calculate salary payments and deductions, and process the respective
amounts with all concerned government agencies.
Chapter 0:
0.6.2 Mid-sized companies
Compared to small companies, mid-sized companies might, beside having more and more complex business transac-
tions, also own real estate (also called land and building), maybe even two or more, and in different cities. The com-
plexities of the transactions and ownership of multiple real estates implies dealing with more partners such as banks,
insurances, as well as governments who control and tax real estate. So from a tax perspective, financial numbers
have to be presented from the views of the different cities where the real estate is located, profits have to be allocat-
ed to each of the real estate locations, and therewith the one financial statement prepared by small companies might
not be sufficient any more. In order to accommodate for these separate or additional reports to the different tax au-
thorities, bookkeeping must be detailed enough, so the chart of accounts may be expanded in this example by sepa-
rate asset accounts and expense accounts for each of the real estates, to record and later disclose all respective de-
tails. So the chart of accounts no longer follows the internal considerations only, instead it is detailed enough to ac-
commodate for the external reporting requirements as well.
A second aspect besides different reporting, and therewith recording, requirements might be related to foreign cur-
rencies. Considerations regarding foreign currencies are of transaction and of translating nature. Transaction refers
to situations where a company buys products and services from abroad in a different currency than the currency in
which most other transactions apply (or it sells to customers in a different currency). While the supplier’s price in
the foreign currency may remain unchanged, the amount in the company’s bookkeeping currency changes because
the exchange rate fluctuates. Translation refers to situation where a company holds assets (or liabilities) in a differ-
ent currency. And while the value of the asset might increase in the foreign currency, with a bad exchange rate the
value of the asset in the bookkeeping currency might decrease. And obviously, foreign currency effects leading to
decreasing values of assets are rather unwanted, decreasing values of liabilities are positive. And similarly, decreas-
ing sales because of foreign exchange are unwanted, decreasing expenditures are positive.
Other examples for increased complexity in addition to real estate are employees in multiple countries (i.e. dealing
with very different social security schemes), subsidiary in foreign country (i.e. GAAP and accounting practices of
this country must be known), production subsidiary in foreign country (i.e. the subsidiary has no revenues, so a ficti-
tious revenue must be calculate for the tax return of the respective country), business activities that require special
disclosure (e.g. financial services, not-for profit activities, or contribution collection), as well as many more.
Mid-sized companies typically need a network of specialists to deal with the diverse country-specific requirements.
The accounting department has typically more than one staff, and certain employees specialize on specific tasks, e.g.
treasury (paying and receiving cash), supplier transaction, customer transactions, and/or international business. The
finance director has more the role of a coach who enables all the specialists to be brought on board at the right time,
as well as working effectively and efficiently as a team. Besides bookkeeping, the finance department must consider
duties like financial reporting, financing options, communication to banks, Investor Relations (i.e. communication to
the capital markets), and many more. All of these duties are rather unlikely for small companies because there is one
report only, one main bank only, the shareholders are all within the family, etc.
Chapter 0:
0.6.3 Multinational corporations
Multinational corporations typically have business activities in different countries. In each country they have legal
entities, and together they form a complex network of subsidiaries. If different divisions apply, e.g. Siemens has
among others transportation business and medical business, multiple legal entities may apply for each country for
each division, sometimes even additional legal entities for production and sales. Some entities may exclusively pro-
duce for other entities within the group, no other company is buying their products and services, and no other sup-
plier is offering these products and services. Such company-exclusive supply chains need specific disclosure and
valuation of products and services. Furthermore, the company laws of some countries limit foreign holding of a sub-
sidiary to e.g. 50%, they may require that the government holds a minimum share of e.g. 20% on foreign controlled
subsidiaries, or they influence the composition of the board, e.g. the majority must be citizens of the respective
country. Overall, the structure of multinational corporations may become very challenging. Typically complying
with all such regulations is possible, but it adds additional levels of complexity onto the company structure and
therewith on accounting. Below are two excerpts from the financial report of Nestlé Group for 2021 indicating the
complexity in shareholding (Figure 3, excerpt from the total group companies of 15 pages) as well as international
structure of business activities (Figure 4).
Figure 3: Companies of Nestlé Group (excerpt)
Note. Nestlé Financial Report 2021, pp. 156ff
Accounting must match the complexity of the legal structure, and it must provide information by legal entity, by
country (e.g. for tax returns), by division (e.g. for managerial decision making), as well as for the overall company
(e.g. for investors). Therefore all legal entities must follow the same accounting rules and instructions, if possible
one single IT system is being used, which however is difficult because of language options or country specifics such
as social security or times and dates (e.g. Ethiopia is using a system of 13 months and they are 7 years behind the
Chapter 0:
Gregorian Calendar used in the west; and the time starts with 1.00 daytime at 7.00 AM and 1.00 nighttime at 7.00
PM). For further harmonization, multinationals typically use international accounting concepts such as International
Financial Reporting Standards (IFRS) or United Stated Generally Accepted Accounting Principles (US-GAAP),
which are typically accepted by most countries as alternative to the country-GAAPs as well as base for country taxa-
tion, country social security and alike.
Multinationals typically have a whole department with a significant number of employees to manage all financial
aspects. This includes employees being located in the decentralized legal entities, maybe even regional competency
centers. Competencies of finance departments typically also include taxation, social security, as well as other specif-
ics such as value added taxes, at least for the countries with significant business activities, in countries with minor
business external experts may still apply. Also, the financial department takes on additional duties such as financing
(e.g. negotiation with bank consortiums for loans) or investor relations (e.g. manage the listing at different stock ex-
changes and the respective reporting).
Figure 4: Companies of Nestlé Group by division (excerpt)
Note. Nestlé Financial Report 2021, pp. 171ff
Chapter 0:
0.6.4 Summary
While the general objective of accounting is quite simple, to financially record all business transactions, the effec-
tive tasks, duties and responsibilities are very different depending on the business as well as on the size of the com-
pany. Table 3 below summarizes the accounting requirements and responsibilities for different sized companies.
Table 3: Accounting requirements by company size
Dimension Small companies Mid-sized companies Multinationals
Types of business • Typically few only that • Limited number, but • Unpredictable level of
transactions are dominant some rather complex complexity
Countries with • Active in one country • Active in some countries • Active in many countries
business activities
and GAAP • One GAAP • Some GAAPs • International GAAPs
Processes • Maybe single-entry • Accrual based double- • Accrual based double-

bookkeeping, maybe cash entry bookkeeping entry bookkeeping
based
• Diverse external report- • Reporting requirement
• One reporting only ing requirements exceed accounting
• Internally oriented pro- • Processes include exter- • Frequent changes due to
cesses only nal requirements evolving business and
structure
Human resources • One person part-time, • Some people, including • Finance department with
responsible for with support from auditor part-time support in the many employees, also
finance decentralized locations decentralized
• External experts for spe-
cial cases • External experts, espe- • Internal experts for social
cially for decentralized security and taxation, ex-
locations ternal experts in smaller
countries
Professional sup- • Auditor, also supports • Auditor • Multiple Auditor

port for finance special transactions and
• Payroll • Payroll, especially for
improvements
decentralized location
• Taxation
• Payroll
• Taxation, especially for
decentralized location
Financial duties • Mainly bookkeeping • Bookkeeping • Bookkeeping

• Financing • Financing
• Investor contact • Investor relations
• Intercompany transaction
Social Security • Rules of one country • Rules of some countries, • Application of various
they might be similar very different systems
• Typically extensive cal-
culation and deductions • Need for multiple exter- • Challenging disclosure or
nal experts the differences
Chapter 0:
Company law • One company law only • Multiple country’s com- • Network of many coun-
pany laws apply, one is try’s company laws
dominant
• Complex legal structure
of companies and subsid-
iaries
Taxation • One taxation law only • Simple taxation in de- • Application of many,
centralized locations partly competing taxation
• Done by internal HR or
systems
Auditor • Auditor or tax expert for
central location • International allocation
Note. Own depiction
0.7 Accounting software for SMEs

Today, accounting and therewith the three types of information required by double-entry bookkeeping (documents,
journal and general ledger) are widely supported by software applications. Whereas many companies still store the
documents in paper form (if they store them electronically, they use respective document management systems), the
journal and general ledger are typically part of the accounting software. Also, the general ledger oftentimes uses
sub-ledgers to properly handle the details and complexities of certain transactions. Examples of sub-ledgers include
payroll (with the complexity of social security and bonus calculation) or receivables, i.e. invoices that are sent to the
customers and await payment by the customers (with the complexities of late payment, sending out reminders, par-
tial payments and therewith partially outstanding amounts, payments in different currencies and potentially foreign
currency exchange differences, etc.).
Application of business software is typically very different for smaller companies than it is or smaller companies.
For international enterprises, the available accounting software solutions are few. They are typically part of a broad-
er Efficient Resource Planning application suite (ERP). Such suites typically offer a broad range of functionalities
that comprehensively encompass all aspects of the business, such as sourcing, inventory, production, sales, service,
as well as support functions such as HR, finance, transportation, facility management, etc. General ERP solutions
include SAP, Microsoft Dynamics, Oracle, Syspro, and many more. Figure 5 below shows the screen to enter a doc-
ument (business transaction) into the general ledger of SAP. The screenshot shows the relevant information of the
document (e.g. supplier invoice) and how it translates into the booking entries in the journal on the lower part of the
screen. The top of the screenshot shows the general structure, which lacks graphical navigation. Most ERP systems
are tailored to professionals and for the bookkeeping part, the journal with booking entries is at the center of func-
tionality and usability.
Chapter 0:
Figure 5: general ledger document entry in SAP
Note. WhyPad 2017
Industry-specific ERP systems offer tailored functionalities for particular businesses, e.g. banking. Most of these in-
dustry-specific ERP systems address international companies and they also include financial accounting functionali-
ties. Examples for industry-specific ERP solutions include Erply for retail business, Maximo for maintenance, repair
and operations industry (such as aircraft technical service providers), Inductive Automation for industrial automa-
tion, TeamWox for business collaboration, Misys, Avaloq and BankVision for banking industry, or itslearning,
Fronter, Moodle, Google Classroom, Open edX for education industry.
Unlike for larger companies, comprehensive, integrated ERP solutions typically do not appeal for SMEs. Instead,
SMEs buy standalone software solutions and use organizational processes to integrate them. The following para-
graphs look at some of the SME accounting software available in different countries.
0.7.1 United States of America
Most US software solutions put the business processes to the core of the user experience. In contrast to the example
above, the journal and booking entries are hidden. Instead, the user chooses e.g. ‘record supplier invoices’ and then
enters the suppliers and amounts (and VAT details), and the system generates the correct booking entry automatical-
ly in the background. These booking entries may be amended, but as business transactions of SMEs tend to be stable
as well as low in variance and particularities, amendments are hardly necessary.
Chapter 0:
0.7.1.1 QuickBooks
The main page of QuickBooks (see Figure 6) shows in the middle the 3 main types of transactions: first with ven-
dors (i.e. purchase orders and invoices from suppliers), secondly the customers (i.e. sales orders invoices and pay-
ments), and thirdly employees (i.e. timesheet and payroll). There are different links between these transactions, e.g.
the invoices to the customers may use the hours recorded by employees. The screen is based on the fact that for
SMEs, most of the transactions are rather standardized, e.g. when a supplier invoice is recorded, the only option to
pay it is through the company’s only bank account (i.e. the second part of the of the booking entry is given). Be-
cause of these limited options, only the supplier side of the booking entry must be entered, and operational employ-
ees can enter this information (e.g. which supplier, applicable VAT, type of services rendered payment days, etc.)
without much double-entry bookkeeping knowledge. On the left side and the right side of the screen there are addi-
tional options which require deeper understanding of double-entry bookkeeping and which allow to record special
cases with all possible options instead of the limited options only. So the main page allows easy recording of 90% or
even 95% of the applicable transactions without much accounting and bookkeeping knowledge.
Figure 6: QuickBooks main page
Note. QuickBooks application
In the background, the accounting software requires significant settings and customizing for the automated limited
options to work correctly. Another important setting is the definition and allocation of access rights. Figure 7 shows
what access level (i.e. full access, no access, view only access, etc.) different employees and software users (i.e.
Carl, Frank, etc.) have to different parts and functions of the software (i.e. asset register, petty cash, deposits, etc.).
Another important aspect of accounting software are reports, i.e. presenting the information that was recorded using
the double-entry bookkeeping in various, appropriate and useful format, whereas useful means in regard to decisions
that banks, governments, customers, suppliers, as well as internal management must take based on the financial in-
formation. Figure 8 shows some of the reporting options in QuickBooks.
Chapter 0:
Figure 7: QuickBooks user permissions
Note. QuickBooks 2017, p. 18
Figure 8: QuickBooks reporting page
Note. QuickBooks 2017, p. 20
0.7.1.2 AccountEdge
Similar to QuickBooks, AccountEdge uses a graphical user interface. The main options are on top (i.e. banking,
sales, time, etc.) and then the respective screen shows the flow of respective finance related activities: for sales this
is order, sales register, enter sales then invoice and payment, etc. While the overall approaches are similar, it seems
Chapter 0:
that AccountEdge offers more options to tailor the detailed steps that are required in the sales process. This then also
allows more detailed user access right, i.e. more specific operational users to support date entry of their specific
steps and contributions to the overall sales process (and similarly to purchase, payroll, etc. processes).
Figure 9: AccountEdge main page
Note. AccountEdge application
0.7.2 Switzerland
In Switzerland, most accounting software applications are rather based on booking entries, so it appears more tech-
nical than QuickBooks or AccountEdge (see Figure 10 and Figure 11). Swiss accounting software typically allows
tight integration with banking, thanks to the banks in Switzerland offering Paynet, a e-billing platform allowing easy
integration of private customers, or alternatively payment slip with reference number (Einzahlungsschein mit Refer-
enznummer, ERS) (SIX 2017). ESR allows a company to print additional electronic information onto the customer
invoice, and when the customer pays the invoice, this information is being processed by the bank together with the
payment and given back to the company together with the customer payment (which allows electronic, automatic
matching of payments from customers with invoices sent to customers).
0.7.2.1 Abacus
Abacus sees itself as main accounting software provider in Switzerland (Abacus 2017). Today, Abacus offers a suite
of solutions, including industry solutions, and it can be seen as ERP solution for SMEs. Abacus also offers cloud
based products as well as integration with Smartphone Apps for specific tasks (Abacus 2017). In addition, Abacus
has tailored solutions for auditors, which allows tight integration of companies with external experts for specific
tasks such as payroll, taxation or support for special business transactions that the internal employees do not know
how to handle. Another strength of Abacus is the integration to additional, subsequent duties, especially manage-
Chapter 0:
ment accounting, reporting, budgeting, and project management, but also electronic document management and ar-
chiving (Abacus 2017). This underlines the direction of Abacus to become a comprehensive ERP solution.
Figure 10: Abacus booking entry screen
Note. Abacus application
0.7.2.2 Banana Accounting

Banana Accounting sees itself as number one solution for small businesses (Banana 2017). While the company was
founded and started in Switzerland, it is now active in more than 120 countries. One of the advantages of Banana
Accounting is the close link to Excel. Many data is entered in an Excel-like way and is therewith appealing to many
people. Also, all data can be easily exported to Excel and further processed as needed.
Figure 11: Banana Accounting booking entry screen
Note. Banana application
Chapter 0:
0.7.2.3 Run my Accounts / Accounto

Run my Accounts and Accounto are two companies that take the idea of expert support one step further. Both are
offering cloud based accounting software. Run my Accounts offers additional expert advice if required, but most of
the work is still done in a traditional way by employees of the company (Run my Accounts 2017). Accounto takes
the idea even further and asks to send all documents to it, by email or in paper. All documents are then digitalized
and booked automatically with their machine learning engine. So in the ideal case, human activities are reduced to
payments (Accounto 2017). The disclosure of data is similar for both solutions, however the way how the data is re-
trieved and processes is significantly more automated with Accounto, at least for the time being.
Figure 12: Run my Accounts screen with invoices to be paid
Note. Run my Accounts application
Figure 13: Accounto screen with invoices to be paid
Note. Accounto application
Chapter 0:
0.7.3 Germany
In order to complement the introduction of accounting software, also two examples from the German market shall
be introduced. The German solutions offer tight integration to e-banking solutions, partly because billing standards
like ESR and Paynet as available in Switzerland do not exist.
0.7.3.1 bexio
Bexio offers online solution with broad (however controlled and secured) access for different internal and external
experts. The core product is an accounting solution, however extended with contact management, offers manage-
ment, product management, time sheet, inventory management, and banking. Bexio also offers easy integration with
other online services such as newsletter with MailChimp, or online shop with Klickshop or PepperShop (bexio
2017). Figure 14 shows the integration with e-banking, allowing to call bexio features (on the right hand side) di-
rectly out of the e-banking solution (left hand side: cash payment to the bank account from a customer) and add the
accounting details such as customer, receivable accounts, over-/underpayment amount, etc. to this bank transaction.
Figure 14: E-banking integration to bexio
Note. bexio application
0.7.3.2 DATEV
DATEV targets mid-sized companies having ties to subsidiaries and/or partners in the European Union (EU), DAT-
EV is targeting such other EU countries and offers solutions, including value added taxes (VAT) and profit tax, for
the respective countries. In addition, DATEV allows comprehensive access of external experts to selected parts of
the software. Therewith it not only mirrors the legal structure of the companies, it also allows different collaboration
models for the different legal entities in each country, allowing flexible mapping of the complexity of the business
transaction, regulation, available internal competencies, etc. (DATEV 2017).
Chapter 0:
Figure 15: Journal of booking entries, allowing access for external partners to selected bookings
Note. DATEV application
0.8 The future of financials

While the 500-year old structure of double-entry bookkeeping might not change anytime soon, the application of the
techniques and methodologies for increasingly global and international businesses might. And some accounting
software systems presented above already indicate the directions that accounting and accounting software might take
in the future. SMEs will benefit the most if the following aspects will be combined:
• Easy integration of international subsidiaries

• Online and cloud-based solutions
• Detailed access rights for internal experts, e.g. from headquarter
• Detailed access rights for external experts, e.g. for country specific payroll, taxation, social security, etc.
Secondly, the idea of billing and payment standards, as implemented in Switzerland with ESR and Paynet, is gaining
momentum. After SEPA (Single Euro Payments Area, i.e. an EU initiative for integration of electronic Euro pay-
ments) was introduced in March 2012 and rolled out to EU as well as non-EU-countries by end of 2016, the stand-
ard ISO 20022 will introduce and allow new payment transactions (ISO-20022A 2017). The standard looks at pay-
ments rather broadly and includes aspect such as a QR code on the invoice for payment by scanning the QR code,
standardized bank statement which allow easy integration of electronic bank statements into accounting systems
(electronic integration is possible since many years using EDI and the EDIFACT standard, but this standard requires
Chapter 0:
intense point to point integration between two companies, which makes it impractical for smaller companies, which
would require a platform that they can easily integrate into), standardized payment slip, universal bank account
numbers (IBAN), as well as e-billing infrastructure. Of course, different countries have different plans which of the-
ses aspects to implement and offer to the companies and with what timeline (ISO-20022B 2017).
A third trend is utilization of machine learning, Artificial Intelligence and further digitalization. In the solutions de-
scribed above, machine learning has already been mentioned for the offerings of Accounto. There are more such
companies and offerings, such as Smacc, a German startup from the Berlin area, which offers AI-enabled financial
management for intelligent financial workflows and automated bookkeeping for SMEs (Smacc 2017). Smacc’s solu-
tion uses 64 data points that every document is automatically checked against and then processed fully automatically
through the financial systems. And as with any AI systems, the solution becomes better and better the more a com-
pany is using the system, and the more the system knows and understands the business of the company. Besides
startups, also established companies foresee significant changes in the finance department, even of larger compa-
nies. Different reports and studies list accounting and accounting jobs to be significantly affected by digitalization,
robots and AI; NPR, an international multimedia news organization, calculates a 97.6% chance for the jobs of
bookkeepers to be automated (based on the for criteria: 1) need to come up with clever solutions, 2) requirement to
personally help others, 3) the need to squeeze into small spaces, and 4) the requirement for negotiations; NPR 2017).
Following this idea of AI and machine learning, the job of accountants might change from today receiving docu-
ments and booking them, to participate in projects, understand what new documents will be produced with the pro-
cesses and solutions being introduced by the project, and then implement IT systems that can correctly understand,
interpret, and process these documents within the context of accounting and financial management, e.g. from which
suppliers will documents be received, how will these documents look like, what information must be checked and
against what other information (e.g. purchase orders or material deliveries), etc. So accounting will be less a reactive
processing, but more a proactive designing of automated systems and observing their behavior.
In summary, while the actual work or accountants and bookkeepers may change, there is still a need for experts to
understand how business transactions are recorded and put into use for economical decisions.
0.9 The limitations of financials: sustainability

Accounting typically takes a rather one-sided view on the company and the respective business transactions: finan-
cials only. So it asks and assesses what the profit-effect and cash-effects of business transactions are. However,
many aspects of company’s activities span beyond financial effects. Instead, they include environmental considera-
tions, e.g. buying internal combustion engines cars as company cars or electric vehicles (with the question how the
respective energy is being produced), or social considerations, e.g. moving production from Poland to Bangladesh
for enjoying lower production cost and at the same time accepting lower working standards for employees. Such
considerations are outside of the information that financials and accounting can offer. While financials are important
and typically considered for any decision taken by businesses, sustainability aspects, i.e. balancing financial, social
and environmental aspects of a decision (Pfister 2014, p. 16), gain more importance in company decision and com-
pany reporting. One standard for reporting on sustainability aspect is the Global Reporting Initiative (GRI). GRI is a
Chapter 0:
framework that guides organization how to think through and report on sustainability aspects of an organization in
addition to other reporting such as financial reporting (GRI Standards 2022). GRI enjoys broad voluntary applica-
tion. Figure 16 shows an excerpt of the sustainability reporting of Sika Group from 2021, including the reference to
GRI. It indicates the level of detail as well as the scope of disclosure required to at least grasp some of the complexi-
ties related to sustainability.
Figure 16: Sustainability and GRI reporting of Sika 2021 (excerpt)
Note. Sika Sustainability Report 2021, p. 66
While the focus of accounting on financials only may be seen as a limitation, it also offers transparency for decision
makers. Instead of adding prices to environmental aspects or social aspects (which might be difficult to define and
which might fluctuate significantly over time, e.g. a price for an oil spill from sinking for a ship), and therewith in-
cluding environmental and social aspects in the financial information, keeping the information separate forces deci-
sion makers to decide on the sustainability balances, i.e. on the environmental and social pros and cons of different
alternatives, instead of using an algorithm so calculate the financially optimal solution. On the other side, recipients
of information must specifically ask for sustainability related information in addition to the financial information.
And hopefully there will be a closer link between the two in the future.
Chapter 0:
0.10 Summary
Accounting aims to mirror business transaction into a framework, which supports financial decision making from
different perspectives, incl. management, taxation, employee compensation, social security, etc. Double-entry
bookkeeping is a methodology that has evolved over several thousand years and has bee finally established some
500 years ago by merchants in Venice, Italy. These techniques and methodologies are still applied today, with the
details typically hidden in accounting software. The complexity of accounting significantly depends on the compa-
ny, the type of business transaction that it has, the number of legal entities that it has established (sales locations,
production locations, warehouses, R&D centers, etc.) and the international footprint of the activities, i.e. the differ-
ence in local GAAPs, taxation, social security regulations, etc. that have to be applied and complied with.
While accounting as a discipline will most likely exist far into the future, the very nature of the jobs will change sig-
nificantly. Concepts like cloud-computing, machine learning, AI, and cognitive computing allow new levels of col-
laboration between various locations, mainly headquarter with subsidiaries, as well as new levels of computer sup-
port and therewith automation of repetitive work. A second path of future development will hopefully be sustaina-
bility. As accounting looks at business transactions from a financial perspective only, with the transactions often-
times also having social and environmental effects that should be also considered by responsible executives during
decision making, additional information besides financials is required. Different companies have included sustaina-
bility reporting under the responsibility of the accounting department.
Chapter 1:
Starting a small Business and Cash Book 49
Starting a small Business and Cash Book

The complexity of accounting depends on the type of business as well as the complexity of the company structure.
However, the fundamental questions and decisions are essentially the same: Is my business profitable? Do I have
enough cash to pay my future obligations and to pursue new opportunities? Am I an interesting partner for custom-
ers, suppliers and bank to collaborate with and to invest in my projects? This chapter starts with a simple example
and introduces the financial accounting as well as how to address these questions. The following chapter will gradu-
ally introduce more aspects of accounting, additional considerations for double-entry bookkeeping, and business
complexity to the example.
1.1 Introduction
1. What are the necessary steps to start a business?
2. How can the dual financial aspects of business transactions, i.e. cash-effect and profit-effect, be recorded simultaneously?
3. How can the total effects of one year’s transactions be summarized and analyzed for taking economic decisions?
1.2 Feeling well with Tom – starting a business
1.2.1 The business idea
Tom plans to study sports and aims to finance the time at university himself. He is thinking about a small business,
offering personal training services (running, swimming, cycling, gym lessons, etc.) for individuals and for groups.
He immediately decides for a name for his business idea: feeling well with Tom.
Personal Opinion
What does Tom actually aim for?
Chapter 1:
Tom’s father likes the idea and wants to support Tom, and remembering his days at University, he suggest Tom to
follow a business models (see chapter 0.2) which he experienced to be helpful in order to establish the business.
Personal Opinion
Do you think it is important for Tom to use a model to structure his ideas?
Reasons to use a model Reasons NOT to use a model
Personal Opinion
Which model do you see most suitable for Tom thinking to become a personal trainer?
Arguments for entry level model Arguments for full-scale model
Tom does not understand the need for concepts; he believes it is a waste of time. Instead, he talks to all his friends
and his parent’s friends about the services that he offers, asking if they are interested in booking lessons. He also
places a small advertising in the local grocery store. Tom must not wait long for the first reaction: Vera Blum sees
Tom’s service as a great opportunity to get serious with her intentions for more physical exercises which she has in
mind for several years but never manages to follow. She talks to Tom and immediately he understands that he
should have been doing some conception thinking before. So they agree on CHF 100 per lesson (60 minutes), which
includes any entrance fees, tools or anything alike that Tom wants Vera to use during the lessons. Without hesitation
Vera agrees on two lessons and pays CHF 200 to Tom in cash.
After Vera caught him on the wrong foot regarding the price and the logistics of the lessons, he spends some extra
time in preparing for her first and second lesson outdoor training. His efforts pay; Vera is highly satisfied and books
another six lessons. Tom asks her to bring the respective money in cash to the next lesson.
Tom receives a phone call from a local group of elderly people that call themselves “always well”. They assemble
infrequently for sport activities. However, they lack ideas of appropriate, challenging and diverse activities. There-
fore they are interested to ask Tom for regular trainings for the group to actually achieve its objective. As a first
step, Tom wants to test the condition of each member by going through an assessment program at a specialized fit-
ness studio. The gym charges Tom CHF 80 per participant, Tom charges the group CHF 100 per member, both be-
ing paid in cash.
Chapter 1:
1.2.2 Financial representation of business activities: Cash Book
Understanding that keeping an eye on the financial situation, he records all the cash transaction in a structure that he
finds on Google: the cash book. A cash book consists of 4 columns: text, cash receipts (cash-in), cash spending
(cash-out), and balance. He records his transactions:
Table 4: Tom’s Cash Book entries start
Text Cash-in Cash-out Balance

Vera Blum, 2 lessons individual training 200 200
Assessment with group „always well“ 500 1 300
Assessment, payment to fitness studio 400 900
Note. Own depiction
After this initial success, business continues to develop well: in addition to the outdoor individual trainings, Tom
adds lessons at gyms (with respective gym equipment allowing for more tailored exercises) as well as at an indoor
swimming pool. In addition, Vera Blum is interested in buying a sports watch with different exercise tracking func-
tions as well as GPS. As she has no experiences with such watches, she asks Tom to buy one for her. As a business
owner he can buy the watch for CHF 600 (i.e. a discount of CHF 100), but he still sells it to Vera at the normal retail
price. And last but not least, Tom has the idea of a tow-day bicycle tour around Lake Constance. He is positive that
he will find some interested cyclists through some newspaper advertisements, so he starts arranging the tours, trans-
portation, required bicycles and other equipment, accommodation, food and beverage. He is very fond of this project
and spends a lot of time on all the required planning, organizing details, and arrangements with different people.
Placing an add in the newspaper, 5 people apply for the tour, at a price of CHF 200 per person for both days (this in-
cludes all expenses such as hotels, meals, and so on). The tour is a great success! In his other activities, there are set-
backs, e.g. one day Tom feels sick and he has problems finding a replacement trainer for the swimming pool lesson
with the group “always well” which he does not want to cancel because the group is such a loyal customer. Finally
he finds one by agreeing on a very high salary. Tom records all these spending and income in his cash book:
Table 5: Tom’s Cash Book entries for the first year 2_01
Text Cash-in Cash-out Balance

Assessment with group „always well“ 500 1 300
Assessment, payment to fitness studio 400 900
Advertisement Lake Constance tour 150 750
Lake Constance tour: 2 days, 5 participants 1 000 1 750
Lake Constance tour: hotel and meals 250 1 500
Lake Constance tour: rent bicycle trailer 50 1 450
Lake Constance tour: insurance 60 1 390
Peter Schnell, 2 lessons individual training 200 1 590
Outdoor training with group „always well“ 400 1 990
Indoor training with group „always well“ 500 2 490
Rent gym room 120 2 370
Chapter 1:
Assessment with Vera Blum 100 2 470

Assessment, part fitness studio 80 2 390
Purchase sport watch for Vera Blum 600 1 790
Selling sport watch to Vera Blum 700 2 490
Peter Schnell, 2 lessons individual training 200 2 690
Annual membership fee personal trainer association 350 2 340
Swimming pool training with group „always well“ 500 2 840
Entrance fee swimming pool 80 2 760
Payment to replacement swim trainer (because Tom is sick) 500 2 260
Birthday present to a member of the group „always well“ 30 2 230
Phone bill 45 2 185
Outdoor training with group „always well" 1 200 3 385
Note. Own depiction
1.2.3 Cash effect vs. Profit effect
Looking at his recordings after the first year, Tom understands that despite all the efforts and endless hours that he
put into his business, he only gained CHF 3 385. Actually, much less than what he was expecting, and definitely not
enough to take him through his university years! He realizes that conceptual work, at least some, is important for
achieving his objectives. But first of all he needs to understand with which activities he gained ‘enough’ money and
with which he did not. Tom turns to Alfred, an old school friend who studies business administration.
After looking at the cash book, Alfred suggests introducing double-entry book keeping. The cash book is single-
entry bookkeeping, i.e. it looks at cash only, recording if a transaction leads to more cash or to less cash. This is a
great approach for simple situations. In more complex situation, e.g. when offering different types of services, dou-
ble-entry bookkeeping offers different advantages, such as it:
• Allows both, calculation of increase in cash as well as calculation of profit

• Allows different type of payments, not cash only
• Allows detailed recording of different types of business activities
• Offers automatic reconciliation (double-checking)
• Offers recording different types of assets (in addition to cash)
• Allows to disclose (future) obligations (both from customers as well as from the company)
Start of Theory Part:

Two-sided effect of transactions and booking entries
The fundamental idea of double-entry bookkeeping is that every business transaction has two aspects. For the busi-
ness transactions that Tom was facing so far, each transaction has an effect on cash, i.e. cash-in or cash-out, and at
the same time it has an effect on profit, i.e. revenue or expense (Chapter 2 and Chapter 3 will introduce more ac-
count types and it will demonstrate, that the two aspects of every business transaction also holds true for any busi-
Chapter 1:
ness transaction, even in more complex examples than what Tom has by now). Below are the definitions for reve-
nues and expenses, as well as profit and loss, which result from deducting expenses from revenues (see Figure 17).
Definitions
Revenues Value that customers see in the products and services of a company, i.e. the price that the custom-
ers are willing to pay (definition varies slightly for governments and NPOs/NGOs). E.g.: Vera
Blum is interested in a personal training lesson and is willing to pay CHF 100.-.
Expenses Value, i.e. price, of resources used/consumed/necessary to provide the products and services to
the customers, or to sell the own assets such as machines or vehicles. E.g.: Tom needs to go to
the swimming pool and in order to use the swimming pool he must pay the entrance fee.
Profit Difference between revenues and expenses, if revenues are higher. So the value which custom-
ers see in the products and services, and the price that they are willing to pay, is higher than the
price of all the resources that were necessary to provide the products and services to the custom-
ers. This can also be understood as positive value creation.
Loss Difference between revenues and expenses, if expenses are higher. So the price of all the re-
sources that were necessary to produce the products and services is higher than the value which
customers see in the products and services, and the price that they are willing to pay. This can al-
so be understood as negative value creation.
Figure 17: calculation of profit or loss
Revenues - Expenses
Profit/loss
>0 <0
Profit Loss
Profit and loss statement Profit and loss statement

Expenses Revenue
Revenue Expenses
Profit Loss
Note. Own depiction
As the definitions of revenues and expenses already indicate, revenues are related to cash-in, and expenses are relat-
ed to cash-out. For the transactions that Tom was facing so far, this is entirely true: all cash-in is at the same time
revenue (i.e. increasing cash balance as well as profit), and all cash-out is at the same time expenses (i.e. lowering
cash balance as well as profit). Chapter 2 will introduce more combinations, namely cash transaction that do not
have and influence on profit, i.e. that are profit neutral, as well as profit transactions that are cash neutral. But for
Tom in the first year, each transaction is cash-effective and at the same time also profit-effective.
Chapter 1:
Figure 18 summarizes the cash- and profit-effectiveness of transactions (the transaction that already applied for Tom
in the first year are in bold). Examples of negative expenses (e.g. supplier is paying back a discount) and negative
revenues (customer is returning a product) are omitted because negative expenses are similar to revenue and vice-
versa.
Figure 18: Cash and Profit effect of Tom’s Business Transactions in the first year 2_01
Effect on Cash
Neutral Cash-in Cash-out
Neutral Exchange CHF to EUR Customer pays invoice Cash purchase of vehicle
Effect on Profit
Sales to customers Cash sales to customers, n/a

Revenue
against invoice e.g. lessons for Vera Blum
Purchase of resources n/a Cash purchases of resources,

Expenses
against invoice e.g. renting gym room
Note. Own depiction
As every transaction financially has two aspects, the theory of double-entry bookkeeping suggest a language to de-
scribe every business transaction with the following 5 information:
1. Date of the transaction

2. Text that describes the business transaction
3. Account affected on the left side
4. Account affected on the right side
5. Value/amount of the transaction
Double-entry bookkeeping suggests booking entries as a standardized way to write the transactions with this 5 in-
formation. Using this standard, the payment of Vera Blum for one of her lessons is described with the following
booking entry:
January 20, training lesson Vera, Cash / Sales from services, CHF 100.-
The paragraphs above uses the terms «accounts» as well as «left-side» and «right-side». While the terms are new,
the respective concepts have already been introduced: cash is one of the accounts that companies use, and when re-
cording transactions, a T-shape is used with all cash-in written on the left side and all cash-out written on the right
side. More generically, accounts are the pre-defined groups of assets, liabilities, revenue, and expenses that compa-
nies use to financially record the business transactions. Each such group is called ‘account’ (each having a name and
number, with the number grouping it as asset, liability, revenue or expense account). The pre-defined set is called
«chart of accounts» (see appendix 1). For all of these accounts, the concept of ‘more’ and ‘less’ applies. However,
for asset accounts such as cash, left side is positive for the company (i.e. more cash); for profit accounts, right side is
positive for the company (i.e. more sales). For Tom, this leads to the …
… most desired booking entry: January 20, lesson with Vera Cash / Sales from services, CHF 100.-
… least desired booking entry: January 25, swimming pool entrance fee, Expenses for services / Cash, CHF 80.-
Chapter 1:
Definitions
Booking entry The booking entry is the language used by double-entry bookkeeping to describe transactions:
date, description, account affected on the left side / account affected on the right side, amount.
Journal List of booking entries.
Accounts List of asset, liability, expense and revenue details used by a company for recording transactions.
Accounts group financial data and therewith define the level of information detail that is available
for decisions. Companies typically apply a best-practices list of accounts.
T-account Representation of accounts to record the amounts of transactions affecting this account.
Left-side / Each transaction is written to the left side of one T-account, and at the same time to the right side
right-side of a second T-account. Left-side refers to the T-account name where the transaction amount must
be written into on the left side (and respectively for right-side).
With the journal and the T-accounts, companies can compile the statement of financial position, summarizing assets
and liabilities, as well as the statement of profit or loss, summarizing revenues and expenses, i.e. what customers are
willing to pay for products and services and how much the company has to pay for producing and offering them.
The list below shows necessary steps to process the booking entries from the journal into the accounts and further
into the statements (accounting software uses the same steps, but processes them automatically in the background):
1. Recording all booking entries in the T-accounts: enter the amount of the booking entry to the left side of
the T-account for the account written on the left side of the «/» sign in the booking entry, and to the right
side of the T-account for the account written on the right side of the «/» sign.
2. After recording all booking entries, close all the T-accounts: for each T-account (except for «equity») cal-
culate the difference between the left side and the right side. Add the difference, i.e. balance, to the
‘shorter’ side. For revenue accounts, the right side should be higher/longer (so the balance is on the left
side), for expense accounts the left side typically is higher/longer (so the balance is on the right side).
3. For each T-account calculate the totals of both sides, including the balance from step 2, now the totals of
both sides must be equal (if they are not, there is a mistake).
4. Write the statement of profit or loss: write a T and list all expense accounts on the left side and all reve-
nues on the right side. For each expense and revenue account, write the balance calculated in step 2.
5. Calculate the total revenues and the total expenses. Most likely they are not the same. If revenues are
higher/longer then the company was making a profit, which is written as a left side balance (if expenses
are higher/longer then the company has a loss which is a right-side balance).
6. Add the profit calculated in step 5 to the equity account (which is a liability account) and calculate the
balance (see step 2).
7. Write the statement of financial position: write a T and list all asset accounts on the left side and all liabil-
ity accounts on the right side. For each asset and liability account, write the balance calculated in step 2
(and 6). The totals on both sides must be equal (if they are not, there is a mistake).
These steps, specifically step 4 and 5, calculate the statement of profit or loss in the T-account format. This is a great
format to look at the detailed expenses and revenues, and maybe compare them to last year in order to understand
which types of expenses or revenues (i.e. customers) increased or decreased. It allows detailed analyses regarding
the type revenues, i.e. the customer as well as products and services, and regarding the type of expenses consumed
during the year. And therewith it directly relates to cost-cutting or expansion initiatives (because cutting costs or
growth must always be related to a certain expense i.e. saving on a certain advertising that does not reach enough
Chapter 1:
customers or adding advertising in a newspaper that reaches the target customer group). However, for productivity
analysis or comparison with other companies, the reporting format seems more applicable (see Table 6). This format
starts with the revenues and then deducts the different expenses by groups and calculates a sum after deduction of
each expense group. The expense groups indicate how directly the expenses are related to the revenue (e.g. taxes are
unrelated to revenues, they are related to profit and international tax structures).
Table 6: Statement of Profit or Loss in Reporting Format
Account Description
3000 – 3999 Sales from goods and services
4000 – 4999 - Material and goods expenses
Gross income
5000 – 5999 - Personnel expenses
6000 – 6799 - Other operating expenses
EBITDA (earnings before interest, taxes, depreciation and amortization)
6800 – 6899 - Depreciation and Amortization
EBIT (earnings before interest and taxes)
6900 – 6999 +/- Financial Result (financial profit or loss)
EBT (earnings before taxes)
7000 – 7999 +/- Accessory operating result
8000 – 8899 +/- Extraordinary and non-operating result
Profit before taxes
8900 – 8999 - Taxes
Profit of the period
Note. Own depiction
Definitions
EBITDA Earnings before interest, taxes, depreciation and amortization

Comparison of employee’s efficiency of companies (core business activities).
EBIT Earnings before interest and taxes

Comparison of operational efficiency of companies (core business activities). EBIT includes depreciation,
i.e. the inflexible part of operations, regardless of the financing structure, i.e. the interest.
EBT Earnings before taxes

Comparison of operational efficiency of capital-intensive companies (core business activities), such as
banks, mining, trains, and alike
Profit before Earnings before taxes

taxes Comparison of the overall efficiency of companies, excluding the impact of the international structure (taxes
largely result from how a company and its’ subsidiaries are structured internationally).
End of Theory Part
Chapter 1:
Looking at the transactions of Tom, they affect the following revenue and expense accounts:
Table 7: Tom’s Cash Book entries with profit accounts for the first year 2_01
Text Cash-in Cash-out Cash Bal. Affected profit account Booking entry Amount
Vera Blum, 2 lessons 200 200 Sales from services (3400) Cash / Sales from services 200
Vera Blum, 6 lessons 600 800 Sales from services (3400) Cash / Sales from services 600
Assessment with „always well“ 500 1 300 Sales from services (3400) Cash / Sales from services 500
Assessment, payment to fitness studio 400 900 Expense for service (4400) Expense for service / Cash 400
Advertisement Lake Constance tour 150 750 Advertising expense (6600) Advertising expense / Cash 150
Lake Constance tour: 2 days, 5 part. 1 000 1 750 Sales from services (3400) Cash / Sales from services 1 000
Lake Constance tour: hotel and meals 250 1 500 Expense for service (4400) Expense for service / Cash 250
Lake Constance tour: bicycle trailer 50 1 450 Expense for service (4400) Expense for service / Cash 50
Lake Constance tour: insurance 60 1 390 Insurance expense (6300) Insurance expense / Cash 60
Peter Schnell, 2 lessons 200 1 590 Sales from services (3400) Cash / Sales from services 200
Outdoor training with „always well“ 400 1 990 Sales from services (3400) Cash / Sales from services 400
Indoor training with „always well“ 500 2 490 Sales from services (3400) Cash / Sales from services 500
Rent gym room 120 2 370 Lease expense (6000) Lease expense / Cash 120
Assessment with Vera Blum 100 2 470 Sales from services (3400) Cash / Sales from services 100
Assessment, part fitness studio 80 2 390 Expense for service (4400) Expense for service / Cash 80
Purchase sport watch for Vera Blum 600 1 790 Expense for trading goods (4300) Expense for trading goods / Cash 600
Selling sport watch to Vera Blum 700 2 490 Sales from trading (3200) Cash / Sales from trading 700
Peter Schnell, 2 lessons 200 2 690 Sales from services (3400) Cash / Sales from services 200
Annual membership fee association 350 2 340 Other operating expense (6700) Other operating expense / Cash 350
Swimming pool training 500 2 840 Sales from services (3400) Cash / Sales from services 500
Entrance fee swimming pool 80 2 760 Expenses for service (4400) Expense for service / Cash 80
Payment to swim trainer 500 2 260 Expenses for wages and salaries (5000) Expenses for wages and salaries / Cash 500
Birthday present 30 2 230 Other operating expense (6700) Other operating expense / Cash 30
Phone bill 45 2 185 Administration expense (6500) Administration expense / Cash 45
Outdoor training with „always well" 1 200 3 385 Sales from services (3400) Cash / Sales from services 1 200
Note. Own depiction
Chapter 1:
1.2.4 Managing the complexity of profitability details: T-Accounts
Table 7 shows the current balance of cash after each transaction. Because Tom is only using cash payments, the in-
crease in cash also equals the profit of his business. Therefore, Table 7 can be understood as two sides of the same
medal: the left part shows all cash-in and cash-out, and the balance shows the current level of available cash after
each transaction. For Tom, the cash balance is equal to the total profit after each transaction, with the profit effect,
i.e. revenue accounts and expense accounts, being shown on the right part. This parallel picture of assets (together
with liabilities) and revenues together with expenses, i.e. two sides of the same medal, is owed to the structure of
double-entry bookkeeping, and it also holds true in more complex cases. Chapter 3 provides the underlying theory.
Besides showing cash- and profit-effects of each transaction, Table 7 also shows the journal for all transactions be-
cause it lists all relevant booking entries (Date, description text, left-side account, right-side account, and amount).
As described in the theory part above, the booking entries of the journal must then be recorded in the T-accounts of
all applicable accounts, and the balances must be calculated. The T-accounts for Tom are shown below, with the
balances written in bold (for the cash account no T-account applies, Table 7 already represents the cash T-account).
Figure 19: T-accounts of Tom’s Business Transactions in the first year 2_01
Sales from services Expenses for services Expenses for trading goods
200 400 600
600 250 600
500 50 600 600
1 000 80
200 80
400 860 Other operating expenses
500 860 860 350
100 30
200 380
500 Advertising expenses 380 380
1 200 150
5 400 150
5 400 5 400 150 150 Expenses for wages and salaries
500
500
Sales from trading Insurance expenses 500 500
700 60
700 60
700 700 60 60 Administrative expenses
45
45
Lease expenses 45 45
120
120
120 120
Note. Own depiction
Chapter 1:
1.2.5 Compiling Revenue and Expenses T-Accounts: Statement of Profit or Loss
After calculating the balances for each T-account, and the totals on both sides being equal, the balances of all reve-
nue accounts and expense accounts must be brought forward in the statement of profit or loss. The statement com-
pares the total revenues and the total expenses, i.e. it calculates the profit (profit is the positive balance, i.e. revenues
are bigger than expenses, loss describes the situation if expenses are bigger than revenues). This profit must be iden-
tical with the net change in financial position (i.e. the total amount of cash that Tom increased during the year).
Table 8: Statement of profit or loss for the year 2_01, in T-account format
Expenses Statement of profit or loss for the year 2_01 Revenue

Expenses for trading goods 600 Sales from trading 700
Expenses for services 860 Sales from services 5 400
Expenses for wages and salaries 500
Lease expenses 120
Insurance expenses 60
Administration expenses 45
Advertising expenses 150
Other operating expenses 380
Profit 3 385
6 100 6 100
Note. Own depiction
The statement of profit or loss in T-account format (see Table 8) allows comparing the 700 sales from the watch
with the 600 expenses to buy it, so a gross profit (i.e. difference) of 100. However, it does hardly allow comparison
of different companies or assess efficiency and effectiveness of a company. For such analyses, companies use the
statement of profit or loss in reporting format (see Table 9 and Appendix 2):
Table 9: Statement of profit or loss for the year 2_01, in reporting format
Account Description Amount

3000 – 3999 Sales from goods and services 6 100
4000 – 4999 - Material and goods expenses -1 460
Gross income 4 640
5000 – 5999 - Personnel expenses -500
6000 – 6799 - Other operating expenses -755
EBITDA (earnings before interest, taxes, depreciation and amortization) 3 385
EBIT (earnings before interest and taxes) 3 385
EBT (earnings before taxes) 3 385
Profit before taxes 3 385
8900 – 8999 - Taxes
Profit of the period 3 385
Note. Own depiction
After having recorded all business transactions in financial terms and having compiled the statement of profit or loss
and the level of cash, now the results must be analyzed, and decisions should be taken. Typically, assessment is in
regards of the objectives, in Tom’s case financing of his study. Decisions are typically regarding customers (focus-
Chapter 1:
ing on the same customer groups, which to abandon, which to include in the future), products and services, incl.
sales prices, internal structures (e.g. automation), or even the overall business strategy. Typically, there is not set an-
swer to these questions, instead executives have a certain believe about future needs of customers, future develop-
ment options (e.g. which technologies become available within the next 3 to 5 years), etc. So the answers typically
list different aspects as pro and con, and after weighting decision makers must summarize these aspects and con-
clude the option most appropriate for the specific situation.
Personal Opinion
How do you see this first year of Tom?
Personal Opinion
What are your suggestions for next year?
Aspects to keep without change Aspects that need to be changed
Comment from a praxis perspective: typically, each booking entry needs a supporting document (physical or digi-
tal), e.g. an invoice. On this document, accounting details must be added (e.g. left side account, right side account,
cost center if applicable, i.e. applicable/concerned organizational department). Also, the document must be verified
and approved (i.e. signed) by the operational department, e.g. the production department must sign that the supplier
invoice is correct and lists the right items at the agreed price, and the finance department signs that the document
was correctly processes from an accounting perspective. For physical documents, an accounting stamp is used (see
Figure 20), electronic documents run through a workflow process collecting all information and confirmations.
Figure 20: Examples of accounting general ledger stamps
Note. Own depiction
Chapter 1:
1.3 Examples Statement of Profit or Loss
1.3.1 Service company: Ryanair
Revenues Expenses
• Maximizing revenues by occupying all seats or by in- • Fuel and personnel expenses are the most significant
crease prices expenses
• Expanding revenue potential by adding more routes to • Very low material expenses, mostly charges to ‘part-
the network ners’
• High depreciation (for planes)
• Relatively high financial expenses (interest for financ-
ing of planes), since 2020
• Expenses fall slower than revenue during the COVID
pandemic
Chapter 1:
1.3.2 Trading company (retail): Walmart (grocery stores)
Revenues Expenses
• Increasing sales by adding more locations (reaching • Cost of goods sold (mainly expenses for trading
out to new customers), adding new products (increase goods, some depreciation of furniture) is very high
share of customer’s wallet), by cross-selling (people • Selling expenses are mainly personnel expenses be-
buy all products at Walmart), up-selling (customers cause good employees are essential
buy higher priced/quality product), increasing prices. • Profit in relation to sales is small
• Expanding revenue potential by acquisition of compet-
itors or additional customer services (telco, health, …)
Chapter 1:
1.3.3 Trading company (wholesales): Advanced Auto Parts
Revenues Expenses
• Business: offering ‘right’ products and support profes- • High cost of sales (cost of goods sold), expenses for
sionals (auto repair shops) for getting the cars back to trading goods
the road quickly: broad information, easy ordering, fast • Relatively high selling expenses: consulting and addi-
delivery, support administration of auto repair shop tional services for professionals (e.g. writing invoices)
Chapter 1:
1.3.4 Production company: Hilti (solutions for construction and building maintenance)
Revenues Expenses
• The business of Hilti is not selling drilling machines, it • High personnel expenses (consulting and supporting
is selling holes (actually including anchoring systems, customers, incl. repair services)
i.e. filled holes) • Low depreciation because of low-cost production lo-
cations and long-lasting production machines
• High profit in relation to sales
• Research and development not disclosed (they consist
of a part of the personnel expenses, and a part of the
material cost, and a part of Depreciation, and so on)
Chapter 1:
1.3.5 Production company: DormaKaba (security systems)
Revenues Expenses
• Production is at some few locations, customers are in- • High expenses for material and employees for produc-
ternational (i.e. secure transportation is required) tion, under “cost of goods sold”
• Who is the customer, who is the user? Architect vs. • Relatively small saving in Sales and marketing help
landlord vs. tenant/user? Do/can tenants influence ar- increasing profits despite lower sales.
chitects? • Relatively low expenses for administration and sales
(DormaKaba has significant security aspects, so any
form of protection is important and expensive, e.g.
transportation must be guarded by security)
• Some research and development
Chapter 1:
1.3.6 Charity NGO: Helvetas (international development cooperation and emergency aid)
Revenues Expenses
• Detailed disclosure by source and reason • Detailed disclosure by activity, by country, and others
• Revenue does not origin from the beneficiaries, but • No information about type of expenses (e.g. person-
from people and organizations that believe the benefi- nel, administrative, etc. expenses)
ciaries should be supported • High financial income, i.e. financial result (why?)
• High profit (what does profit indicate?)
• Significant change in funds capital, i.e. ‘promise’ to
spend the money received this year for defined pur-
poses in the near future.
• Profit does not belong to the organizations, instead it
is allocated to different parts of the organizational cap-
ital
Chapter 1:
1.4 Summary
1 Statement of financial position Cash

Current liabilities
• Assets: things that a company uses for production of goods & services Receivables
• Liabilities: rights that others can execute
• Equity: money provided by the owners and non-distributed profits Non-current
liabilities
• Analysis
o Quick ratio
assets Equity
o Long-term debt and equity to asset ratio
o Equity ratio

Account Designation
EBITDA
EBT
89 - Taxes

of private account)
Transport costs
Transport costs
Decrease in inven-
tory
Chapter 1:
5 Production
6 Value adjustments

Chapter 1:
1.5 Exercises
1.5.1 Business transactions of «Leo»: Revenues
Leo is a fashion retailer (similar to Zara). Assess the following transactions from the perspective of Leo in terms of
revenue, i.e. service to the customer. For each transaction, add the following information to the scheme:
• Revenue account: name of the applicable revenue account from to the chart of accounts
• Effect on profit: mark if the transaction increases (+) or decreases (-) the company’s profit
Effect on
profit
Business transaction Expense account
Customers buy cloths at the flagship store in Zurich and pay cash.
Customers buy cloths at the store in Basel and pay with credit card.
Customers buy cloths at the online store and pay with PayPal.
UBS asks Leo’s head of Marketing to arrange a fashion cat walk at the annual
UBS employee meeting. Leo sends an invoice to UBS for this.
At the end of the year, the bank deposits the interest income for the positive bank
account balance into Leo’s bank account.
1.5.2 Business transactions of «Leo»: Expenses
Leo is a fashion retailer (similar to Zara). Assess the following transactions from the perspective of Leo in terms of
expenses, i.e. resources necessary to service the customers. For each transaction, add the following information to
the scheme:
• Expense account: name of the applicable expense account from to the chart of accounts
Effect on
profit
Leo pays salaries.
Leo purchases a new winter collection.
Leo has some of the products from the new winter collection tested for chemical
ingredients and receives the invoice form the laboratory.
Leo is entering an insurance to protect itself against bad weather.
Leo pays the lease for the flagship store at Zurich.
Chapter 1:
Leo pays the invoice from the electricity company.
At the flagship store at Zurich, Leo replaces 3 computer mice with pens (to more
easily assemble and show designs to customers).
In the flagship store at Zurich, the light bulbs that are inside of the display furni-
ture must be replaces.
The cleaning company sends the invoice for the weekly services at the at the
flagship store at Zurich.
The advertising agency sends Leo the invoice for launching the winter collection
(which includes newspaper advertising, radio commercials, presents, and host-
esses).
For a street marketing activity, Leo is hiring a professional street marketing com-
pany.
Leo pays the invoice of the external auditing company.
1.5.3 Business transactions of «GBau»: Revenues
GBau is a gardening company, specializing on establishing and caring gardens for private homes. Assess the follow-
ing transactions from the perspective of GBau in terms of revenue, i.e. service to the customer. For each transaction,
add the following information to the scheme:
Effect on
profit
A customer pays the invoice for a comprehensive rework of the garden.
A customer pays 5 hours of working in his garden, in cash.
A customer pays 2 hours of excavation work with a digger, in cash.
An architect is planning a new design for the OLMA area at St. Gallen. He or-
dered GBau to plan all green areas. Now he pays the invoice for the respective
planning services.
GBau sells various gardening tools (shovels, leaf blower, etc.) to a private cus-
tomer so he can care his new garden by himself in the future.
account balance into GBau’s bank account.
Chapter 1:
1.5.4 Business transactions of «GBau»: Expenses
ing transactions from the perspective of GBau in terms of expenses, i.e. resources necessary to service the custom-
ers. For each transaction, add the following information to the scheme:
Effect on
profit
GBau pays salaries.
GBau pays the monthly invoice from Shell for fuels (needed for lawn mowers,
leaf blowers, etc.)
GBau pays the monthly rent for the leased office.
GBau pays the invoice of the cleaning company for cleaning the office.
For a special customer request, GBau must hire a sub-contractor (i.e. a company
specialized for such services) and pays by bank transfer.
As GBau has a lot of work, it hires temporary staff through a job center for 2
weeks. Now the job center sends the invoice.
After a self-imposed small accident with the company’s vehicle (i.e. the insur-
ance will not pay) the garage sends the invoice for the repair.
The road traffic licensing department sends the invoice for the annual fee.
The tax authority sends the tax invoice.
GBau is a member of the Swiss association of gardening companies and must pay
the annual membership fee.
The local authority sends GBau the invoice for the annual business registration
charge.
The transportation company sends the invoice for transporting stones for a stone
wall directly to the customer.
The government laboratory sends the invoice for testing soil.
GBau buys different office equipment (copier paper, pencils, etc.).
GBau pays the monthly invoice of the flower company (for having always fresh
flowers at the entrance and office).
One customer is 7 months late with paying the invoice. By the end of the year he
files for bankruptcy and therefore he will never pay the invoice.
Chapter 1:
GBau has started to save money because it plans to buy a new excavator. Some
months ago, GBau followed the advice of a stockbroker and bought some shares.
Now as GBau needs the money the shares must be sold at a loss.
As the damage of the vehicle was not properly repaired, GBau returns the car and
the garage agrees to repair it again as guarantee service.
1.5.5 Business transactions of «SMW»: Revenues
SMW is an automotive company (similar to BMW). Assess the following transactions from the perspective of SMW
in terms of revenue, i.e. service to the customer. For each transaction, add the following information to the scheme:
Effect on
profit
SMW delivers vehicles to the dealership SMWBuyCenters, which pays the in-
voice by bank transfer.
SMW delivers Goodyear tires to a partner who also offers tire services besides
selling SMW vehicles (he is temporarily short on tires).
SMW offers a comprehensive sales and marketing education to the employees of

a dealer (which goes far beyond the typical education for new models or alike).
SMW charges the dealer for this service.
Exceptionally, SMW consults a competitor regarding avoiding rolling noise on

silent asphalt for fast curve driving on curvy routes (after the canton of Graubün-
den introduced this asphalt, SMW was the first to develop approaches to reduce
the rolling noise).
account balance into SMW bank account.
1.5.6 Business transactions of «SMW»: Expenses
in terms of expenses, i.e. resources necessary to service the customers. For each transaction, add the following in-
formation to the scheme:
Chapter 1:
Effect on
profit
SMW pays salaries.
SMW purchases Aluminum to produce roofs for its cars.
SMW purchases airbags from a supplier.
SMW purchases screws that are used at different steps of the assembly line inside
the car.
SMW buys baseball caps from a supplier, which shall be sold to customers.
SMW buys key chains that shall be given to customers at the auto show Geneva
(as presents).
SMW pays the invoice for the business liability insurance.
SMW pays the invoice for the building insurance (for the production factories
that it owns).
SMW pays the invoice for electricity (for the electricity used in the production
building).
SMW pays the invoice for electricity (for the office building).
SMW pays the invoice for phone and internet service.
SMW pays the invoice for office material (copier paper, pencils, etc.).
The employee at the reception buys new flowers for the entrance hall.
SMW buys a present for an employee who celebrates his 30th anniversary with
the company.
SMW pays the invoice for the services of a lawyer that supported founding of a
new daughter company.
The bank withdraws the annual charges for managing the bank account from
SMW’s bank account.
Because of using and getting older, the remaining value of production machines
and assembly lines decreases.
Chapter 1:
1.5.7 Industry-specific expenses and revenues
What are typical expenses and revenues for the following industries (types of business and activities)?
1. Cinema
2. Taxi
3. Private school
4. Carpentry
5. Hotel
6. Trucking company (for transportation by trucks)
7. Agricultural Farm
8. Home appliance shop
9. Lawyer (for divorces)
10. Bicycle manufacturer
11. Mountain cable car company
1.5.8 Statement of Profit or Loss: Hotel and Restaurant
Compile the statement of profit or loss based on the following information:
8. Sales restaurant 620 800

9. Purchase of food 487 400
10. Meals for employees 16 700
11. Sales hotel business 418 500
12. Cleaning 18 600
13. Interest paid for loans 72 000
14. Other operating expenses 52 100
15. Sales from renting out meeting rooms 16 200
16. Salaries paid 150 000
17. Heating and electricity 41 500
18. Depreciation 88 000
19. Misc. revenues 1 600
1.5.9 Statement of Profit or Loss: Printing Shop
1. Use of paper 176 200

2. Other material used 26 800
3. Depreciation furniture 60 000
4. Services to customers 486 000
5. Rent business premise 72 000
7. Sales print products 27 300
8. Other operative expenses 43 100
9. Repair of furniture 2 700
10. Interest for loan 8 600
Chapter 1:
1.5.10 Statement of Profit or Loss: Financial Service Company
1. Financial income 8 200

2. Payment received for consulting services 92 800
4. Administrative expenses 9 100
6. Agency fees received for houses sold 113 500
7. Other operative expenses 34 700
8. Travelling expenses 6 400
9. Lease expenses 16 500
10. Compensation received for bookkeeping 87 300
1.5.11 Statement of Profit or Loss: Insurance Company
2. Advertisement expenses 118 000
3. Premium revenue 3 936 700
4. Brokerage fees paid to private insurance agents 196 800
5. Income from re-insurance pay back 117 500
6. Payment for casualties 3 300 000
7. Administrative expenses 82 800
9. Financial income 725 600
10. Travelling expenses insurance agents 93 500
11. Expenses for a building that the insurance company owns and is rented out to private people 102 500
Chapter 2:
Asset Accounts 76
Asset Accounts
After Tom started his own business last year with various revenues and expenses, he still needs to improve the profit
and cash that he generates (otherwise he is not able to pay for his study). One limitation last year was that he only
accepted cash payments. Allowing more payment options requires using additional accounts that are similar to the
cash account. However, this also means that the cash book no longer represents all transaction, i.e. the total profit as
well as the total cash earned during the year. Therefore, allowing various payments requires, in order to disclose
them correctly from a financial perspective, to first understand the concept of double-entry bookkeeping: booking
entries, accounts and financial statements.
2.1 Introduction
1. What are booking entries, what are they used for and what is their ‘language’?
2. What account types do we use in double-entry bookkeeping and how are they used?
3. What are financial statements, what do they disclose and how are they interrelated?
2.2 New year – new business ideas: need for asset accounts
2.2.1 Need to multiply profit
While cash is being brought forward into the next (second) year, revenues and expenses start at zero in the new
(second) year. However, to increase profit (and cash surplus) Tom is thinking about strategies to increase revenues
and/or to decrease expenses. What options do you see for Tom, what are advantages and disadvantages for each op-
tion?
Tom decides for the following:
• For individual customers: selling lessons as package

• Try to find more groups similar to the group always fit
Chapter 2:
Asset Accounts 77
Based on customer feedback from last year, Tom believes that for both scenarios payment in cash is not sufficient,
instead customers would like to pay by bank transfer. He talks to his bank and opens a private bank account by the
name “Fit with Tom”. Proudly he writes a letter to his existing private customers informing them about the possibil-
ity of paying for the lessons by bank transfer. However, customers need to book (and pay) a minimum of 10 lessons.
He creates a 10 lesson value card.
Figure 21: Tom’s 10 lesson value card
Fit$with$Tom$
10$lesson$value$card$
$
$ $ $ $ $ $ $ $ $ $ $
1$ 2$ 3$ 4$ 5$ 6$ 7$ 8$ 9$ 10$
$
$
$
Note. Own depiction
For the group customers, having a bank account is not sufficient. Instead, Tom needs to send them an invoice, i.e. a
notification about the rendered services and provide the information for payments. The groups’ cashier shall pay
these invoices after 30 days.
2.2.2 Financial consequences of revenue initiatives
Considering the consequences of bank payments and invoices, Tom realizes the strengths of double-entry bookkeep-
ing. Cash, bank account and invoices to be paid by customers are somewhat identical: all of them are money (how-
ever, the invoices first need to be paid by the customer and that is outside of the company’s control). All three con-
stitute assets, i.e. they are resources that a company owns and that are necessary to provide services to customers
(e.g. sufficient cash to pay for e.g. entrance fees) or that can be used to produce products for customers (e.g. produc-
tion machines). Cash and bank are disclosed in cash account and bank account, customer invoices (i.e. expected
payments from customers) are disclosed in an account called «receivables for goods & services».
So from now onwards the transaction will no longer be cash only, instead sometimes the services increase the bank
account and expenses decrease the bank account. Furthermore, there are new transactions that only affect asset ac-
counts (but not the profit, i.e. neither revenue nor expense accounts). Examples include depositing cash money into
the bank account or a customer paying the invoice (leading to less receivables from goods & services but more cash
or more money in the bank account).
With this understanding, Tom wants to record the following transactions:
1. Vera Blum buys 1 value card for 10 lessons for herself and a second one as a gift to her friend, Anita Mil-
ler. She pays CHF 2 000 by wire transfer to Tom’s bank account.
2. After a second, shorter trip to Lake Constance, Tom sends the respective invoice for CHF 300 to the
group’s cashier.
3. Tom believes the amount of cash is too high, he deposits CHF 2 000 into his bank account.
4. The group pays the invoice (see transaction 2) by wire transfer to Tom’s bank account.
5. Payment of 750 in cash to the fitness studio for renting 20 lessons with Vera Blum and Anita Miller (be-
cause of the number of entrances, the fitness studio offers a discount).
Chapter 2:
Asset Accounts 78
Table 10: Booking entries A, year 2_02
Nr Left-side (debit) Right-side (credit) Text Amount
1 Bank Sales from services Vera Blum, 2 value cards 2 000
2 Receivables from G&S Sales from services Trip Lake Constance 300
3 Bank Cash Bank deposit in cash 2 000
4 Bank Receivables from G&S Customer pays invoice 300
5 Lease expenses Cash Lease of gym for 20 lessons 750
Note. Own depiction
Reviewing these transactions Tom understands that they result in:
• His current profit is CHF 1 550

• There are currently no outstanding invoices (balance of «receivables from G&S» is 0)
• Bank increased by CHF 4 300
• Cash decreased by CHF 2 750
• The change in assets is equal to the profit: CHF 1 550 (+4 300 bank – 2 750 cash + 0 receivables from G+S)
Theory explanation

Account types and their structure
2.2.3 Account types: time period vs. point in time
While the cash book allows companies to have one type of asset only, petty cash, most companies require a whole
range of asset accounts to deal with money (petty cash, bank account in CHF, bank account in USD, etc.), as well as
other assets such as machines (e.g. to produce certain parts themselves instead of buying them from a supplier, i.e.
Tom could buy testing machines himself instead of renting the gym). Asset accounts show the resources that the
company owns. In addition to the asset accounts, also liability & equity accounts apply which show the company’s
obligations. While the revenue and expense accounts are summarized into the statement of profit or loss, the asset
and liability & equity accounts are summarized into the statement of financial position. While the revenue accounts
show the value created for customers during a certain period of time, and the expense accounts show the resources
consumed to do so during the same period of time, the asset and liability accounts show the current balance of
owned resources and applicable obligations as per a certain day, which equals the last day of the revenue and ex-
pense account’s time period. The time period consists of 12 months, with many companies using the calendar year
as financial, i.e. January 1 to December 31. Other financial years are possible, e.g. July 1 to June 30, and the state-
ments may be prepared more often than annually, e.g. quarterly. Table 11 summarizes the two financial statements
and the account types that they disclose.
Chapter 2:
Asset Accounts 79
Table 11: Elements of Financial Statements
Financial Statements
Statement of profit or loss Statement of financial position

(also referred to as income statement of P&L) (also referred to as Balance Sheet)
Expense Accounts Revenue Accounts Asset Accounts Liability & Equity Acc.
Resources used to serve Value of the products and Resources owned by a Obligations that the com-
the customers, i.e. to pro- services for the customers, company and used to pany must pay back and
duce and offer products and i.e. what customers are serve customers. capital provided by owner
services to the customers willing to pay. incl. profits.
Note. Own depiction
Definitions
Assets Assets show the resources that a company owns and which are used to serve the customers. As-
sets also show, how the financial means, that the company has control over, are used. Examples:
cash, bank accounts, receivables, inventories, vehicles, tools, machines, or land and buildings.
Liabilities Liabilities are obligations of the company, typically financial obligations, that the company must
pay back. Examples: payables to suppliers, bank loans, or mortgages.
Equity For equity, two definitions apply: first, it is the capital that the owners provided to the company
plus the sum of all previous profits that have not been distributed to the owner. Secondly, equity
is the net book value of the company, i.e. the difference between all assets minus all liabilities.
Liabilities & Liability & equity together must be the same amount as assets and they show where the financial
Equity means, that the company has control over, do come from.
While the statement of profit or loss discloses the total revenues and expenses that accumulated during all the days
of the financial year (or quarter), e.g. from Jan 1 to Dec 31, the statement of financial position discloses the level of
assets, liabilities and equity as per the last day of the financial year, e.g. Dec 31. Figure 22 shows this difference in
timeing of the statement of profit and loss and the statement of financial position graphically.
Figure 22: Timeline of Financial Statements
20_1 20_2 20_3

Time axis
Profit/loss st. 20_2 Profit/loss st. 20_3
SFP as at 31/12/20_1 SFP as at 31/12/20_2 SFP as at 31/12/20_3
Note. Own depiction
Chapter 2:
Asset Accounts 80
2.2.4 Financial Development of a Company in a Nutshell
Assets, liabilities, revenues and expenses are related: first, a company needs cash (provided by the owners during the
foundation process), and this cash can then be used, together with additional money from bank loans, to buy ma-
chines, buy material, and start production, which leads to additional pay-outs (need for cash). Only selling to the
customers allows getting money again, which can then be used for further production and paying back to the bank.
Table 12: Financial Development of a Company in a Nutshell
Statement of Financial Position Statement of Profit or Loss
Assets Liabilities & Equity Expenses Revenues
Founding More cash More equity
Bank loan More cash More bank obligation
Less cash, more value

Buying a machine
of machine
Less cash, less ma- Diverse: personnel, ma-

Production chines (less value be- terial, depreciation
cause of using it)
Selling to customers More cash More revenue
Paying back to bank Less cash Less bank obligation
Note. Own depiction
The statement of financial position discloses who provided capital (equity indicates provided by founders/owners,
liabilities indicate secondary providers such as banks), and how this capital is used, i.e. what resources the company
has acquired in order to have the necessary infrastructure and means to serve the customers (assets), as per a certain
day (December 31). The Statement of Profit or Loss shows what resources were consumed during a certain time pe-
riod (e.g. January 1 to December 31), i.e. what financial value was necessary to serve the customer (expenses), and
what value the customers saw in the products and were therefore willing to pay (revenues). So money ‘moves’
through the company: from the founders/owners into machines, also from the banks into machines, the machine, to-
gether with employees, material etc., which also require money to be paid for, leads to products and services, which
then are sold to the customers having to pay money for them. And this money from the customers can then be used
again for further production, further purchase of machines, or paying money back to banks or owners (owners are
typically not paid back, but they receive the profit or a part of the profit, see chapter 4.3 for sole proprietorships and
chapter 9.3 for joint stock companies). Besides money many other financial values ‘move’ through the company,
however less comprehensively as money: material (purchase, raw material inventory, production, finished-goods in-
ventory, selling), machines (purchase, production), etc. In some cases, one transaction can even have two booking
entries, i.e. it leads to a change in two cycles, e.g. selling of goods that were produced by the company leads to more
revenue and more cash on the one hand side, and to less stock/inventory and more expenses on the other hand.
Chapter 2:
Asset Accounts 81
2.2.5 Account left-side (debit side) and right-side (credit side)
Similar to what Tom has already learned for the cash book (cash-in being recorded on the left-side and cash-out be-
ing recorded on the right-side), each type of account has left-side entries and right-side entries. However, left-side
and right-side have different meanings for each account type, as described in Table 13.
Table 13: Overview account type debit and credit side
Left-side (Debit side) Right-side (Credit side)
Asset Left-side entry in an asset account indicates an in- Right-side entry in an asset account indicates a
accounts crease in assets (more assets) decrease in assets (less assets)
Company has more resources and more options to Machine is used for production (i.e. it contributes
serve the customer, but also more pressure to use to value for the customers), but maybe machines
and occupy the asset (e.g. production machines). become too old, outdated.
Liability Left-side entry in a liability or equity account indi- Right-side entry in a liability or equity account
(& equity) cates a decrease in liability or equity (less liability, indicates an increase in liability or equity (more
accounts less equity) liability, more equity)
Company pays back liabilities (rather good) or it Company has more obligations (must pay back to
loses equity (very worrisome!) bank or owner have more decision/voting power),
at the same time it has more capital which is a
prerequisite for buying machines or investing.
Expense Left-side entry in an expense account indicates an Right-side entry in an expense account indicates a
accounts increase in expenses (more expenses). decrease in expenses (less expenses).
In order to provide value to the customer, the com- There is a reduction in resources consumed to
pany is required to consume more resources (nega- serve the customer (positive/desirable effect for
tive/undesirable effect for the company, providing the company, if the level of value provided re-
the same level of customer value with less remains the same).
sources would be preferable).
Revenue Left-side entry in a revenue account indicates a de- Right-side entry in a revenue account indicates an
accounts crease in revenue (less revenue). increase in revenue (more revenue).
There is a reduction in value that the customer is The customer sees a higher value or more cus-
willing to pay for, e.g. a discount must be offered tomers see value in the offerings of the company
(negative/undesirable effect for the company). (positive/desirable effect for the company).
Note. Own depiction
The left-side and right-side changes in the accounts are triggered by the business transactions and expressed by the
booking entries. These left-side and right-side changes can be expressed graphically in the T-accounts, see Figure 23
(which also includes the ending balances as they are typically expected, however for all accounts ending balances
could theoretically be on either side). This overview only looks at the four different types of accounts, for a specific
company multiple accounts of each type apply. For assets accounts, detailed accounts such as cash, bank, receiva-
bles, inventories, machines, etc. apply; for liability & equity accounts detailed accounts such as payables, bank loan,
shareholders’ capital, etc. apply; for expense accounts detailed accounts such as expenses for material, expenses for
wages and salaries, lease expenses, etc. apply; and for revenue accounts detailed accounts such as revenues from
trading goods, revenues from services, etc. apply.
Chapter 2:
Asset Accounts 82
Figure 23: Graphical overview account type debit and credit side in T-accounts
Debit Asset account Credit Debit Liability account Credit
Opening balance Opening balance

Decreases Decreases
Increases Increases
Balance Balance
Debit Expense account Credit Debit Revenue account Credit

Reduction of Reduction of
expenses revenue
Expenses Revenue
Balance Balance
Note. Own depiction
Expense and revenue accounts show all transactions of consumption of resources and sales to customers during the
year, i.e. they restart at 0 every January 1. In contrast, asset, liability and equity accounts start with an opening bal-
ance, and this opening balance is identical to the ending balance of the previous year. This means that the amount
that is in the cash register on December 31 can be used starting January 1 of the following year to pay suppliers.
The structure of increase and decrease of the different account types follows a strict logic. Combing the 4 account
types, a total of 16 different generic transactions are possible (see Table 14). The most and least desired booking en-
try for companies might help you to remember this structure:
• Most desired booking entry: January 20, Cash / Sales from Services, CHF 100.- (lesson with Vera)
• Least desired booking entry: January 25, Expenses for services / Cash, CHF 80.-, (entrance fee)
Table 14: Generic types of transactions
Business transaction Assets Liabilities Expenses Revenue

+ - - + + - - +
1 Asset swap X X
2 Liability swap X X
3 Capital procurement X X
4 Capital repayment X X
5 Expenses (paid in cash or by bank) X X
6 Expenses (against obligation) X X
7 Reduction of expenses (giving back to supplier) X X
8 Reduction of expenses (against obligation) X X
9 Revenue (paid directly by customer) X X
10 Revenue (reduction of obligation) X X
11 Reduction of revenue (paid back to customer) X X
12 Reduction of revenue (against obligation) X X
13 Expenses swap X X
14 Revenue swap X X
15 Revenue & expenses increase X X
16 Revenue & expenses decrease X X
Note. Own depiction
Chapter 2:
Asset Accounts 83
Example for transaction 13, expense swap: all 300.- expenses for printer paper was recorded as administrative ex-
penses, but 100.- should be recorded as advertising expenses at year end:
Dec 31, advertising expenses / administration expenses 100.
Example for transaction 14, revenue swap: all revenues from selling high-end computers have been recorded as
product revenues, but 100.- should be recorded as revenues from services (consulting how the computers may im-
prove business processes) at year end:
Dec 31, sales from produced goods / sales from services 100.
Example for transaction 15, revenue & expenses increase: a company that produces printing paper and beer cans
buys aluminum from a supplier and ‘pays’ by delivering paper, i.e. the two companies agree on a barter trade:
Jan 10, expenses for material / sales from produced goods 800.
Example for transaction 16, revenue & expenses decrease: the company that produces printing paper and beer cans
finds some of the aluminum to be of low quality and returns it to the supplier. The supplier agrees to take back the
low quality aluminium, at the same time he asks for a discount for the paper:
Jan 10, sales from produced goods / expenses for material 200.
2.2.6 Full structure of double-entry bookkeeping
After understanding the four different account types, Figure 24 summarizes how they relate to the statement of profit
or loss and the statement of financial position.
Figure 24: Graphical overview account type debit and credit side in T-accounts
Opening statement of financial positions
Assets Liabilities
D Assets C D Liabilities C D Expenses C D Revenue C

OB - - OB - -
+ +
+ B B + B B
Closing statement of financial positions Profit and loss statement
Expenses
Assets Liabilities Revenues
Profit
Note. Own depiction
End of Theory Part
Chapter 2:
Asset Accounts 84
2.2.7 Tom is growing
Things are going good for Tom: he has 3 additional customers as well as different groups interested in trips around
Lake Constance. Tom is thinking about bringing in additional trainers to keep up with the business demand. On
March 7 Anita Miller calls Tom to arrange the 8th lesson for tomorrow. At the same time, she informs Tom that she
is moving to another town and she asks him if he would reimburse the remaining 2 lessons of her value card in cash.
He agrees, and while he wonders how to record such a transaction in his scheme, he decides to ask the gym to void
two lessons, and also the swim trainer for a discount for bringing all the interested groups to the swim training. The
gym argues that the discount was already very high. But for the swim teacher Tom thinks a discount of 30% (CHF
150) would be appropriate. And thinking about it … a retroactive discount of 30% would be a good start into a suc-
cessful long-term business relationship. To his surprise the swim trainer agrees and refunds the retroactive discount
on April 1 in cash. On May 15 the next swimming session takes place with the group “always well”: 500 revenue in
cash; 50 for swimming pool entrance and 350 for swim trainer by bank transfer.
Table 15: Booking entries B, year 2_02
Date Debit Credit Text Amount
Mar 8 Sales from services Cash Refund Anita Miller 200
Apr 1 Cash Exp. f. wages and salaries Retroactive discount swim 150
May15 Cash Sales from services Swim training “always well” 500
May 15 Expenses for services Bank Entrance swimming pool 50
May 15 Exp. f. wages and salaries Bank Swim trainer 350

Note. Own depiction
Theory explanation

Booking entry writings
Alternative writings 1:
Jan 20 deposit cash in the bank account Bank / Cash 2 000
May 15 cash payment from customer for service Cash / Sales from services 500
Alternative writings 2:
Jan 20 deposit cash in the bank account Bank to Cash 2 000
May 15 cash payment from customer for service Cash to Sales from services 500
Important: the «/» and «to» are only placeholders to separate the left-side entry account and the right-side entry ac-
count. But it does not mean that e.g. something goes from Bank to Cash.
End of Theory Part
Chapter 2:
Asset Accounts 85
Understanding that normally accounting software translates the journal of booking entries into T-accounts and then
calculates the ending balances and compiles the statement of profit or loss and the statement of financial position,
Tom nevertheless wants to do this by hand just to make sure that he understands the process:
Figure 25: T-accounts of Tom’s Business Transactions in the second year 2_02
Payables for Expenses for wages

Cash goods & services and salaries Sales from services
OB 3 385 2 000 OB 0 350 150 200 2 000
150 750 300
500 200 500
B 1 085
4 035 4 035 B 0 B 200 B 2 600
0 0 350 350 2 800 2 800
Bank account
OB 0 50 Misc. current liabilities Expenses for services Financial income
2 000 350 B 0 OB 0 50 ?
2 000 0 0 B 50 B
300 50 50
?B
Loans Lease expense
B 0 OB 0 750
Receivables from G&S 0 0 B 750
OB 0 300 750 750
300 Equity
OB 3 385
B 0
300 300 B ?
Note. Own depiction
2.2.8 Year-end bookings
After recording the individual booking entries in the respective T-accounts, the software calculates the year-end
bookings, in the following sequence (to be extended in the following lectures):
1. Book specific year-end transactions (interest on bank accounts, depreciation, etc.). For Tom: interest on
the bank account: +15
2. Calculate the balance (and total) for each account (already done above, except for equity)
3. Calculate the profit or loss (i.e. calculate the statement of profit or loss by bringing the balances of all
revenue and expense accounts forward into the statement of profit or loss)
4. Bring the profit or loss forward into the equity account (with the booking entry profit / equity for profit;
or equity / loss for loss)
5. Compile the statement of financial position (by bringing forward the balances of all asset, liability and
equity account into the statement of financial position)
Chapter 2:
Asset Accounts 86
Table 16: Booking entries C, year 2_02, year-end bookings
Dec 31 Bank Financial income Bank account interest 15
Dec 31 Statement of profit or loss Exp. f. wages and salaries Closing, exp. f. wages and sal. 200
Dec 31 Statement of profit or loss Expenses for services Closing, exp. for services 50
Dec 31 Statement of profit or loss Lease expenses Closing, lease exp. 750
Dec 31 Sales from services Statement of profit or loss Closing, sales from services 2 600
Dec 31 Financial income Statement of profit or loss Closing, financial income 15
Dec 31 Statement of profit or loss Equity Profit of the period 1 615
Dec 31 Statement of fin. position Cash Closing, cash accounts 1 085
Dec 31 Statement of fin. position Bank Closing, bank accounts 3 915
Dec 31 Equity Statement of fin. position Closing, liability accounts 5 000

Note. Own depiction
Theory explanation

Year-end bookings
Instead of having a separate booking entry for each account for year-end bookings, summarized booking entries by
account type (revenue, expense, asset, liability & equity) is possible. Table 17 shows the amounts of Tom’s second
year 2_02 (for details see Table 16).
Table 17: Booking entries year-end bookings
Dec 31 Statement of profit or loss Expenses Closing, expense accounts 1 000
Dec 31 Revenue Statement of profit or loss Closing, revenue accounts 2 615
Dec 31 Statement of fin. position Assets Closing, asset accounts 5 000
Dec 31 Liabilities & equity Statement of fin. position Closing, liability accounts 5 000
Note. Own depiction
End of Theory Part
Chapter 2:
Asset Accounts 87
2.2.9 Year-end financial statements
Tom now calculates the statement of profit or loss for the year 2_02 in reporting form as he did last year:
Table 18: Statement of profit or loss for the year 2_02, in reporting format

4000 – 4999 - Material and goods expenses -50
Gross income 2 550
5000 – 5999 - Personnel expenses -200
6900 – 6999 +/- Financial Result (financial profit or loss) 15
8900 – 8999 - Taxes
Note. Own depiction
For the statement of financial position, Tom uses the structure as discussed with his friend, however for the time be-
ing only a small number of accounts was necessary for his business:
Table 19: Statement of financial position per December 31, 2_02
Assets Statement of financial position per Dec 31, 2_02 Liabilities

Cash 1 085 Equity 5 000
Bank account 3 915 Total equity 5 000
Receivables from G&S 0
Current assets 5 000
Furniture and facilities 0

Tools and appliances 0
Non-current assets 0
5 000 5 000
Note. Own depiction
Personal Opinion
What is the equity of 5 000, where does it come from?
Chapter 2:
Asset Accounts 88
Personal Opinion
How do you see this second year of Tom?
Personal Opinion
What are your suggestions for next year?
Aspects to keep without change Aspects that need to be changed
Theory explanation

Additional Background and Recommendations for Financial Statements
2.2.10 Additional Background and Recommendations for Financial Statements
Characteristics of the statement of financial position
• In the national currency or in the currency essential to business activities

• No quantities, only values
• Summarized
• Drawn up as per a certain date
• In practical application: comparison with previous year
• The asset structure reveals the type of business (high inventory indicates trading business, high machines in-
dicate production business, high infrastructure indicates services business), the liability and equity structure
reveals the legal form (shareholders’ capital for joint stock companies, partnership capital for partnerships).
• Asset side is typically ordered according to convertibility into cash (with cash on top and intangible assets
with are difficult to sell at the bottom), liability & equity side is ordered according to maturity (with paya-
bles for goods and services, i.e. supplier invoices, on top and equity at the bottom).
Chapter 2:
Asset Accounts 89
Thinking strategy for the formulation of a booking entry
1. Read and understand the description of the transaction

2. What two accounts are concerned / will be changed (start with thinking about change in money and
change in revenue)?
3. See (visualize) both accounts
4. Will this result in an increase or a decrease?
5. Formulate booking entry
a. Entry on the left-hand (debit) side ⇨ first account in the booking entry
b. Entry on the right-hand (credit) side ⇨ second account in the booking entry
Objectives of financial accounting
For the executive board, the core task of financial management is to take appropriate measures to preserve the com-
pany’s financial equilibrium on a permanent basis. Financial equilibrium means that:
1. the company’s solvency (liquidity) is safeguarded at all times (i.e. enough cash to pay obligations at all
times), and
2. over-indebtedness (i.e. the existing assets are no longer capable of covering the liabilities, the borrowed
capital) is avoided.
To ensure that the financial equilibrium can be maintained and that if the company’s solvency and equity are in
jeopardy, measures can be taken in good time, financial accounting must provide reliable information about the de-
velopment of the asset, finance and revenue positions. The vouchers of financial accounting also constitute evidence
in disputes, the calculation basis for pricing, and the basis for the computation of taxes.
Structure and details asset, liability and equity account
1. Assets are the economic resources that the company owns.

a. Current assets include the means of payment, as well as all the assets that are expected to be real-
ized, sold or consumed within a year (i.e. cash, inventory, etc.).
b. Non-current assets are available to the enterprise for more than a year (i.e. tools, buildings, etc.).
c. According to Art. 959, 2 Code of Obligations, assets are defined as property values that are owned
based on a past event or from which future values are expected. In addition, assessment of the val-
ues must be reasonably possible.
2. Liabilities show the people or entities that made capital available to the enterprise, i.e. have legal claims
on parts of the enterprise’s assets.
a. Current and non-current liabilities reveal the extent of capital made available by third parties for a
certain period of time. As a rule, lenders are entitled to have the capital repaid by an agreed date
and against annual interest.
b. Equity is the capital available to the enterprise from the outside through owners or from the inside
through capital earned by itself. Secondly it must also be interpreted as mathematical difference
between assets and liabilities. It is therefore dependent on the valuation of assets and liabilities,
i.e. any sudden fluctuation in assets (e.g. assets are destroyed by fire, without insurance) or liabil-
ity (e.g. tax authority wins legal claim and the company has a new, before unrecognized obliga-
tion) leads to a loss in equity.
c. According to Art. 959, 5 Code of Obligations, liabilities are defined as a claim of third parties,
which exist because of a past event or by which an outflow of values is likely in the future. In ad-
dition, assessment of the values must be reasonably possible.
Chapter 2:
Asset Accounts 90
Figure 26 uses the example of a trading company to illustrate the relation between the statement of financial position
and the statement of profit or loss. At the same time, this also represents the main cash cycle of a trading company
(other important aspects such as paying salaries, selling lease for shops, etc. are missing).
Figure 26: main cash cycle for trading company
Inventories Sale
Purchase
Cash Payment Receivables
Note. Own depiction
2.2.11 Legal obligation to keep records, and legal accounting principles
Art. 957(1) Swiss Code of Obligations

1
The duty to keep accounts and file financial reports in accordance with the following provisions applies to:
1. sole proprietorships and partnerships that have achieved sales revenue of at least 500 000 francs in the last fi-
nancial year;
2. legal entities.
Art. 957a Swiss Code of Obligations

1
The keeping of accounts serves as basis for financial reporting. It reports business transactions and facts that are
necessary for a true and fair presentation of financial position, financing and income situation of company (econom-
ic situation).
2
It follows the principles of financial reporting. Namely:
1. the complete, truthful, and systematic reporting of business transactions and facts,
2. a voucher for individual bookings,
3. clarity,
4. usefulness in regard of size and type of company,
5. and verifiability.
3
Vouchers may be written note on paper or in electronic or any other appropriate form, which is necessary to recon-
cile the business transaction of fact that underlays the booking entry.
4
The booking is in the currency of the country or in the currency that is important for the business activity.
5
It applies in one of the country’s languages or in English. It may be in written, electronically of in any other appro-
priate form.
Art. 958(1,2) Swiss Code of Obligations

1
Financial reporting is intended to present the economic position of the undertaking in such a manner that third par-
ties can make a reliable assessment of the same.
2
The accounts are filed in the business report. This contains the annual accounts (the financial statements of the in-
dividual entity), comprising the balance sheet, the profit and loss account and the notes to the accounts. […]
Art. 958c Swiss Code of Obligations

1
The following principles in particular apply to financial reports:
1. they must be clear and understandable.
2. they must be complete.
3. they must be reliable.
4. they must include the essential information.
5. they must be prudent.
Chapter 2:
Asset Accounts 91
6. the same rules must be applied in presentation and valuation.

7. assets and liabilities and income and expenditure may not be offset against each other.
2
The sum entered for the individual items on the balance sheet and in the notes to the account must be proven by an
inventory or by some other method.
3
Financial reports must be adapted to the special features of the undertaking and the sector while retaining the statu-
tory minimum content.
Art. 959 Swiss Code of Obligations

1
The statement of financial position shows the asset and financing position of the undertaking on the statement of
financial position date. It is structured into assets and liabilities.
2
Items must be entered on the statement of financial position as assets if due to past events they may be disposed of,
a cash inflow is probable and their value can be reliably estimated. Other assets may not be entered on the statement
of financial position.
3
Cash and cash equivalents and other assets that will probably become cash or cash equivalents assets or otherwise
be realized within one year of the statement of financial position date or within the normal operating cycle must be
entered on the statement of financial position as current assets. All other assets are entered on the statement of finan-
cial position as capital assets.
4
Borrowed capital and shareholders’ equity must be entered on the statement of financial position as liabilities.
5
Liabilities must be entered on the statement of financial position as borrowed capital if they have been caused by
past events, a cash outflow is probable and their value can be reliably estimated.
6
Liabilities must be entered on the statement of financial position as current liabilities if they are expected to fall
due for payment within one year of the statement of financial position date or within the normal operating cycle. All
other liabilities must be entered on the statement of financial position as long-term liabilities.
7
The shareholders’ equity must be shown and structured in the required legal form.
End of Theory Part
Chapter 2:
Asset Accounts 92
2.3 Example: Schlecker
Short history:
In 2011:
• restructuring (new logo, innovation program “fit for future”)

• external COO and CFO
• new employment contracts, pre-negotiated with the union
• June: announcement that in 2011 many stores will be closes (500 – 800) because of losses for 3 subsequent
years
• Year end: the founder and owner, Anton Schlecker, then aged 68, put in additional cash (high 2-digit million
EUR amount)
In 2012:
• January 23: filed for bankruptcy

• According to the newspaper “Handelsblatt” the wealth of the Schlecker family decreased from EUR 1.65
billion to EUR 35 – 40 million
Chapter 2:
Asset Accounts 93
2.4 Summary

Current liabilities
liabilities
• Analysis
o Quick ratio
assets Equity
o Equity ratio

Account Designation
EBITDA
EBT
89 - Taxes

of private account)
Transport costs
Transport costs
Decrease in inven-
tory
Chapter 2:
Asset Accounts 94
5 Production
6 Value adjustments

Chapter 2:
Asset Accounts 95
2.5 Exercises
2.5.1 Business transactions of «Leo»
Leo is a fashion retailer (similar to Zara). Assess the following transactions from the perspective of Leo and add the
following information into the scheme below for each of the transactions:
• Account that is affected on the left side: name according to the chart of accounts
• Account that is affected on the right side: name according to the chart of accounts
• Effect on money: mark if the accounts cash or bank increase (+), decreases (-), or remain (0)
• Effect on profit: mark if company’s profit increases (+), decreases (-), or is not touched (0)
Effect on profit
Effect on cash
Left-side Right-side
Business transaction account account
Customers buy cloths at the flagship store in Zurich and

pay cash.
Leo pays salaries by bank transfer.
Customers buy cloths at the store in Basel and pay in

cash.
Leo purchases a new winter collection and pays by bank

transfer.
Customers buy cloths at the online store and pay by

bank transfer.
Leo has some of the products from the new winter col-
lection tested for chemical ingredients and pays the la-
boratory in cash.
As some of the products contain forbidden chemical in-

gredients Leo sends back some of the packages. The
supplier transfers the respective amount back to Leo’s
bank account.
Leo is entering an insurance to protect itself against bad

weather and pays by bank transfer.
Leo pays the lease for the flagship store at Zurich

through the bank account.
Leo instructs the bank to transfer the money to the elec-

tricity company.
At the flagship store at Zurich, Leo replaces 3 computer

mice with pens (to more easily assemble and show de-
signs to customers) and pays in cash.
Chapter 2:
Asset Accounts 96
In the flagship store at Zurich, the light bulbs that are in-
side of the display furniture must be replaces. Leo pays
the bulbs by bank transfer.
Leo pays the invoice of the cleaning company for the

weekly services at the at the flagship store at Zurich by
bank transfer.
Leo pays the invoice of the advertising agency for

launching the winter collection (which includes newspa-
per advertising, radio commercials, presents, and host-
esses) via the bank.
Leo also sells perfume, and for a launch together with

the new winter collection Leo receives a advertisement
support which the supplier send to Leo’s bank account.
Because Leo has taken on a very high number of train-

ees this year, the government refunds part of the charges
that Leo paid (to the bank account).
After a water incident at the shop in Basel, Leo talks to

the landlord for a refund of this month’s lease. The land-
lord pays a part back in cash.
After a customer bought 5 shirts, he realizes at home

that two of them do not fit the color of his dresses. He
brings back these two shirts and gets the price back in
cash.
For a street marketing activity, Leo is hiring a profes-

sional street marketing company and pays by bank trans-
fer.
UBS asks Leo’s head of Marketing to arrange a fashion

cat walk at the annual UBS employee meeting. UBS for
this by bank transfer.
Leo pays the invoice of the external auditing company

by bank transfer.
At the end of the year, the bank deposits the interest in-
come for the positive bank account balance into Leo’s
bank account.
2.5.2 Business transactions of «GBau»
ing transactions from the perspective of GBau and add the following information into the scheme below for each of
the transactions:
Chapter 2:
Asset Accounts 97
Effect on profit
Effect on cash
At the end of the month of April, the invoices for all

gardens that were finished are sent to the customers.
One customer pays the April invoice by bank transfer.
GBau pays salaries by bank transfer.
GBau pays the monthly invoice from Shell for fuels

(needed for lawn mowers, leaf blowers, etc.) via bank.
A customer pays 5 hours of gardening work in cash.
As per end of the year, GBau is entitled for a retrospec-

tive discount (because it consumed more than 10 000 li-
ters of fuel), which is paid to the bank account.
GBau pays the monthly rent for the leased office in cash.
GBau pays the invoice of the cleaning company for

cleaning the office in cash.
For a special customer request, GBau must hire a sub-

contractor (i.e. a company specialized for such services)
and pays by bank transfer.
As GBau has a lot of work, it hires temporary staff

through a job center for 2 weeks. Now the job center
sends the invoice and GBau pays by bank transfer.
A customer pays 2 hours of excavation work with a dig-

ger, in cash.
After a self-imposed small accident with the company’s

vehicle (i.e. the insurance will not pay) GBau pays the
garage in cash.
The road traffic licensing department sends the invoice

for the annual approval fee and GBau pays via bank.
A retrospective discount is granted to a key customer for

his April invoice, which he did not pay yet.
GBau pays the invoice from the tax authority by bank.
GBau is a member of the Swiss association of gardening

companies and pays the annual membership fee by post.
Chapter 2:
Asset Accounts 98
The local authority sends GBau the invoice for the an-
nual business registration charge and GBau instructs the
bank to settle the amount.
GBau pays the invoice of the transportation company for

transporting stones for a stone wall directly to the cus-
tomer by bank transfer.
The government laboratory sends the invoice for testing

soil by bank transfer.
GBau buys different office equipment (copier paper,

pencils, etc.) and pays in cash.
An architect is planning a new design for the OLMA ar-

ea at St. Gallen. He ordered GBau to plan all green are-
as. Now he pays the invoice for the respective planning
services by bank transfer.
GBau pays the monthly invoice of the flower company

(for having always fresh flowers at the entrance and of-
fice) in cash.
One customer is 7 months late with paying the invoice.

By the end of the year he files for bankruptcy.
GBau sells various gardening tools (shovels, leaf blow-

er, etc.) to a private customer so he can care his new
garden by himself in the future. The customer pays in
cash.
As the damage of the vehicle was not properly repaired,

GBau returns the car and the garage agrees to repair it
again as guarantee service.
come for the positive bank account balance into GBau’s
bank account.
2.5.3 Business transactions of «SMW»
and add the following information into the scheme below for each of the transactions:
Chapter 2:
Asset Accounts 99
Effect on profit
Effect on cash
In February SMW delivers vehicles to the dealership

SMWBuyCenters and sends the invoice.
SMW pays salaries by bank transfer.
SMW purchases Aluminum to produce roofs for its cars

and pays by bank transfer.
SMWBuyCenters pays SMW’s February invoice by

bank transfer.
SMW purchases airbags from a supplier and pays by

bank transfer.
SMW purchases screws that are used at different steps

of the assembly line inside the car. SMW pays in cash.
SMW buys key chains which shall be given to custom-

ers at the auto show Geneva (as presents). SMW pays
cash.
As the quality of some of the key chains does not meet

the agreed standard, SMW sends them back. The sup-
plier returns the respective amount in cash.
SMW delivers Goodyear tires to a partner who also of-

fers tire services besides selling SMW vehicles (he is
temporarily short on tires). SMW sends an invoice.
SMW buys baseball caps from a supplier, which shall

be sold to customers. SMW pays through its post ac-
count.
As some of the baseball caps have production errors in

the logo, SMW sends back 10% of the caps, the supplier
returns the respective amount to the bank account.
SMW offers a comprehensive sales and marketing edu-

cation to the employees of a dealer (which goes far be-
yond the typical education for new models or alike).
SMW asks the dealer to pay in cash for this service.
SMW pays the business liability insurance by bank

transfer.
SMW pays the building insurance (for the production

factories that it owns) by bank transfer.
The tire partner pays the invoice for the Goodyear tires
by bank transfer.
Chapter 2:
Asset Accounts 100
SMW pays the invoice for electricity (for the electricity

used in the production building) via post account.
SMW pays the invoice for electricity (for the office

building) by bank transfer.
SMW pays the invoice for phone and internet service in

cash.
SMWBuyCenters sells many more cars than agreed.

Therefore, SMW offers an additional discount (retro-
spective sales bonus) and transfers the amount by bank.
SMW pays for office material (copier paper, pencils,

etc.) in cash.
The employee at the reception buys new flowers for the

entrance hall and pays in cash.
Exceptionally, SMW consults a competitor regarding

avoiding rolling noise on silent asphalt for fast curve
driving on curvy routes. SMW send the respective in-
voice in November.
SMW buys a present for an employee who celebrates

his 30th anniversary with the company and pays in cash.
SMW pays the invoice for the services of a lawyer that

supported founding of a new daughter company in cash.
The competitor pays the November invoice for the roll-

ing noise avoidance consulting by bank transfer.
The bank withdraws the annual charges for managing

the bank account from SMW’s bank account.
come for the positive bank account balance into SMW
bank account.
2.5.4 Account “Cash” of children day-care nursery
Draw up the account “Cash” of a children day-care nursery for the month of November with the following transac-
tions:
Date Text Amount

CHF
Nov, 1 Opening balance 95.30
Nov, 3 Expenses for decoration 37.40
Nov, 5 Donation income 45.00
Chapter 2:
Asset Accounts 101
Nov, 7 Contribution of the children for making Christmas presents 144.00
Nov, 8 Cash withdrawal from bank account 200.00
Nov, 11 Expenses for material for making Christmas presents 258.35
Nov, 17 Expenses for various food and beverage for the kitchen 36.90
Nov, 25 Purchase of a birthday present for the trainee 21.60
How much cash does the day-care own as per November 30?
2.5.5 Accounts “Cash” and “Bank” of an advertising agency
Draw up the accounts “Cash” and “Bank” of an advertising agency for the month of June with the following transac-
tions:
Date Text Amount

CHF
Jun, 1 Opening balance cash 178.20
Jun, 1 Opening balance bank 567.90
Jun, 2 The bank statement shows that customer “Annen” paid his invoice 267.00
Jun, 4 Purchase of various office material in cash 37.30
Jun, 5 Purchase of a book with the bank’s debit card 98.00
Jun, 7 Cash withdrawal of money at the ATM 300.00
Jun, 8 Cash payment for various different kitchen material 46.50
Jun, 10 Customer “Peyer” pays for a short consulting in cash 180.00
Jun, 14 Customer “Jenni” pays the services by bank transfer 400.00
Jun, 17 Advanced cash payment for a meal with a key customer 250.00
Jun, 22 Misc. income in cash 165.40
Jun, 25 Deposit of excess cash onto the bank account 200.00
Jun, 30 Bank charges 15.70
How much money (cash + bank) does the advertising agency own as per June 30 in cash and on the bank account?
Chapter 2:
Asset Accounts 102
2.5.6 Account and financial statements of Job Center
Angela starts her own business (job center services). She asks you to support her with the first year business transac-
tions. She brings CHF 2 000 cash and CHF 5 000 on the bank account into the business (i.e. the opening balance of
the equity is CHF 7 000).
Nr Text Amount
CHF
1 Angela buys a computer and printer, she pays in cash 1 100
2 Angela rents an office space and must pay an advance in cash 260
3 Angela transfers money for the ordered office material by bank 70
4 Cash withdrawal from bank account 1 000
5 The first customer pays for services in advance to the bank 2 600
6 Angela sends invoices to various customers for her services 12 500
7 Angela pays for telephone and internet services via online banking 120
8 The landlord asks for a cash payment for excess heating expenses 190
9 Angela pays for an external assessment center via bank transfer 500
10 The bank debits the interest income for the positive bank balance 60
11 The newspaper asks Angela to pay cash for an advertising 110
12 A customer pays his invoice to the bank account 10 000
13 The bank transfers the salaries as instructed by Angela 2 200
14 A customer pays his invoice in cash 2 500
15 Cash deposit into the bank account 1 000
16 Bank withdraws the bank charges 50
What are the booking entries for these transactions? Also prepare the T-accounts, the statement of profit or loss, and
the statement of financial position for December 31 of this first year.
Chapter 3:
Financing and Statement of Financial Position 103
Financing and Statement of Financial Position

In addition to assets, the statement of financial position also shows the financing side, i.e. who has contributed fi-
nancial support and therefore to whom must be what amount of money be paid back. Financing typically includes li-
abilities and equity. Liabilities are obligations to third parties, i.e. banks or suppliers and the respective amounts
must be paid back as per the agreed point in time. Equity is the contribution from the owners or the profit that the
company has made in the past. The details of equity depend on the legal structure of the company, but typically eq-
uity must not be paid back, but the owners have rights, including the right for participating in decisions and receiv-
ing distribution of profits, if it is decided to distribute the profit instead of keeping it with the company. The liability
and equity are important aspects as they disclose obligations that must be met, in addition to meeting the customer
needs, as well as who may influence the company’s decision and why. With the statement of financial position com-
plete, so called financial ratios can be calculated and analyzed, i.e. formulas that compare different aspects of the fi-
nancial statements and therewith allow a quick financial assessment of companies.
3.1 Introduction
1. What are the differences between liability and equity?
2. What financing options do startups have and what are advantages and disadvantages?
3. To what extend can financial ratios help to analyze the situation of a company?
3.2 Starting point of Tom’s year 3
For the start of the third year, as per January 1, 2_03, the statement of profit or loss is empty, the statement of finan-
cial position is the same as the statement of financial position per year-end 2_02.
Table 20: Statement of financial position per January 1, 2_03
Assets Statement of financial position per Jan 1, 2_03 Liabilities

Cash 1 085 Equity 5 000
Bank account 3 915 Total equity 5 000

Tools and appliances 0
Non-current assets 0
5 000 5 000
Note. Own depiction
Chapter 3:
Table 21: Statement of profit or loss per beginning of the year 2_03, in reporting format

3000 – 3999 Sales from goods and services 0
4000 – 4999 - Material and goods expenses 0
Gross income 0
5000 – 5999 - Personnel expenses 0
6000 – 6799 - Other operating expenses 0
EBITDA (earnings before interest, taxes, depreciation and amortization) 0
6800 – 6899 - Depreciation and Amortization 0
EBIT (earnings before interest and taxes) 0
EBT (earnings before taxes) 0
7000 – 7999 +/- Accessory operating result 0
8000 – 8899 +/- Extraordinary and non-operating result 0
Profit before taxes 0
8900 – 8999 - Taxes 0
Profit of the period 0
Note. Own depiction
3.3 Expansion of Business
In the third year of his study, Tom’s time is getting more and more tight. He must write many papers for his study,
he should be planning for the bachelor thesis, and he does not want to add an extra semester because he spends a lot
of time training with his customers. His service business, which initially offered significant advantages (easy and
simple to start, not much prerequisites and preparation required) now reveals its most significant disadvantage: Tom
must invest his time to generate revenues, i.e. his sales depend directly on the number of hours that he reserves for
giving training (or on the ability to charge higher prices). Tom is thinking about expanding his business.
3.3.1 Options for the third year
What options does Tom have? What are advantages and disadvantages of different options? What are consequences
of different options for his financial accounting?
Personal Opinion
Options for Tom?
Chapter 3:
Personal Opinion
Assessment of different options for Tom?
Advantages Disadvantages
Personal Opinion
Consequences of different options for financial accounting?
Opportunities Challenges
Working with elderly customers, he has recognized that for these groups, the lessons are not only well-being activi-
ties, but also (or even more so) social activities. Some of the groups turn into social network. After thorough consid-
erations, Tom decides to start a business by selling electric bicycles to his group customers. While e-bikes are 30%
to 50% more expensive than conventional bikes, e-bikes offer two specific advantages that are important for Tom’s
business: first the support of the electric motor allows elderly people to virtually drive any route with e-bikes, and
secondly the electric parts of the bicycles require bi-annual maintenance which leads to repeated service revenue for
Tom. And last but not least, his elderly customers tend to have the required budget to buy the somewhat expensive
e-bikes. Tom sees the e-bike business to be more important for his future than the personal training business, so he
decides to start a formal firm with the name ‘Tom’s Cycle Shop’.
Thinking through this idea, Tom concludes that he needs a showroom where he can also perform some maintenance
and simple repair services (for the time being he can use the garage of his rented apartment), he needs to find one or
more good suppliers, and maybe he needs to reach out to additional customers in the future (i.e. he needs marketing
and advertising). For his internal operation, he needs some liquid funds (petty cash), facilities, tools, spare parts and
bicycles for the show-room. And most importantly he needs the money to finance the respective upfront expendi-
tures and investments. His investigations suggest that just for a good operation, including 10 e-bikes for the show-
room, he requires CHF 30 000.
Chapter 3:
3.3.2 Financing and investing
Where does Tom get the money from to purchase the items that he needs for his internal operation which costs CHF
30 000, i.e. how can he finance his investments of CHF 30 000? First of all, he can use the money that he already
earned from the personal training business (5 000; cash and bank). After long discussions, his grandmother promises
an interest-free loan of 10 000, and one of the suppliers agreed for favorable payment terms (payment of the e-bikes
only after they are sold to customers). So Tom is going forward with his new business: he pays 685 cash into the
bank account on January 30, he receives the money from the loan of his grandmother on February 1 by bank trans-
fer, he purchases the shop equipment and tools on February 15 paying by bank transfer, and he orders the e-bikes on
February 20 (delivery to his shop is on March 10). After all the purchases and the transfer of cash to the bank he
owns the following assets and has the following obligations (both of which match, at CHF 30 000).
Table 22: Financing and Investment plan for bicycle business
Cash CHF 400

Credit balance at the bank CHF 3 600
Shop and workshop equipment 1 desk and chair, 3 shelves CHF 5 000
Tools and spare parts Spanners, tires, etc. CHF 6 000
Selection of bicycles as trading goods 10 units, purchase price CHF 1 500 CHF 15 000
Total CHF 30 000
Grandmother’s loan CHF 10 000

Supplier’s invoice CHF 15 000
Invested savings CHF 5 000
Total CHF 30 000
Note. Own depiction
All these transactions concern the statement of financial position only, and they consist of financing transactions and
asset swaps. The booking entries are:
Table 23: Booking entries A, year 2_03
Jan 30 Bank Cash Cash deposit 685
Feb 1 Bank Loans Loan from grandmother 10 000
Feb 15 Furniture and facilities Bank Purchase equipment 5 000
Feb 15 Tools and appliances Bank Purchase tools 6 000
May 10 Inventory, trading goods Payables for goods & svcs Delivery of e-bikes 15 000
Note. Own depiction
Chapter 3:
Founding a new company instead of transforming an existing company will be discussed in Chapter 9.
Unfortunately, Tom was very busy with his study and starting his shop, he did not have time for any personal train-
ing lessons. Luckily, he started to introduce some colleagues last year already, and they took over all the customer
lessons. Consequently, Tom does not have any income, but at least the customers remain loyal and happy, which is a
prerequisite for selling e-bikes to them. After founding the shop, his interim financial statements as per end of June
are:
Table 24: Statement of profit or loss for January to June 2_03, in reporting format

4000 – 4999 - Material and goods expenses -500
Gross income 8 000
5000 – 5999 - Personnel expenses -7 600
Profit before taxes 0
8900 – 8999 - Taxes
Profit of the period 0
Note. Own depiction
Table 25: Statement of financial position per June 30, 2_03
Statement of financial position per Jun 30, 2_03

Assets (transformed business) Liabilities
Cash 400 Payables for goods + services 15 000
Bank account 3 600 Current liabilities 15 000
Inventories, trading goods 15 000
Current assets 19 000 Loans 10 000
Non-current liabilities 10 000
Furniture and facilities 5 000 Total liabilities 25 000
Tools and appliances 6 000
Non-current assets 11 000 Equity 5 000
Total equity 5 000
30 000 30 000
Note. Own depiction
Chapter 3:
3.3.3 New potential thanks to new venture – what about profit?
As the e-bikes do not meet the specified and agreed upon quality, Tom has to send back all 10 bicycles. He fears that
he is not able to meet his targets for selling of e-bikes and therefore he focuses on personal training until the end of
the year. From July to December he achieves the following:
• Personal training services for individuals, all paid by bank transfer: 3 000
• Invoices sent to groups and associations for personal training services: 3 000
• Of the invoices sent to groups and associations, 2 500 were paid by bank transfer
• Expenses for services, paid by bank transfer: 3 500
• Expenses for wages and salaries, paid by bank transfer: 1 000
• Lease expenses, paid by bank transfer: 200
• Advertising expenses, paid by bank transfer: 200
• Administration expenses, paid by bank transfer: 150
Table 26: Booking entries B, year 2_03
Dec 30 Bank Sales from services Private customers 3 000
Dec 30 Receivables from G&S Sales from services Groups and associations 3 000
Dec 30 Bank Receivables from G&S Payment of invoices 2 500
Dec 30 Expenses for services Bank Misc. external services 3 500
Dec 30 Expenses f. wages and salary Bank Misc. support people 1 000
Dec 30 Lease Expenses Bank Lease fitness studio 200
Dec 30 Advertising expenses Bank Newspaper advertisement 200
Dec 30 Administration expenses Bank Misc. administration 150
Note. Own depiction
The supplier sends the new e-bikes by mid of December. As per end of December, the bank statement shows that
Tom has gained CHF 50 interest from the money on the bank account, i.e. the bank pays interest of CHF 50 to Tom
because he has mostly a positive bank account (for the days with a negative bank balance the bank charges Tom a
typically much higher interest which he then has to pay to the bank).
Chapter 3:
Table 27: Booking entries C, year 2_03, year-end bookings
Dec 31 Bank Financial income Bank account interest 50
Dec 31 Revenues Statement of profit or loss Closing, revenue accounts 6 050
Dec 31 Statement of financial pos. Assets Closing, asset accounts 31 000
Dec 31 Liabilities & equity Statement of financial pos. Closing, liability accounts 31 000
Note. Own depiction
Table 28: Statement of profit or loss for January to December 2_03, in reporting format

Gross income 10 500
6900 – 6999 +/- Financial Result (financial profit or loss) +50
8900 – 8999 - Taxes
Note. Own depiction

Cash 400 Payables for goods + services 15 000
Total equity 6 000
31 000 31 000
Note. Own depiction
Chapter 3:
In the first year, assessing how the business is going was relatively simple. Now with the two statements and the dif-
ferent business activities Tom is looking for some assessment tools. He remembers his friend saying that financial
ratios help comparing and assessing different businesses.
Theory explanation

Financial Ratio Analysis
Companies use virtually thousands of different ratios. Some companies use even different calculation formulas for
the same ratio. However, all companies tend to use ratios for three dimensions (see also Figure 27):
• Liquidity/Cash: Does the company have enough cash to meet its financial obligations?
• Risk/Security: what is the ratio of liability to equity (or each of them to total capital), how does equi-
ty/capital compare to assets?
• Return/Profitability: how profitable can the company offer its products and services to the customer, how
productive (i.e. efficient, effective, and profitable) does the company use the capital/assets that has been
provided/that it owns?
Figure 27: Magical triangle of financial ratios
Note. Own depiction
3.3.4 Cash-oriented financial ratios (liquidity)?
Solvency (i.e. sufficient cash) denotes the ability to make any due payments without any restrictions. The level of
cash must match the financial obligations at all times. A situation of insufficient cash is also called illiquidity and it
entails the danger of bankruptcy.
Chapter 3:
Figure 28: Cash Ratio Cash ratio (liquidity ratio 1)

Liabilities
Assets Statement of Financial Position & equity
Liquid funds
Cash Current liabilities Current liabilities
Receivables
Non-current
liabilities The ratio compares the current obligations of the fol-
Inventories
lowing 12 months with the cash and cash-equivalent
Non-current
Equity
positions (e.g. marketable securities) being effectively
assets
available today.
Benchmark: 30-80 %.
Note. Own depiction
Figure 29: Quick Ratio Quick ratio (liquidity ratio 2)

Liabilities
(Liquid funds + receivables)

Receivables
Non-current
liabilities Assuming that customers pay in due time (i.e. receiva-
Inventories
bles very soon turn into cash), the ratio compares the
Non-current
Equity
current obligations of the following 12 months with
assets
the cash being effectively available today and within
the payment days of the customers (e.g. 30 days or 3
Note. Own depiction

months).
Benchmark: 100 %.
Figure 30: Current Ratio Current ratio (liquidity ratio 3)

Liabilities
Current assets
Receivables
Non-current
liabilities As inventories will most likely be sold to customers
Inventories
within the next 12 months, inventory is included in the
Non-current
Equity
comparison to the current obligations of the following
assets
12 months. Nevertheless, it is likely that some of the
(old) inventory can no longer be sold to customers (or
at reduced prices only) and therefore this part of inven-
Note. Own depiction
tories will never turn into cash (and therefore it cannot
be used to pay for the financial obligations).
Benchmark: 150 - 200 %
Chapter 3:
3.3.5 Security-oriented financial ratios
The right structure of current assets to non-current assets to current liabilities to non-current liabilities to equity (and
different combinations thereof) is important to allow the company the necessary level of flexibility, while at the
same time ensuring enough stability to not make it vulnerable to market fluctuations and disruptive forces. The de-
sired structure is specific to the company and it depends on the specific activities, future plans, and competitors of a
company, as well as applicable market forces.
Figure 31: Equity Ratio Equity Ratio

Liabilities
Equity
Cash Current liabilities
Total assets
Receivables
Non-current
liabilities Liabilities must be paid back, therefore the respective
Inventories
money should only be used for activities that have a
Non-current
Equity high probability of being successful (i.e. they contrib-
assets
ute cash). Therefore, risky (new) ventures and initia-
tives should be finance by equity. So equity must
match the level of risk in asset. The equity ratio com-
Note. Own depiction
pares equity to total assets and this ratio should be sim-
ilar to the percentage of rather risky assets.
Benchmark: 30 – 70 %
Figure 32: Long-term Debt and Equity to Non-Current Asset Ratio Long-term Debt and Equity to Non-Current Asset
Liabilities
Assets Statement of Financial Position & equity Ratio

(Non-current liabilities + equity)
Receivables
Non-current Non-current assets
liabilities
Inventories
A value of 100 % indicates that long-term assets (in-
Non-current
Equity vestments) are funded with long-term borrowed capi-
assets
tal. Long-term investments (i.e. contribute back cash in
the long- term only) should not be financed with short-
Note. Own depiction

term obligations (i.e. need cash to pay back in the
short-term). Short-term activities should not be finance
with long-term capital that binds the company for mul-
tiple years. However, long-term capital tends to be less
expensive than short-term capital.
Benchmark: 120 %
Chapter 3:
3.3.6 Profitability-oriented financial ratios
Profit is the difference of what customers are willing to pay for the goods and services, and the resources that the
company used to serve the customers. Any company must yield profit in the long run to continuously serve custom-
ers and stay ahead of competition, i.e. to survive
Figure 33: Return on Equity Return on Equity (RoE)

Liabilities
Assets Statement of Financial Position & equity Expenses Statement of Profit or Loss Revenues

Operational
expenses
Receivables
Non-current Sales Average equity
liabilities Financial expenses
Inventories
Profit
Other revenues
Non-current
assets
Equity RoE is an indication how profitable (i.e. effectively
and efficiently) the money offered by the owners (i.e.
the equity) was used to serve customer needs (i.e. per-
Note. Own depiction
form the value creation). For businesses with higher
risks, relatively higher RoE is expected.
Benchmark: 8 % - 15 %
Figure 34: Return on Assets Return on Assets (RoA)

Liabilities
Assets Statement of Financial Position & equity Expenses Statement of Profit or Loss Revenues

Operational
Profit of the period + financial result
expenses
Receivables
Non-current Sales Average total assets
liabilities Financial expenses
Inventories
Profit
Other revenues
Non-current
assets Equity RoA shows how profitable the company uses the as-
sets, i.e. how well it invested the total capital and then
served customer needs with these assets. The return on
Note. Own depiction
assets is typically lower than the return on equity.
Benchmark: 6 % - 10 %
Figure 35: Return on Sales Return on Sales (RoS)

Expenses Statement of Profit or Loss Revenues

Operational Sales from production, trading and services
expenses
Sales
Financial expenses RoS describe the percentage of the sales, i.e. what cus-
Profit
tomers were willing to pay, results as profit, i.e. is not
Other revenues
used up by expenses. The RoS is very dependent on
the industry (low in grocery retail, high in consulting).
Note. Own depiction
Benchmark: 2 - 5 %
End of Theory Part
Chapter 3:
3.4 Examples
3.4.1 Statement of financial position of a retail company: H&M Group
a. What is striking about the 2021 (as per November 30) statement of financial position?
b. Give reasons for the particular characteristics of the statement of financial position.
https://hmgroup.com/investors/reports.html
Chapter 3:
3.4.2 Statement of financial position of a bank: Julius Baer Group
a. Which are the most important asset positions?

b. Which are the most important liability positions (sources of funding)?
https://www.juliusbaer.com/en/media-investors/financial-reporting/
Chapter 3:
3.4.3 Statement of financial position and statement of profit or loss of Hewlett-Packard En-
terprise
Assess the financial situation of Hewlett-Packard Enterprise (information technology hardware, software and ser-
vices) on the basis of indicators and their interpretation.
Chapter 3:
https://investors.hpe.com/financial/annual-reports
Chapter 3:
3.5 Summary

Current liabilities
liabilities
• Analysis
o Quick ratio
assets Equity
o Equity ratio

Account Designation
EBITDA
EBT
89 - Taxes

of private account)
Transport costs
Transport costs
Decrease in inven-
tory
Chapter 3:
5 Production
6 Value adjustments

Chapter 3:
3.6 Exercises
3.6.1 Asset types statement of financial position
Fill in what kind of statement of financial position change is taking place (a = asset; l = liability).
No Transaction a+ or l- a- or l+
1. We pay CHF 250 in cash into the bank account. Bank + Cash -
2. We pay due invoices from raw material suppliers with a bank trans-
fer of CHF 900.
3. Firm owner Burton increases his capital contribution by paying in

CHF 10 000 into the company’s bank account.
4. We buy office furniture in the value of CHF 1 900 against invoice.
5. We pay CHF 3 800 in cash into the bank account, thus decreasing
debts due to the bank.
6. Customers pay invoices in the amount of CHF 3 000 by transfers in-

to our bank account.
7. We return part of the office furniture. The supplier credits us with

CHF 400 (cf. case 4).
8. A customer paid his invoice twice. We send him

CHF 3 000 by bank transfer.
9. We instruct our bank to pay invoices from our raw material suppli-
ers in the amount of CHF 2 400.
10. Firm owner Burton reduces his capital contribution by CHF 10 000
by withdrawing CHF 4 000 in cash and CHF 6 000 by bank transfer.
11. We withdraw CHF 1 200 in cash from the bank account.
12. Repayment (amortization) of CHF 1 000 to lender Mr. Stoppard by

bank transfer.
Chapter 3:
3.6.2 Statement of financial position of an amusement park
a) Draw up a statement of financial position that is divided up into current and non-current assets, as well as bor-
rowed capital and equity using the following information (amounts in CHF 1 000): Loan received from the munici-
pality 60, shareholders’ capital 90, receivables from goods and services 2, loans 50, land and buildings 79, enter-
tainment equipment 83, cash 11, machines 10, furniture and facilities 25, accounts payable 2, bank account?
b) What is striking about the statement of financial position?
c) Give reasons for the particular characteristics of the statement of financial position.
d) Describe general current challenges for amusement parks and explain their consequences for the statement of fi-
nancial position.
Assets Statement of financial position as per December 31, 2_01 Liabilities
3.6.3 Statement of financial position of a manufacturing firm
rowed capital and equity using the following information (amounts in CHF 1 000): Bank 24, office equipment and
IT 25, equity 180, other reserves 58, vehicles 8, receivables from goods and services 39, loans 190, land and build-
ings 213, cash 2, machines 67, patents and licenses 32, payables for G&S 12, inventories, finished goods 13, inven-
tories, raw materials 17
d) What consequences does the structure of the assets have for the liabilities side?
Chapter 3:
3.6.4 Statement of financial position of an electronics shop
rowed capital and equity using the following information (amounts in CHF 1 000): Bank account (credit or debit
balance?) 11, capital A. Miller 70, capital P. Miller 50, vehicles 21, receivables from goods and services 14,
cash 38, furniture and facilities 35, payables for goods & services 59, inventories, trading goods 62,
inventories, repair parts (trading goods) 8, tools and appliances 12.
Chapter 3:
3.6.5 Formulation of booking entry
Formulate the booking entries for the following business transactions.
1. The business owner increases his capital contribution in cash, 25

2. Cash payment of debts to raw material supplier, 21
3. Purchase of seven office desks against invoice, 58
4. Cash withdrawal from bank account, 45
5. Return of one office chair (cf. 3.), 4
6. Purchase of furniture in cash, 68
7. Purchase of a car against invoice, 39
8. Credit advice from the bank for the sale of securities (on the stock exchange), 9
9. Customer payments into bank account, 15
10. The business owner pays a private invoice through the firm’s bank account, 3
11. Purchase of security (on the stock exchange) through the bank, 7
12. Granting a cash loan to Mr. Miller, 5
3.6.6 Closing booking entries
What are the closing booking entries for the following accounts?
Expenses for wages and Sales from produced

salaries Machines goods
24 000 5 000 248 000 15 000 17 000 327 000
8 000 33 000 5 000 11 000
Bank Sales from services Other operating expenses

15 000 1 400 11 000 156 000 41 000 3 500
500 2 100 14 000 2 000
4 000 3 000
Chapter 3:
3.6.7 Comparison between manufacturing company and trading company
a) Compile the statement of financial positions for a manufacturing company and for a trading company using the
following information for each of the company.
1) Manufacturing company 2) Trading company

Desks and cabinets 87 Petty cash 37
Balance supplier invoices 42 Bank deposit 43
Business buildings 580 Office equipment 11
Petty cash 18 Cars 28
Balance customer invoices 74 Loan debt due to Venture Capitalist 80
Current account debt 79 Debts to suppliers 76
Mortgage debts 400 Debts, customers 39
Production and assembly lines 148 Shareholders’ capital ?
Inventories, finished products 58 Short-term marketable securities 18
Inventories, raw materials 38 Inventories, trading goods 91
Shareholders’ capital 482
b) Compare the structure of the statements of financial position of the two companies. Which one do you consider to
be better? State reasons why which each of the two companies may get into difficulties in the near future.
Assets Statement of financial position (manufacturing company) as per December 31, 2_01 Liabilities
Assets Statement of financial position (trading company) as per December 31, 2_01 Liabilities
Chapter 3:
3.6.8 Interpretation of booking entry
What transactions could have resulted in the following booking entries (in TCHF)?
1. Bank account to Cash 1

2. Cash to Receivables from good & services 49
3. Office equipment and IT to Misc. current liabilities 8
4. Vehicles to Misc. current liabilities 28
5. Misc. current liabilities to Vehicles 2
6. Bank account to Receivables from good & services 56
7. Land and buildings to Loans 270
8. Payables for goods & serv. to Bank account 62
9. Bank account to Cash 3
10. Cash to Furniture 34
11. Equity to Bank account 23
12. Payables for goods & serv. to Loans 7
3.6.9 Financial ratios service company
Assets Statement of financial position as per Dec 31, 2_01 Liabilities

Cash 90 Payable for goods & services 20
Bank 750 Current liabilities 20
Receivables from goods & service 210
Furniture and facilities 70 Total liabilities 2 420
Vehicles 300
Land and buildings 1500 Equity 500
Non-current assets 1 870 Total equity 500
2 920 2 920
Calculate the following financial ratios (round to two decimal places)
Cash Ratio
Current Ratio
Long-term debt and equity to non-

current asset ratio
Chapter 3:
3.6.10 Coherent exercise for an esport training center
a) Draw up the booking entries and the closing statement of financial position.
b) In the Bank account, keep an additional column that will give you the account balance at all times (balance col-
umn). What do you notice?
Assets Statement of financial position as per Jan 1, 2_02 Liabilities

Cash 12 Payables for goods & services 9
Bank account 9 Miscellaneous current liabilities 4
Receivables from goods & services 5 Current liabilities 13
Other receivables 4
Current assets 30 Loans 55
Non-current liabilities 55
Total liabilities 68
Machines and equipment 70 Equity 40
Non-current assets 78 Total equity 40
108 108
Business transactions:
1. Enter opening booking entries and opening balances in the accounts.

2. We pay cash into our bank account, 10
3. We pay our suppliers (payables for goods & services) through the bank account, 7
4. We improve our equipment, against invoice, 6
5. We sell old furniture, against invoice, 3
6. We pay invoices that are due (misc. current liabilities) through the bank account, 4
7. Increase in the bank account by increasing equity, 20
8. Customers pay their invoices to our bank account:
For other receivables, 2
Receivables from goods and services, 3
9. We install a new Augmented Reality game with all required physiological equipment, against invoice, 25
10. The bank increases the loan for equipment by 12
11. We purchase new furniture for the Augmented Reality games and pay in cash, 1
12. We pay various payables through bank transfers:
Misc. current liabilities 28
Payables for goods & services 1
13. Close the accounts.
+ Bank account - Balance
Chapter 3:
Booking entry list

No. Booking entry Text Amount
Debit Credit
1a Opening, assets
1b Opening, liabilities
8a
8b
10
11
12a
12b
13a Closing, assets
13b Closing, liabilities

Cash Payables for goods & services
Bank account Miscellaneous current liabilities
Receivables from goods & services Current liabilities
Other receivables
Current assets Loans
Non-current liabilities
Furniture and facilities Total liabilities
Machines and equipment
Non-current assets Equity
Total equity
Chapter 3:
Payables for goods &

+ Cash - - services +
Bank account
Misc. current
- liabilities +
- Loans +
Receivables from
+ goods & services -
- Equity +
+ Other receivables -
+ Furniture and facilities -
Machines and
+ equipment -
Chapter 3:
3.6.11 Financial ratios trading company

Cash 10 Payable for goods & services 64
Bank 18 Debts to banks 76
Short-term marketable securities 32 Current liabilities 140
Receivables from goods & service 64
Inventories, trading goods 56 Loans 300
Current assets 180 Non-current liabilities 300
Furniture and facilities 60 Total liabilities 440
Vehicles 100
Land and buildings 300 Equity 200
Non-current assets 460 Total equity 200
640 640
3.6.11.1 Initial financial ratios
Calculate the following financial ratios (round to two decimal places)
Quick Ratio
Current Ratio

current asset ratio
Equity ratio
3.6.11.2 Restatement of assets
The auditors notice that the account “Short-term marketable securities” contains 30 shares of a supplier. These
shares constitute a third of the supplier’s total shareholders’ capital and are held for strategic reasons (i.e. they must
be disclosed in the account “Investments” of the non-current assets). This correction in disclosure of the shares de-
creases current assets by 30 and increases non-current assets by 30. Does this correction impact the financial ratios?
Financial ratio Change New value

Yes No
Quick ratio
Current ratio

current asset ratio
Equity ratio
3.6.11.3 Personal opinion
What is striking about the statement of financial position and the financial ratios?
Chapter 4:
Sole Proprietorship and Trading Company 130
Sole Proprietorship and Trading Company

After the previous chapters have introduced the fundamental structure and language of double-entry bookkeeping,
this and the following chapters now look at its specific application in certain situation. First, the specifics of the le-
gal form of a sole proprietorship are introduced, how they find representation in financial accounting, and what spe-
cific booking entries apply. Secondly, the business cycle and transactions of a trading company are introduced, in-
cluding the applicable financial activities and booking entries.
4.1 Introduction
1. How are the private activities of the owner in a sole proprietorship separated from the business activities?
2. What is the income of an entrepreneur as owner of a sole proprietorship?
3. How do the booking entries financially map the products cycles of a trading business?
4.2 Starting the new year
In the third year, Tom for the first time has multiple asset and liability & equity accounts in his statement of finan-
cial position. At the beginning of the financial year, these accounts must be opened in the same ways they are closed
at year-end (but the reverse booking).
Theory explanation

Year-start bookings
According to the structure of the statement of financial position as well as asset and liability & equity accounts, the
closing balance at the end of the financial year is also the opening balance at the start of the next financial year. So
in the same way as the accounts are closed by year-end, they are opened with two booking entries by start of the
year (with reverse booking entries). Opening only applies for the assets and liabilities & equity, i.e. the statement of
financial position, because the expense and revenue accounts start at 0 (i.e. they do not have an opening balance).
Chapter 4:
Table 30: Booking entries year-start: opening entries
Jan 1 Statement of financial pos. Liabilities & equity Opening, liability accounts
Jan 1 Assets Statement of fin. pos. Opening, asset accounts

Note. Own depiction
End of Theory Part
For Tom, the opening booking entries for the start of the year 2_04 are the reverse entries from the closing booking
entries at the end of the year 2_03, with the same amount.
Table 31: Tom’s booking entries A, 2_04, opening entries
Jan 1 Statement of financial pos. Liabilities & equity Opening, liability accounts 31 000
Jan 1 Assets Statement of fin. pos. Opening, asset accounts 31 000

Note. Own depiction
4.3 Tom’s private transactions in a Sole Proprietorship
Theory explanation

Sole Proprietorship
Organizations and companies need a legal structure, i.e. rules about right and obligations of the owners. In most le-
gal systems the available forms of legal structures can be grouped into partnerships and joint stock companies. The
specific forms within these groups mirror aspects like size of the organization, different level of engagement of dif-
ferent owners, etc. In addition to the legal forms with multiple owners, most legal system also offer the form of a
sole proprietorship which is for businesses that are owned by one private person only. While legally Tom as a pri-
vate person and the business are the same, i.e. Tom is held reliable for all business activities with all of his private
assets, they are still being kept separate from an accounting perspective. So on the bank account, transactions for the
business (e.g. payment of advertising expenses) as well as transaction for private purpose (e.g. payment for a vaca-
tion) might occur. To separate such private transactions, sole proprietorships have an equity account called «Pri-
vate». This private account holds all such private transactions of Tom through the business’s bank account: if he
pays his private vacation, he must pay back the respective account to the business, i.e. the business has a receivable
towards Tom. In a similar way, Tom might not pay monthly salary to his private bank account, instead every month
Chapter 4:
he only records his right to receive money, but money transfers to the private account only apply if Tom effectively
needs the money. So every month, the business increases the liability towards Tom for transferring the amount by
the time he actually needs it.
In addition to having a Private account representing the transaction between Tom and his business, sole proprietor-
ships also have special rules to calculate the income of Tom, the entrepreneur, sole proprietor and only owner.
Table 32: Calculation of Sole Proprietor’s Income
Position Explanation
Salary
Interest for the balance of the private account (Tom receives interest if the
+ Interest
businesses owes money to Tom and visa-versa)
If the business uses space in the house owned by Tom or in the apartment
+ Lease
that Tom rents, Tom charges the appropriate lease to the business.
As the legal form of a sole proprietorship is not a legal entity, the prof-
+/- Profit/loss
it/loss automatically ‘belongs’ to the sole proprietor.
= Sole Proprietor Income

Note. Own depiction
In addition to the private account, sole proprietorships also have an equity account. While the private account is used
for rather short-term transactions between the owner and the business, long-term contributions of the owner to the
business are recorded as equity and they are never being paid back (never meaning it is not planned to do so, of
course there are rare cases when the amount is partially or fully paid back, e.g. if the business is given up). By year-
end, the balance of the private account (either debit balance or credit balance) is being brought forward into the eq-
uity account as shown in Table 33 (in a generic way).
Table 33: Sole Proprietorship Private and Equity accounts
Private
Private withdrawals in cash or kind Entrepreneur’s salaries and interests (not paid
Payments for private household in cash or by bank, credited to the entrepre-
neur’s private account)
Lease for private premises used for business
Business expenses paid privately
Debit Balance (with credit surplus) Credit Balance (with debit surplus)
Equity
Opening balance
Reduction of long-term contribution Increase in long-term contribution
“Private” credit balance (with debit surplus) “Private” debit balance (with credit surplus)
Loss (from statement of profit or loss) Profit (from statement of profit or loss)
Balance
Note. Own depiction
End of Theory Part
Chapter 4:
4.3.1 Tom’s private transactions
Tom and his family being Orthodox Christians, he is looking for Christmas presents for his godfather girl and boy.
The girl asks for a dresser for her new room and the boy wants a new bicycle. Looking for different offers, Tom
finds out that the supplier that delivered the showroom furniture also offers dressers at a 50% discount for business
customers. The e-bike supplier offers a 50% discount for a child bike if it is used for a test-customer. So Tom orders
the dresser and the child bike through his business to enjoy the discounts. Both are delivered and he is receiving the
invoices of the two invoices. Because the business ordered the items, the business must pay for the items, they do
not belong to the business, instead the business is expecting Tom paying back the respective amounts.
Table 34: Tom’s booking entries B, 2_04
Jan 2 Private Payables for G&S Bike (Christmas present boy) 350
Jan 2 Private Misc. current liabilities Dresser (Christmas present girl) 205
Note. Own depiction
Theory explanation

Payables for Goods & Services or Miscellaneous Current Liabilities?
Bot accounts, payables for goods & services, as well as misc. current liabilities hold supplier invoices that must be
paid by the company. But the invoices that they hold are of different nature: payables for goods & services relates to
everyday core business, e.g. invoices for material or trading goods that the company orders daily, weekly or monthly
and that it uses daily for its operation. Misc. current liabilities in contrast hold invoices for one-time purchases (i.e.
seldom, maybe every 3 years) or non-operational purchases.
End of Theory Part
Additional private transactions:
1. He pays his private telephone invoice through the company’s bank account, CHF 64.
2. He uses his private postage stamps for his business correspondence, CHF 45.
3. Tom transfers a lottery win of CHF 8 000 into his company’s bank account. He would like to use it for
the planned growth of the business.
Table 35: Tom’s booking entries C, 2_04
1 Private Bank account Payment of private invoice 64
2 Admin. expenses Private Private postage stamps 45
3 Bank account Equity Capital increase 8 000

Note. Own depiction
Chapter 4:
4.4 Business Transactions and Booking Entries for Trading Company
Tom would like to focus more on trading bicycles. To stock up his showroom, he purchases an additional 12 bicy-
cles from a bicycle manufacturer.
Theory explanation

Accounting for a Trading Company
A trading company focuses on a certain customer group and then selects the products, e.g. fashion items, that appeal
to them. The customers then know what to expect when visiting the shop, online shop or catalogue. While some
trading companies, such as Zara or Migros, also produce (most of) the items that they sell and therefore they are not
real trading companies, smaller shops and boutiques are typically pure trading companies. For such trading compa-
nies, the core business is rather simple: buy products from supplier, present them in a shop, and sell them to custom-
ers at a higher price. The price difference between purchase price and selling price must cover all other expenses
such as salaries for employees, lease expense for renting the shop, expenses for furniture, government fees, etc.
For the core business of trading companies, three accounts apply (besides cash, bank, receivables and payables): ex-
penses for trading goods for transactions with suppliers, inventory for goods in our possession, and sales from trad-
ing goods for transactions with customers (see Figure 36).
Figure 36: General Model of Trading Company
Note. Own depiction
There are two different ways how to book the trading business. The first approach, called three-account method
with perpetual inventory, adds every purchase transaction to the inventory. This approach typically applies if the
shop uses a comprehensive ERP software for all aspects of its business (such as SAP or a similar software suite).
The software automatically handles and books all incoming material, inventory change, and sales. The second ap-
proach, called three-account method without perpetual inventory, assumes that all purchased items will be sold
within a very short time (or it becomes outdated soon and has no inventory value). Inventory is calculated at year-
end only for the items that are still in the shop. This second approach is used by smaller shops without much soft-
ware support which sell the items quickly. Table 36 compares the booking entries of the two approaches.
Chapter 4:
Table 36: Comparison of Trading Business booking approaches
Business transaction Three-account method Three-account method

(all payments in cash) with perpetual inventory without perpetual inventory
Purchase from supplier • Inventory, trading goods / Cash • Expenses for trading goods / Cash
• Expenses for trading goods / Inventory, trading goods
Sale to customer • Cash / Sales from trading goods
• Cash / Sales from trading goods
If more inventory:
• Inventory, trading goods / Expenses for trading goods
Year-end (no booking entry)
If less inventory:
• Expenses for trading goods / Inventory, trading goods
Note. Own depiction
At year-end, the two approaches are equal. The first one shows appropriate inventory at every point in time, but cal-
culation of the inventory value is more difficult (because items are purchased at different prices). In the following,
this book uses and further describes the second approach only.
Figure 37: Entries in Trading company accounts (approach without perpetual inventory)
+ Expenses for trading goods -

Purchases in cash Returns to suppliers
Invoices from Suppliers Supplier trade discounts
Purchasing expenses Supplier discounts
(Balance) Purchasing value of purchased goods
Decrease in inventory Increase in inventory
Balance: purchasing value of sold goods
+ Inventories, trading goods -

Opening balance
Increase in inventory Decrease in inventory
Balance
- Sales from trading goods +

Returns from customers Sales in cash
Customer trade discounts Invoices to customer
Customer discounts
Selling expenses
Balance
- Captive consumption +
Deliveries to the sole proprietor
Balance
Note. Own depiction
Explanation of the different entries:
• Purchases from suppliers, as well as sales to customers may be in cash or against invoice.
• Different discounts apply, from suppliers or to customers. There are two fundamental types of discounts:
first trade discounts, i.e. discount for fast payment which is under full control of the payer, and secondly bi-
lateral discounts, i.e. agreements that are used for price differentiation and which often are a result of nego-
tiation, e.g. retrospective discount if more than 100 products are ordered over the course of 12 months.
• Purchasing expenses: some items may require further actions and expenses before they can be sold, e.g. if a
Swiss fashion shop purchases T-shirts in China, different laboratory tests regarding chemicals used, import
fees, transportation (freight-in), etc. apply. All such expenses that apply to have the items in the shop ready
to be sold to the customers are recorded as purchasing expenses.
Chapter 4:
• Selling expenses: similar to the purchasing expenses, different expenses may apply to have the products at
the customer. Any such expenses are recorded as selling expenses.
As indicated above, transportation expenses may be for freight-in (transportation from our supplier to us) or freight-
out (transportation from us to our customer). Freight-in is considered as purchasing expenses, freight-out is consid-
ered as selling expense, i.e. lowering sales from trading goods or sales from produced goods. In addition to the core
transportation service, the invoice from the transportation company (i.e. freight-in or freight-out) may expenses for
services such as insurance, quality control/testing, financing, customs duty, or alike. Customs duty expenses are typ-
ically freight-in (because customs is paid when the goods are imported into a country, so freight-in), in rare cases
our customer may make us to pay for his customs expenses (however this is seldom and it makes working with the
customs authority difficult). Quality control may be freight-in (we test what the supplier sends to us) or freight-out
(the customer makes us achieve an additional quality certificate for our products before shipping to him).
End of Theory Part
4.4.1 Tom’s purchasing of trading goods
Tom would like to focus more on trading bicycles. To stock up his showroom, he purchases an additional 12 bicy-
cles from a bicycle manufacturer.
1. Invoice from Cyclemaker Ltd. for 12 bicycles at CHF 1 500 each.

2. Cash payment to transport company, CHF 210.
3. 1 bicycle has manufacturing defects. Tom returns it to the supplier.
4. Tom conducts negotiations and manages to obtain a retroactive discount of CHF 1 000.
5. Bank payment after 8 days. Deduction of 2% trade discount.
6. Tom collects the remaining CHF 500 from the year 2_03 in cash from the groups cashier.
Table 37: Tom’s booking entries D, 2_04
No. Debit Credit Text Amount
1 Expenses for trading goods Payables for G&S Supplier’s invoice 18 000
2 Expenses for trading goods Cash Purchasing expenses 210
3 Payables for G&S Expenses for trading goods Return to supplier 1 500
4 Payables for G&S Expenses for trading goods Discount 1 000
5 Payables for G&S Expenses for trading goods Trade discount (2 % of 15 500) 310
Payables for G&S Bank account Payment 15 190
6 Cash Receivables from G&S Collection in cash 500

Note. Own depiction
Chapter 4:
Figure 38: Tom’s expenses for trading goods account 2_04
+ Expenses for trading goods -

Invoice from Supplier 18 000 Return to supplier 1 500
Purchasing expenses 210 Supplier trade discount 310
Supplier discount 1 000
Purchasing value of purchased goods 15 400
Note. Own depiction
While the purchase price was CHF 1 500 per bicycle, after considering all discounts and additional purchasing ex-
penses, the average purchasing value of purchased goods is CHF 1 400 per bicycle (and Tom has 11 bicycles).
4.4.2 Tom’s selling of trading goods
Tom has some success in selling the bicycles:
1. Sale of 4 bicycles at CHF 1 900 each against cash, and shipment of 6 bicycles to a cycling association
against invoice.
2. Tom takes back one bicycle (one of the four sold for cash) because the customer does not like its color.
Reimbursement in cash.
3. Tom grants the cycling association a retroactive discount of CHF 1 140.
4. After 6 days, the payment for 5 bicycles (out of the 6 bicycles sold, one must still to be paid for by the cy-
cling association) is received in the bank account; deduction of 2 % trade discount.
5. The cash expenses of CHF 399 for packaging material, shipment and insurance at Tom’s expense must
still be entered in the accounts.
6. Tom gives his mother a bicycle as a birthday present.
Figure 39 shows the operational documents for such transactions, an order confirmation and the delivery note, i.e.
the confirmation that the products were delivered, typically to be signed by the customer, i.e. confirming the receipt.
Figure 40 shows an invoice and a receipt, i.e. the financial follow-up document to the operational process, the in-
voice as a notification to pay and the receipt as a confirmation to the customer to have paid.
Figure 39: Examples for order confirmation and delivery note
Note. Own depiction
Chapter 4:
Figure 40: Examples for order confirmation and delivery note
Note. Own depiction
Theory explanation

Captive consumption
Captive consumption describes business transaction which contain withdrawals of goods with which the firm cannot
make any profit. This may either be withdrawals for operating reasons (e.g. a coffee machines shop is using one of
the machines for its showroom) or withdrawals by the business owners. Since the balance of the expenses for trad-
ing goods accounts serves for comparison and for pricing, it should only contain those goods with which the compa-
ny has undertaken economic activities. For this reason, goods withdrawals for operating purposes, for instance ad-
vertising, are reposted into the corresponding advertising expenses account at purchasing value. Private goods with-
drawals by the business owner are generally at purchasing value. They are actual sale transactions at a special price
and are posted as operating income through the «captive consumption» account.
End of Theory Part
Table 38: Tom’s booking entries E, 2_04
No. Debit Credit Text Amount
1 Cash Sales from trading goods Cash sales 7 600
Receivables from G&S Sales from trading goods Customer invoices 11 400
2 Sales from trading goods Cash Return from customer 1 900
3 Sales from trading goods Receivables from G&S Discount 1 140
4 Sales from trading goods Receivables from G&S Trade discount (2 % of 8 550) 171
Bank account Receivables from G&S Payment for 5 bicycles 8 379
Chapter 4:
5 Sales from trading goods Cash Shipping expenses 399
6 Private Captive consumption Withdrawal at purchasing value 1 400

Note. Own depiction
These booking entries lead to the following details in the account «Sales from trading goods» after year end closing:
Figure 41: Tom’s sales from trading goods account 2_04
- Sales from trading goods +

Returns from customer 1 900 Sales in cash 7 600
Customer trade discount 171 Invoices to Customers 11 400
Customer discount 1 140
Shipping expenses 399
Net revenue from sold goods 15 390
19 000 19 000
Note. Own depiction
With the sales price of CHF 1 900 per bicycle, after considering all discounts and additional selling expenses, the
average net revenue per bicycle is CHF 1 710 (and 9 bicycles have been sold).
4.4.3 Tom’s inventory correction
After Tom’s purchasing (11 bicycles) and sales (9 bicycles), plus one bicycle withdrawn for his mother’s birthday,
Tom has 1 bicycle left in his shop by year-end. According to the three-account method without perpetual inventory,
this 1 bicycle is recorded as an increase in inventory and therewith reduces the expenses for trading goods. The ap-
plicable amount is the ‘purchasing value of purchased goods’ per bicycle, i.e. CHF 1 400.-. With this final booking
entry in the account expenses for trading goods, the final balance of the account, the purchasing value of goods sold,
can be calculated.
The sales value and the ‘purchasing value of sold goods’ are used to calculate the margin and mark-up, i.e. how
much higher the sales value is compared to the expenses required to have the bicycle ready.
Table 39: Tom’s booking entries F, 2_04
Dec 31 Inventories, trading goods Expenses for trading goods Increase in inventory 1 400
Note. Own depiction
Theory explanation

Mark-up vs. Margin
Chapter 4:
Mark-up and margin both describe the relation between expenses for trading goods (purchasing value of goods
sold), sales from trading goods, and the gross profit, i.e. the difference between these sales and expenses. The mark-
up expresses the gross profit as % of the expenses of trading goods (gross profit / expenses for trading goods). The
(gross profit) margin expresses the gross profit as % of the sales from trading goods (gross profit / sales from trading
goods). So the two concepts mark-up and margin use different however interrelated numbers for the calculations.
Given the structure of these interrelated numbers and the way they are used in the calculations, the mark-up is al-
ways higher than the margin. Figure 42 describes this relationship graphically.
Figure 42: Calculation of mark-up vs. calculation of margin
Note. Own depiction
Mark-up Gross profit margin

Expenses for trading goods 14 000 100.0 % 83.4 %
+ Gross profit + 2 790 19.9 % 16.6 %
= Sales from trading goods = 16 790 119.9 % 100.0 %
Knowing this structure, mark-up and margin can easily be converted: a mark-up of 15% can be understood as gross
profit of 15 and expenses of 100, i.e. sales of 115. So, the margin is 15 / 115 = 13%.
The gross profit margin and mark-up calculations do not include other important expenses such as salaries and alike
(because the purchasing value of goods sold only includes the expenses for purchasing trading goods minus related
expenses such as freight-in). However, the values are relatively easy to calculate, easy to compare across companies,
and for a trading company the gross profit is the result that must cover all the subsequent company costs such as sal-
aries, depreciation, administration, etc.
End of Theory Part
Finally, the year-end bookings apply, and all T-accounts can be closed, as well as the statement of profit or loss and
the statement of financial position can be compiled.
Chapter 4:
Table 40: Tom’s booking entries G, 2_04, year-end bookings
Dec 31 Equity Private Closing, private 1 974
Dec 31 Revenue Statement of profit or loss Closing, revenue accounts 16 790
Dec 31 Statement of fin. pos. Assets Closing, asset accounts 40 326
Dec 31 Liabilities Statement of fin. pos. Closing, liability accounts 40 326

Note. Own depiction
Payables for Expenses for trading Sales from trading

Cash goods & services goods goods
OB 400 210 1 500 OB 15 000 18 000 1 500 1 900 7 600
500 1 900 1 000 350 210 1 000 1 140 11 400
7 600 399 310 18 000 310 171
B 5 991 15 190 1 400 399
8 500 8 500 B 15 350 B 14 000 B 15 390
33 350 33 350 18 210 18 210 19 000 19 000
Bank account
OB 4 100 64 Misc. current liabilities Administration Exp. Captive consump.
8 000 15 190 B 205 205 45 B 45 B 1 400 1 400
8 379 205 205 45 45 1 400 1 400
B 5 225
20 479 20 479 Loans
B 10 000 OB 10 000
Receivables from G&S 10 000 10 000
OB 500 500
11 400 1 140
171 Equity
8 379 1 974 OB 6 000
B 1 710 8 000
11 900 11 900 B 14 771 2 745
16 745 16 745
Inventories,
trading goods
OB 15 000 Private
1 400 B 16 400 350 45
16 400 16 400 205
64
Furniture and facilities 1 400 B 1 974
OB 5 000 B 5 000 2 019 2 019
5 000 5 000
Tools and appliances

OB 6 000 B 6 000
6 000 6 000
Chapter 4:

Cash 5 991 Payables for goods + services 15 350
Bank account 5 225 Misc. current liabilities 205
Receivables from G&S 1 710 Current liabilities 15 555
Total equity 14 771
40 326 40 326
Note. Own depiction

Gross income 2 790
8900 – 8999 - Taxes
Note. Own depiction
Chapter 4:
4.5 Summary

Current liabilities
liabilities
• Analysis
o Quick ratio
assets Equity
o Equity ratio

Account Designation
EBITDA
EBT
89 - Taxes

of private account)
Transport costs
Transport costs
Decrease in inven-
tory
Chapter 4:
5 Production
6 Value adjustments

Chapter 4:
4.6 Exercises
4.6.1 Increase in inventory
Opening balance 50 kg at 1.00 = 50 Sales 1 850 kg at 2.00 = 3 700

Purchases 2 000 kg at 1.00 = 2 000 Sales expenses at our expense 50
Purchasing expenses 80 Sales price reductions 170
Purchasing price reductions 200 Final inventory 200 at 1.00 = 200
Statement of financial position as per

Jan 1, 2_04 Inventories, trading goods
Expenses for trading goods Sales from trading goods

Dec 31, 2_04 Statement of profit or loss for 2_04
4.6.2 Decrease in inventory
Opening balance 400 kg at 1.00 = 400 Sales 2 800 kg at 2.00 = 5 600

Purchases 2 500 kg at 1.00 = 2 500 Sales expenses at our expense 100
Purchasing expenses 70 Sales price reductions 80
Purchasing price reductions 250 Final inventory 100 at 1.00 = 100

Jan 1, 2_04 Inventories, trading goods

Dec 31, 2_04 Statement of profit or loss for 2_04
Chapter 4:
4.6.3 Booking entries
a) Book the following transactions:

1. The business owner pays business expenses with private funds, 35.
2. The business owner withdraws business cash for private purposes, 550.
3. A dentist’s invoice of the business owner is paid through a bank transfer for the business ac-count, 132.
4. The business owner is credited 3% own interest from the equity of 65 000.
5. The business owner increases his capital contribution by signing over a property to the business, 455 000.
6. The business owner withdraws furniture in the amount of 3 500 from the business for his private household.
7. The business owner pays the expenses for an employee’s board and lodging in his private house, 175.
8. Balance the private account: debit 12 250, credit 10 000.
b) Explain the significance of this booking entry of point 8.
4.6.4 Product calculation
Opening balance 65, Gross purchases 420, Gross sales 700, Purchasing expenses ?, Reduction of revenue 62,
Increase in inventory 8, Purchasing value of goods sold 475, Reduction of expenses 22.
Enter the above figures into the following accounts:
Inventories, trading goods Expenses for trading goods Sales from trading goods
Calculate the following values:
... the purchasing expenses ____________________________
... the net sales ____________________________
... the final inventory of goods ____________________________
... the gross profit ____________________________
... the mark-up ____________________________
... the gross profit margin ratio ____________________________
… name two other purchasing expenses other than shipping expenses ____________________________
____________________________
Chapter 4:
4.6.5 Missing values
Calculate the missing values in the following table:
Balances before closing Balances after closing
Equity Private Profit/loss Equity

Debit surplus Credit surplus
a) 23 000 3 000 -1 000 ?
b) 48 000 2 000 4 000 ?
c) 37 000 7 000 ? 28 000
d) 75 000 500 ? 77 000
e) 12 000 ? ? 2 700 16 000
f) 54 000 ? ? -3 600 43 000
g) ? 4 500 2 000 97 500
h) ? 19 000 -4 000 66 000
4.6.6 Entrepreneur’s income
The following values are given for the sole proprietorship of Frances Kellaway:
• the provisional profit of CHF 52 750 before entrepreneur’s wage and interest,
• private withdrawals of CHF 15 000 and
• the starting capital of CHF 150 000.
Calculate the Frances Kellaway’s wage, the interest on the starting capital, Kellaway’s lease income, as well as the
sole proprietorship’s profit or loss and the entrepreneur’s income for the following scenarios:
a) Entrepreneur’s wage: CHF 5 000 per month, and own interest: 3% on the starting capital
b) Entrepreneur’s wage: CHF 2 000 per month, and own interest: 5% on the starting capital
c) Entrepreneur’s wage: CHF 0, and own interest: 0 %
4.6.7 Booking entries for a trading company
John Fergusson deals with lawn mower equipment.
a) Customer Ms. June Deere orders a mower, catalogue price CHF 750, with CHF 50 autumn discount.
b) John Fergusson receives the mower that he ordered for Ms June Deere from his supplier Campbell and im-
mediately pays the net price of CHF 350 in cash as per agreement.
c) John Fergusson delivers the mower to his customer Ms June Deere.
d) Ms June Deere pays the invoice. She transfers the amount, less 2% trade discount, to the bank account.
e) What is John Fergusson’s mark-up on the mower?
Chapter 4:
4.6.8 Mixed business transactions
Name the journal entries of the following business transactions:
1. We sell goods for CHF 25 000, ½ in cash, the rest against invoice.
2. Customers pay invoices in the amount of CHF 6 000 by bank transfer but first deduct a discount of 2.5%.
3. Customers return delivered goods, CHF 2 380.
4. We purchase goods for CHF 15 000 against invoice.
5. We pay for the purchased goods by bank transfer (point. 4.), but previously deduct 2% trade discounts
6. A customer delivers office accessories and supplies in the amount of CHF 2 000. We offset his invoice
against receivables from him.
7. A supplier sends us a credit note for CHF 500 for a retroactive price reduction.
8. The logistics carrier sends an invoice for:
• import duties CHF 450
• foreign customs duties CHF 1 750
• freight-out CHF 5 000
• freight-in CHF 3 500
9. We pay CHF 100 for the shipment of a delivery to a customer in cash. Delivery conditions are free of charg-
es, i.e. delivered to the customer’s door.
10. We entered an invoice to a customer with CHF 450 instead of CHF 540 by mistake. Correct this error.
Chapter 4:
4.6.9 Booking entries for mixed business transactions
1. We sell goods in the amount of CHF 150 000 against invoice.

2. Cash payment for printing a new leaflet, CHF 550.
3. A customer who owes us CHF 20 000 pays this amount by post but first deducts 4% discount and 3% trade
discount.
4. The owner left you, the accountant, a sheet of paper on which he wrote that he had withdrawn goods from the
business the night before, which he used as follows:
• CHF 50 (selling price CHF 65.00) as a present for his godchild;
• CHF 400 for his private household;
• he sold goods in the amount of CHF 520 to these business friends against cash (purchasing value
CHF 450, standard selling price CHF 950).
• CHF 80 as an (advertising) present for two business friends;
5. A supplier grants us 2% trade discount on his receivable of CHF 5 000. We pay by bank transfer.
6. Barnes supplies two bicycles for CHF 3 700 to the business, which the owner wants to use privately.
7. The logistics carrier sends an invoice for the last 6 months:
• bicycle shipment (point 6) CHF 57
• freight-in CHF 450
• freight-out CHF 220
8. A customer returns defective goods in the amount of CHF 750 and pays the remaining CHF 2 950 by post.
9. We pay the carrier’s invoice (point 7) by bank transfer but deduct 2% trade discount.
10. Customers pay due invoices:
• their bank transfers, CHF 5 600
• their deductions of trade discount, CHF 250
11. The inventory of goods amounts to CHF 18 000 at the beginning of the year and to CHF 15 000 at year end.
What does the adjusting entry look like?
Chapter 4:
4.6.10 Coherent exercise
a. Keep the accounts (booking entry list and ledger) of the beverage trading company of Fred Hensing.
b. Draw up the closing statement of financial position, the statement of profit or loss in account format, and the
statement of profit or loss in reporting format.
Statement of financial position, Fred Hensing, as per

Assets Jan 1, 2_04 Liabilities
Bank account 15 000 Misc. current liabilities 5 000
Other current receivables 5 000
Inventories, trading goods 40 000 Loans 85 000
Current assets 85 000 Non-current liabilities 85 000
Total liabilities 110 000
Furniture and facilities 15 000
Vehicles 10 000 Equity 200 000
Land and buildings 200 000 Total equity 200 000
Non-current assets 225 000
310 000 310 000
Business transactions:
1. Open the statement of financial position accounts.

2. Various customers buy goods in cash 230 000
3. The Restaurant MountainView pays its invoice by bank account, as follows:
our invoice 10 000
less 3% discount - 300 9 700
4. Wage payments are made as follows:
to the two employees through the bank account, 25 000 each 50 000
by credit note to Hensing’s private account 30 000 80 000
5. Hensing purchases goods for CHF 100 000 and immediately pays by
bank transfer, deducting 5% trade discount 95 000
6. Freeman pays some cash into the bank account 190 000
7. Hensing purchases a new delivery van against invoice 41 000
8. Hensing pays the invoice for the vehicle (41 000) as follows
he delivers goods to the seller 1 000
less discount 5 000
his cash payment 35 000
Chapter 4:
9. Hensing submits the following receipts to the accountant:

business lunch with a potential customer (paid for privately) 250
goods withdrawals for private use, purchasing value 800
cash withdrawals 3 000
10. Hensing pays the annual lease for warehouse and office by bank transfer 15 000
11. The telephone bill is debited to the bank account 3 000
12. Hensing receives an inheritance after the death of his uncle and transfers 20 000 to the business bank account
13. Sale of the old vehicle against invoice for 10 000
14. The invoice for taxes arrives. 15 000
15. The following bank payments apply
Interest payment for the loan 5 000
Part repayment of the loan 30 000
Payment of payables for goods + services 5 000
Payment of misc. current liabilities 7 000
Total bank transfer 45 000
16. The final inventory of goods amounts to 30 000
17. Balance the private account.
Booking entry Amount

Date
Debit Credit
1
Chapter 4:
10
11
12
13
14
15
16
17
18
Statement of financial position, Fred Hensing, as per

Assets Dec 31, 2_04 Liabilities
Cash Payables for goods + services
Bank account Misc. current liabilities
Receivables from G&S Current liabilities
Other current receivables
Inventories, trading goods Loans
Current assets Non-current liabilities
Total liabilities
Furniture and facilities
Vehicles Equity
Land and buildings Profit of the period
Non-current assets Total equity
Chapter 4:
Expenses Statement of profit or loss, Fred Hensing, for 2_04 Revenue

Personnel expenses Captive consumption
Lease expenses Income from land and buildings
Advertising expenses
Other operating expenses
Depreciation
Financial expenses
Expenses for land and buildings
Tax expenses

3000 - 3999 Sales from goods and services
Gross income
5000 - 5999 - Personnel expenses
6000 - 6799 - Other operating expenses
6800 - 6899 - Depreciation and Amortization
6900 - 6999 +/- Financial Result (financial profit or loss)
7000 - 7999 +/- Accessory operating result
8000 - 8999 +/- Extraordinary and non-operating result
Profit before taxes
8900 - 8999 - Taxes
Chapter 5:
Payment Transactions and Production 154
Payment Transactions and Production

In contrast to trading, production typically involves additional business aspects such a sufficient production capaci-
ty, i.e. production machines being sufficiently available and ready, shipment in case of central production, currency
translation, as well as engaging agents for selling and implementation partners for installing and operating the ma-
chines in local areas. Also, the production, purchase, sales and delivery process may be customer specific, and there-
fore the producing company may ask the customer for a prepayment. Partial deliveries may apply according to a
milestone plan. Some of these aspects require special consideration from a financial perspective, with some being
beyond the scope of this book, e.g. currency translation aspects. Different aspects are not exclusive for production
companies instead they are also found in other companies, especially because in reality, companies combine differ-
ent activities instead of being single business companies.
5.1 Introduction
1. How much money does a company effectively receive using different payment methods?
2. How to production machines financially turn into revenue and cash?
3. How should unfinished goods on the production belt be considered at year end?
5.2 Cash difference and Petty Cash
First thing for Tom is opening the asset and liability and equity accounts again:

Note. Own depiction
Chapter 5:
5.2.1 Cash difference
Theory explanation

Year-end activities
Besides the year-end bookings, different additional activities apply for the accounting department. These include
counting the inventory, confirm valuation of fixed assets, counting the cash balance, check valuation of assets with a
market value (including stock market prices, vehicles, items in stock), assess likelihood that customers pay the out-
standing receivables, arranging the audit services with the auditor, and alike. Some of these activities might be
pushed to November (or January), but they must apply around closing of the financial year.
Depending on the outcome of these activities, different actions must be taken. Inventory booking for trading good
has already been introduced. For valuation of fixed assets, in case of the risk that customers do not pay their receiv-
ables, or market prices of inventory item drop, value adjustments apply (see Chapter 6). For differences in the cash
register, the following rules apply:
• A cash deficit is booked into Other operating expenses (account 6700).

• A cash surplus is booked into Other operating income (account 3600).
End of Theory Part
As part of the year-end activities, Tom should have calculated the cash amount in the cash register. As he forgot do-
ing so, he is doing it in January of the year 2_05: he is startled to see that instead of the CHF 5 991 to be expected
according to his accounts, he only finds CHF 5 941.
Jan 2 Other operating expenses Cash Cash difference 50

Note. Own depiction
5.2.2 Levels of Cash
Besides recording all transactions of the company’s various activities and making them comparable through finan-
cial lenses, the finance department of a company must support the company’s top management with various subject
matter expert. One such area for support, suggestions, forecasting and planning includes the right levels of cash at
hand, including cash in the right currency (which is not part of this lecture). Looking at last year’s bank transaction,
the exact dates of the transactions matter, because Tom might have had a negative bank balance (see mock-up bank
account statement in
Chapter 5:
Figure 43).
Figure 43: Excerpt of Tom’s bank statement of year 4
Bank Statement
Date Text Debit Credit Valuta Balance

Jan 1 Opening Balance 4 100.00
Feb 10 Transfer to Swisscom (Swiss Telecom) 64.00 17.01. 4 036.00
Feb 20 Transfer from Tom 8 000.00 31.03. 12 036.00
Apr 10 Transfer to Cyclemaker 15 190.00 14.04. -3 154.00
Oct 15 Transfer Cycling Association 8 379.00 01.05. 5 225.00
Dec 31 Closing Balance 5 225.00
Note. Own depiction
The bank statement shows, that between April 10 and October 15, the bank account had a negative balance. The
bank typically allow such ‘short-term’ operating negative balances (i.e. the ‘automatically’ offer a loan, up to a pre-
defined limit), however they charge significant interest for these types of credit lines. Paying such invoices is unfor-
tunate in Tom’s case, because he would have had enough cash in his register to cover the negative bank balance.
Such understanding of cash balances, forecasting and planning these balances and transferring respective amounts
early is part of the subject matter duties of the finance department.
5.3 Payment types and anticipatory tax
For payments from customers, Tom already accepts cash payments (in this case no invoice is necessary, only a
payment receipt), as well as payments of invoices by money transfer to his bank account (and the customer may opt
to make this payment from his own bank account or from a transfer company such as Western Union, Tom will not
see the difference). Now he is thinking about additional payment methods.
Personal Opinion
What alternative payment methods do exist and what are arguments why Tom should be thinking about
them and what are limitations/cons?
Pro arguments Con arguments
Chapter 5:
5.3.1 Credit card payments from customers
Theory explanation

Credit card payments and other intermediaries
Credit card companies are payment intermediaries: they pay in behalf of the credit card holder to the recipient and
later collect the money from the credit card holder. They charge a commission fee for their service (typically a per-
centage of the payment amount), the traditional credit cards like Visa, MasterCard and American Express charge
this fee from the recipient (maybe an annual fee from the credit card holder). Figure 44 shows the steps of a credit
card sales process to customers (for debit cards the process is identical, with the difference that the card holder must
have an account with the card organization with a positive balance).
Figure 44: Process of credit card sales to customer
1. Identification and consent to debiting
Tom’s Cycle Shop 2. Payment voucher 4. Settlement Customer

Card organisation
3. Credit note 5. Credit note
Note. Own depiction
The traditional credit cards act as direct intermediaries, so they facilitate the payments between the seller and buyer.
Other intermediaries such as PayPal offer additional services and try to keep the payment within their own payment
infrastructure. For such extended intermediaries, different fees may apply: a reduced fee for transactions within their
network (e.g. from the buyer’s PayPal-account to the seller’s PayPal-account) and a higher fee for transactions out-
side of their network (e.g. from the buyer’s credit card to the seller’s PayPal-account).
From a bookkeeping perspective of the seller (i.e. shop) he does not receive cash with the sales, instead he has a re-
ceivable from credit card organizations. When the credit card organization pays a few days later, it does not pay the
full receivable amount, the remaining amount, which is the transaction fee, is booked as financial expenses.
End of Theory Part
Tom sells three bicycles for a total of CHF 6 000. The customer pays by credit card. A few days later, the card or-
ganization transfers CHF 5 790 into the bank account.
Feb 15 Receivables, card organization Sales from trading goods Sales, bicycles 6 000
Feb 20 Bank account Receivables, card organization Credit note 5 790
Feb 20 Financial expenses Receivables, card organization Commission 3.5% 210
Note. Own depiction
Chapter 5:
5.3.2 Prepayments paid to suppliers
Theory explanation

Prepayments
For large, specific and/or customized orders (e.g. customized machine), sellers and buyers oftentimes agree on a
payment plan, including prepayments. So instead of waiting for delivery of the machine and paying 100% of the
price then, the agreement may be something like 1/3 to be paid upon ordering (i.e. at the beginning of the production
of the machine), 1/3 to be paid upon delivery of the final machine, and 1/3 to be paid after final installation of the
machine at the customer location. So instead of one delivery and one payment, one delivery and 3 payments apply.
The second and third payments are payment of supplier invoices. However, the first payment from the buyer misses
any return service of the seller/producer, and therefore this prepayment is seen as obligation for the seller/producer
to in the future deliver on what he has agreed on (so it is booked into the liability account «Prepayments received»,
2030), and a right of the buyer to collect what was agreed upon, i.e. the specific machine (so it is booked into the as-
set account «Prepayments paid», 1192). Upon delivery of the machine, this prepayment obligation and liability con-
cludes.
End of Theory Part
Tom senses that there are new opportunities for his firm in the production of special bicycle spokes. He enters nego-
tiations for suitable production facilities. The supplier and Tom conclude the following agreement:
• Construction of a tailor-made machine at the price of CHF 20 000

• 1st payment on conclusion of the agreement: CHF 6 000 (paid by bank account)
• 2nd payment on delivery: CHF 10 000 (paid by bank account)
• 3rd payment 60 days after delivery: CHF 4 000 (paid in cash)
Mar 1 Prepayments paid Bank account 1st payment (deposit) 6 000
Apr 15 Machines Misc. current liabilities Delivery of the machine 20 000
Misc. current liabilities Prepayments paid Offset deposit (March 1) 6 000
Misc. current liabilities Bank account 2nd payment 10 000
Jun 15 Misc. current liabilities Cash 3rd payment 4 000
Note. Own depiction
Chapter 5:
5.3.3 Invoice and payment automation: ISO 20022
Theory explanation

ISO 20022
One practical challenge with received payments is to map them to the receivables, i.e. the invoices issued. Often-
times bank charges apply, payments might be in foreign currency, and different exchange rates apply, as well as
many other reasons why the amounts of payment and receivable do not match. There are different initiatives to
make payments and matching payment easier. Typically, this starts with the invoice where a code is added (e.g. a
QR code, see Figure 45, which includes the order number, the customer number, the amount to be paid, and more),
and this code is then forwarded throughout the payments, in the case of international payments this might include
various international payment transaction banks. As the payment arrives at the issuer of the invoice together with the
code, he can easily match the payment with the receivable (i.e. with the customer, order and invoice). One such ini-
tiative is the ISO 20022 standard. However, other initiatives exist, namely electronic payment networks.
Figure 45: Example of a QR payment slip and comparison to old payment slip
Note. Foundation «Stiftung Green Ethiopia»

End of Theory Part
Chapter 5:
5.3.4 Bank account interest and Anticipatory Tax (in Switzerland)
Theory explanation

Interest on bank accounts and anticipatory withholding taxes in Switzerland
The bank account of a company may have a positive balance or a negative balance (so the bank may owe money to
the company or the company may owe money to the bank). Traditionally, companies were paid interest on positive
bank account balances, so the banks compensated companies for lending them money. Since the financial crisis in
2008, interests have come under pressure, even to the point where companies must pay interest for positive account
bank balances (i.e. negative interest rates). In addition to the interest, charges, commissions and fees apply which the
bank charges to the company. While interests that the company receives from the bank are booked as financial in-
come (6850), the interest that the company must pay, together with charges, commissions and fees, are booked as fi-
nancial expenses (6800).
In Switzerland, a special taxation applies on financial income, the anticipatory withholding tax. Its intention is that
companies and individuals report their financial income in the tax report. The mechanism of the tax is that the bank
must pay 35% of the financial income, i.e. interest, to the government, only 65% are paid to the customer. If the cus-
tomer reports the financial income in his tax report, the 35% that the government has already received may be re-
claimed and deducted from the customer’s tax bill (see Figure 46 for the graphical explanation of the process). The
anticipatory withholding tax is not taxation of financial income, it is rather a method to make sure that financial as-
sets as well as financial income are disclosed and part of the profit calculation. The taxation is on the profit.
Figure 46: Process of anticipatory withholding tax in Switzerland
Bank 65 % Account holder

35 %
Tax administration Reimbursement
Note. Own depiction
End of Theory Part
On June 30, Tom receives a bank statement listing a gross interest for Tom of CHF 300. However, only CHF 195 is
deposited into his bank account, the rest being marked as anticipatory tax. After exceptional tax filing in July, he can
reclaim the anticipatory tax by July 30.
Chapter 5:
Jun 30 Bank account Financial income Interest, net 195
Receivables, anticipatory tax Financial income Deduction of antic. tax 105
Jul 30 Bank account Receivables, anticipatory tax Reimbursement antic. tax 105
Note. Own depiction
5.4 Production company
With the new machine for producing spokes, Tom is no longer a trading business only, instead he is also starting
some production activities. The financial processing of production is very similar to trading business on the purchas-
ing and selling side, particularities exist regarding the production process and products that have been produced (in
full or partly) but not sold, i.e. raw material, supplies, as well as other production expenses such as salaries, lease,
electricity, etc. have been used for the production of these products and they are put to inventory.
Theory explanation

Production Company
For Expenses for raw material and inventories of raw material, as well as expenses for supplies and inventories of
supply, the accounting is identical as for the purchasing side of trading activities. The difference between material
and supplies is that material is/becomes a main part of the product and can be specifically assigned to one final
product (e.g. car seats is material for the car). Supplies are materials that are used for the production process, but
they cannot be directly seen within the final product (e.g. oil and grease for machines, screws, bolts, etc. for cars).
The selling side of the production company is the same as it is for the trading activities, except if a company produc-
es a product for its own use (e.g. producing the own production machine instead if purchasing it from a supplier).
Such a transaction is called «goods and services on own account», and the chart of accounts hold a revenue account
by this name. While selling to a customer leads to more assets in the form of cash (or more receivables and then
more money in the bank account), the goods and services on own account transaction leads to more assets in the
form of machines: machines / goods and services on own account CHF 20 000.
The significant difference between trading activities and production activities is with the inventory for finished
goods, semi-finished goods and work in process, for which the valuation includes production expenses. The increase
of such inventory is recorded in a revenue account called «changes in inventory». Figure 47 compares the trading
and production activities graphically.
Chapter 5:
Figure 47: Comparison of trading activity accounts and production activity accounts
Note. Own depiction
5.4.1 Purchasing side
Figure 48: Entries in Production company accounts, purchasing
+ Expenses for materials / expenses for supplies -

Purchases in cash, gross Returns to suppliers
Invoices from suppliers Supplier trade discounts
Purchasing expenses Supplier discounts
Sales of material purchasing value
(Balance: Purchasing value of purchased goods)
Decrease in inventory Increase in inventory
Balance: Purchasing value of sold goods
+ Inventories, raw materials / inventories, supplies -

Opening balance
Balance
Note. Own depiction
The only difference to the purchasing of a trading company is the position «material sales at purchasing value» on
the right side of the accounts «Expenses for materials» or «Expenses for supplies». It shows selling materials or
supplies to a fellow company or even competitor in order to support his smooth supply and uninterrupted business.
Chapter 5:
5.4.2 Selling side
Figure 49: Entries in Production company accounts, selling
- Sales from produced goods +

Returns from customers Sales in cash
Customer trade discounts Invoices to Customers
Customer discounts
Sales commissions
Selling expenses
Balance: net revenue from produced goods
- Goods and services on own account +

Deliveries to the company itself
Balance
Note. Own depiction
The only difference to the selling of a trading company, besides the account «Goods and services on own account»,
is the position «Sales commissions». Production companies oftentimes sell their products and services through
agents, especially in new markets (later as these markets mature, the companies might set up their own branch).
Such agents typically get a sales commission for each sale that they support and complete.
5.4.3 Produced goods in stock
At the end of the year, some goods might have been produced, fully or partially, but not been sold yet. So, the re-
spective material and supplies are no longer in the inventory, and employee hours, i.e. salary expenses, as well as
other operational expenses have been spent on the production of these goods. And all these expenses are converted
into increase in «inventory of finished goods» or «inventory of semi-finished goods» («work in process» describes
services such as planning of an architect, that is only partially finished). As the expenses for these not sold goods are
already booked, e.g. expenses for materials / cash, or expenses for wages and salaries / cash, the increase in invento-
ry of finished goods or semi-finished goods (as well as work in process) is booked as revenue, called changes in in-
ventory. Every year-end, the company counts the inventory of finished goods, semi-finished goods, work in progress
and valuates the goods. An increase in inventory value is booked as revenue, a decrease in inventory value is booked
as expense (in the same revenue account changes in inventory):
• Increase in finished good inventory value: inventories, finished goods / changes in inventory
• Decrease in finished good inventory value: changes in inventory / inventories, finished goods
Figure 50: Entries in Production company accounts, production
+ Inventories, finished goods, inventories semi-finished goods, work in process -

Opening balance
Balance
- Changes in inventory +
Balance (= revenue) Increase in inventory
Or
- Changes in inventory +
Decrease in inventory Balance (= negative revenue)
Chapter 5:
Note. Own depiction

End of Theory Part
5.4.4 Tom starts production
As planned, Tom complements his business activities with the production of spokes and hubs. After a long search,
he has found a supplier for the required special alloy. On August 5, he purchases raw material for CHF 15 000
against invoice. On August 18, before payment of the invoice and after skillful negotiations, he obtains a subsequent
price reduction of 15 %. Until the end of the year, Tom converts most of the raw material into finished goods. On
November 24, he sells finished goods for CHF 30 000 (market value) against bank account payment. During De-
cember, Tom improves his production process by enhancing his production machines himself. The enhanced Ma-
chine is ready by December 20 and the value of this work is estimated to be CHF 500. On December 28, Tom pays
due invoices in the total amount of CHF 20 205 (CHF 20 000 for payables for goods + services, CHF 205 for misc.
current liabilities). When he takes stock at the end of the year, Tom finds:
• raw material in the value of CHF 3 000 in the raw material inventory
• finished goods in the value of CHF 8 000 in the finished goods inventory
• 8 bicycles with a book value of CHF 11 200 in the trading goods inventory
In addition, Tom expects a very good year and for the first time he credits himself a salary of CHF 24 000.
Aug 5 Expenses for material Payables for goods & services Purchase of raw material 15 000
Aug 18 Payables for goods & services Expenses for material Discount 2 250
Nov 24 Bank account Sales from produced goods Sales to customers 30 000
Dec 20 Machines G&S on own account Improvement of machine 500
Dec 28 Payables for goods & services Bank account Payment of invoices 20 000
Misc. current liabilities Bank account Payment of invoices 205
Dec 31 Inventory, raw material Expenses for material Increase in raw material 3 000
Inventory, finished goods Changes in inventory Increase in finished goods 8 000
Expenses for trading goods Inventory, trading goods Decrease in trading goods 5 200
Dec 31 Expenses for wages and salary Private Credit note own salary 24 000
Note. Own depiction
Chapter 5:
The payment of CHF 24 000 salary to Tom is over-simplified. In reality, social security would apply.
Theory explanation

Social security for salary payments
Every country requires companies to contribute social security, also called pension, when paying salary, sometimes
also private income tax. Unfortunately, most countries use very different approaches how to do so. In Switzerland, 2
types of social security exist: AHV (elderly contribution scheme) and BVG (pension saving scheme). 50% of both
contributions are deducted from the salary of the employee, 50% must be contributed by the employer. At the be-
ginning of the year the applicable AHV and BVG rates are defined by employee and then deducted from every sala-
ry payment. At the end of the year, any correction is calculated (which may apply because of changing salaries, such
as bonuses) and the company pays the amount to the social security authorities (in Switzerland: AHV and BVG),
and calculates the next year’s deduction amounts for the employees, taking into consideration this year’s correction.
So in the chart of accounts, there are two accounts «payables to AHV» and «payables to BVG». The booking entries
for a salary payment of 1 000 with 5% AHV and 8% BVG (for the employee) would be:
• Expenses for social security / payables to AHV 100 (5% of 1 000 by the employee and by the employer)
• Expenses for social security / payables to BVG 160 (8% of 1 000 by the employee and by the employer)
• Expenses f. wages and salaries / Bank 870 (payment to employee)
End of Theory Part
5.5 Compiling the year-end financial statements
Bringing these booking entries forward into the T-accounts leads to the following accounts:
Cash Payables from goods & svces Expenses for materials Sales from produced goods
OB 5 991 50 2 250 OB 15 350 15 000 2 250 B 30 000 30 000
4 000 20 000 15 000 3 000 30 000 30 000
B 1 941 B 8 100 B 9 750
5 991 5 991 30 350 30 350 15 000 15 000 Sales from trading goods
B 6 000 6 000
Bank account Misc. current liabilities Expenses for trading goods 6 000 6 000
OB 5 225 6 000 6 000 OB 205 5 200 B 5 200
195 10 000 10 000 20 000 5 200 5 200 G&S on own account
105 20 000 4 000 B 500 500
5 790 205 205 Other operating expenses 500 500
30 000 B 5 110 B 0 50 B 50
41 315 41 315 20 205 20 205 50 50 Changes in inventory
B 8 000 8 000
Receivables from G&S Loans Exp. for wages and salaries 8 000 8 000
OB 1 710 B 1 710 B 10 000 OB 10 000 24 000 B 24 000
1 710 1 710 10 000 10 000 24 000 24 000 Financial income
195
Receivables, card org. Equity Financial expenses B 300 105
OB 0 5 790 OB 14 771 210 B 210 300 300
6 000 210 24 000 210 210
B 0 B 44 361 5 590
Chapter 5:
6 000 6 000 44 361 44 361

Receivables, anticip. tax Private
OB 0 105 B 24 000 24 000
105 B 0 24 000 24 000
105 105
Machines Inventories, fin. goods
Prepayments paid OB 0 OB 0
OB 0 6 000 20 000 8 000 B 8 000
6 000 B 0 500 8 000 8 000
6 000 6 000 20 500 B 20 500
20 500 20 500
Inventories, trading goods
OB 16 400 5 200 Furniture and facilities Tools and appliances
B 11 200 OB 5 000 B 5 000 OB 6 000 B 6 000
16 400 16 400 5 000 5 000 6 000 B 6 000
Inventories, raw mat.

OB 0
3 000 B 3 000
3 000 3 000
Chapter 5:
Table 49: Tom’s booking entries G, 2_05, closing entries
Dec 31 Private Equity Closing, private account 24 000
Statement of profit or loss Expenses Closing, expense accounts 39 210
Revenue Statement of profit or loss Closing, revenue accounts 44 800
Statement of profit or loss Equity Profit of the period 5 590
Statement of financial position Assets Closing, asset accounts 62 461
Liabilities Statement of financial position Closing, liability accounts 62 461
Note. Own depiction
Table 50: Statement of profit or loss for January to December 2_05, in T-account format
Expenses Statement of profit or loss 2_05 Revenue

Expenses for materials 9 750 Sales from produced goods 30 000
Expenses for trading goods 5 200 Sales from trading goods 6 000
Expenses for wages and salaries 24 000 G&S on own account 500
Other operating expenses 50 Changes in inventory 8 000
Financial expenses 210 Financial income 300
Profit 5 590
44 800 44 800
Note. Own depiction

Gross income 29 550
8900 – 8999 - Taxes
Note. Own depiction
Chapter 5:

Receivables from G&S 1 710
Inventories, raw materials 3 000 Non-current liabilities 10 000
Inventories, finished goods 8 000 Total liabilities 18 100
Equity 44 361
Machines 20 500 Total equity 44 361
62 461 62 461
Note. Own depiction
Personal Opinion
How do you assess the fifth year of Tom?
Aspects to keep Aspects to improve
5.6 Introductory example “Work in process” (not yet invoiced services)
Theory explanation

Work in process
In September 2_01, the engineer Eva Wanner secures an order, which will take two years to complete. She has been
commissioned to establish statics plans for railroad bridges in the Bernina area. The expected volume of orders
amounts to approx. CHF 13m. A dedicated “Sales from services” account is kept for this. For purposes of simplifi-
cation, the invoice date is identical with the date on which the in-voice is paid by bank transfer.
5.6.1 Year 2_01
On October 15 Eva Wanner receives a bank transfer of CHF 1m for the services it has invoiced. At year end Eva
Wanner values its own services that have not yet been invoiced at CHF 4m.
Chapter 5:
Table 53: Work in process, Year 1
Oct 15 Bank account Sales from services Services invoiced 1 000 000
Dec 31 Work in process Changes in inventory Increase in inventory 4 000 000
Sales from services Statement of profit or loss Closing 1 000 000
Changes in inventory Statement of profit or loss Closing 4 000 000
Statement of financial position Work in process Closing 4 000 000
Note. Own depiction
Work in process Changes in inventory Sales from services

OB 0 4 000 000 1 000 000
4 000 000 B 4 000 000 B 4 000 000 B 1 000 000
4 000 000 4 000 000 4 000 000 4 000 000 1 000 000 1 000 000
5.6.2 Year 2_02
On November 15 Eva Wanner receives a bank transfer of CHF 7m for the services it has invoiced. At year end Eva
Wanner values its own services that have not yet been invoiced at CHF 3m.
Jan 1 Work in process Statement of financial position Opening 4 000 000
Nov 15 Bank account Sales from services Services invoiced 7 000 000
Dec 31 Changes in inventory Work in process Decrease in inventory 1 000 000
Statement of profit or loss Changes in inventory Closing 1 000 000
Statement of financial position Work in process Closing 3 000 000
Note. Own depiction

OB 4 000 000 1 000 000 1 000 000 7 000 000
B 3 000 000 B 1 000 000 B 7 000 000
4 000 000 4 000 000 1 000 000 1 000 000 7 000 000 7 000 000
Chapter 5:
5.6.3 Year 2_03
On September 10, the customer accepts the robot. Subsequently, Tool Manufacturing Ltd. receives a bank transfer
of CHF 5.5m.
Jan 1 Work in process Statement of financial position Opening 3 000 000
Sep 10 Bank account Sales from services Services invoiced 5 500 000
Dec 31 Changes in inventory Work in process Decrease in inventory 3 000 000
Statement of profit or loss Changes in inventory Closing 3 000 000
Note. Own depiction

OB 3 000 000 3 000 000 3 000 000 5 500 000
B 0 B 3 000 000 B 5 500 000
3 000 000 3 000 000 3 000 000 3 000 000 5 500 000 5 500 000
5.6.4 3-year Comparison
2_01 2_02 2_03
Sales from services (in million CHF) 1.0 7.0 5.5
Changes in inventory (in million CHF) 4.0 -1.0 -3.0
Total revenue (in million CHF) 5.0 6.0 2.5
End of Theory Part
Chapter 5:
5.7 Summary

Current liabilities
liabilities
• Analysis
o Quick ratio
assets Equity
o Equity ratio

Account Designation
EBITDA
EBT
89 - Taxes

of private account)
Transport costs
Transport costs
Decrease in inven-
tory
Chapter 5:
5 Production
6 Value adjustments

Chapter 5:
5.8 Exercises
5.8.1 ETools Ltd.
ETools Ltd. produces different electronic tools, mainly e-readers for e-books. What are the booking entries? Calcu-
late the purchasing value of goods purchased and the purchasing value of goods sold.
Assets Statement of financial position as per Jan 1, 2_05 Liabilities

Inventories, raw materials 38 000 Loans 70 000
Inventories, supplies 34 000 Non-current liabilities 70 000
Equity 284 000
Office equipment and IT 38 000
Vehicles 14 000
426 000 426 000
1. Purchases against invoice
of processors 54 000
of wires and buttons 26 000
of glass 9 000
of greases and oils 1 500
2. Half of the wires and buttons are returned because they are incorrect.
3. Sales of finished goods, against invoice 260 000
4. Purchase of aluminum cases against invoice 80 000
5. 25% of the aluminum aces are defective and returned. The remaining invoice amount is
paid through the bank account, with deducting 2% trade account.
6. The transportation company sends an invoice for
foreign customs duties 2 500
freight-in (80% for material, 20% for supplies) 1 000
freight-out 500
7. ETools Ltd. places a series of different online and offline advertising, invoiced at 7 000
8. We receive net customer payments to our bank account of 157 500
This amount is after customer deducted various discounts of 30 000
and customers also deducted trade discounts of 2 500
9. We order the bank to pay wages to employees of 120 000
pay to different suppliers for raw material 50 000
pay interest for the bank loan 3 000
partial repayment of bank loan 10 000
10. ETools improves two of its production machines, valued at 15 000
14. Closing inventories:
Greases and oils 1 000
Processors 23 000
Aluminum cases 27 000
Finished goods 60 000
Also, what is the purchase value of the goods purchases and the purchase value of the goods sold
for raw materials and supplies?
Chapter 5:
5.8.2 YouGoSolar Engineers
YouGoSolar Engineers design and configure customized solar and battery systems for Prosumers (i.e. private
households that produce and consume their own electricity (i.e. they are producers and consumers at the same time).
For the customer projects, the following terms and conditions apply:
• Prepayment of ⅓ of the total estimated price at the time of the order

• Payment of ⅓ of the total estimated price on delivery
• Payment of the remaining balance within 30 days after delivery
Book the following transactions, a) from the firm’s perspective, and b) from the customer’s perspective:
Jan 10 Customer Miller orders a system, the expected amount is CHF 66 000
Jan 13 Miller pays by PayPal
Feb 15 Delivery of the system as ordered
Feb 20 Miller pays by bank account
Mar 10 Because of defects, Miller asks for a price reduction, and YouGoSolar agrees on CHF 5 000.
Mar 15 Miller pays the final amount by bank account.
5.8.3 BestView lakeside hotel
BestView lakeside hotel has 15 double rooms and a restaurant with 80 seats. What are the booking entries for the
following transactions (use sales from services, accommodation, and sales from services catering).
March 28: The group FutureViews makes a reservation for the weekend of May 15 and 16. The group’s cashier is
obliged for a prepayment of CHF 500 in cash, which will not be refunded in case the group does not show up.
May 15: The group FutureViews announces that it cancels the reservation. To not have the hotel rooms empty,
BestView hotel posts a special weekend arrangement on Facebook. The total guests are:
35 dinner arrangements, booked through the internet, paid by credit card CHF 2 800
various beverages, paid cash CHF 1 700
May 16: On Sunday, the hotel guests are checking out and Best View books the revenues:
10 double rooms, booked through the internet, paid by credit card CHF 1 500
May 31: The credit card organization transfers the money to BestView’s bank account, having deducted 3.5%
commission.
June 30: When counting the cash in the cash register for quarter end, there is a deficit of CHF 95.
July 1: The bank sends the quarterly statement:
Interest CHF 150.00

Bank expenses CHF 50.00
Chapter 5:
5.8.4 BestClimate
BestClimate produces climate and heating systems. It uses iron, aluminum, electronic controllers, and different pipes
as raw materials; electric cables, holders, etc. are considered supplies (and they are recorded in separate accounts).
What are the booking entries for the following transactions?
1. The constructor sends the final invoice for the new production building 350 000
2. In the production building, BestClimate installs one of its own system, at a value of 40 000
3. Delivery of raw material against invoice 25 000
and of supplies 2 000
4. The supplier grants a discount for the raw material 3 000
5. Supplier invoices are paid by bank transfer 24 000
6. For the repair services, a new business vehicle is purchased against invoice 16 000
7. The invoice for the business vehicle is paid by bank transfer
8. Sales of climate and heating systems to different hardware stores against invoice 120 000
9. Shipping costs for delivery to the hardware stores, payment in cash 1 000
10. Customer returns of damaged systems 10 000
11. Customer pay by bank transfer after 10% discount
12. Inventories: Opening Closing

Raw material 9 000 7 000
Supplies 1 000 2 000
Semi-finished goods 5 000 2 000
Finished goods 2 000 7 000
Chapter 5:
5.8.5 Case study BevBeverage Inc.
Brief description of BevBeverage Inc.
As a company with a long tradition and strong regional roots, BevBeverage Inc. is one of Switzerland’s leading fruit
and vegetable producers. The company produces a third of the apple juice concentrate in Switzerland and is a signif-
icant supplier of fruit and vegetable juices to the Swiss super-market chains (Migros, Coop, Lidl, Aldi). BevBever-
age Inc. converts 30 000 tones of fruit and 7 500 tones of vegetables into top-quality, natural juices and is thus an
important partner of the agricultural sector.
Among other things, it operates a bottling plant for glass, PET and kegs with four production lines (kegs are reusa-
ble barrels which were specially developed for industrial filling and sterile storage of beverages. Kegs are now
largely standard in the catering industry. Customary keg sizes are 30 liters and 50 liters. Annually, more than 115
million bottles of beverages leave the production and logistics center. The company also fills bottles for third parties
(filling as subcontractors) such as Lipton, Appenzeller Bier, Rimuss, and others.
The company’s traditional brands are highly popular with Swiss consumers. In the rapidly growing segment of
health-conscious consumers, BevBeverage Inc. has occupied a top position for fruit and vegetable juices for years.
With the help of state-of-the-art technology, more than 10 million bottles of organic juices (28 different types) are
produced and exported worldwide every year.
BevBeverage Inc. specializes in the production and distribution of semi-finished goods for the Swiss and European
food industry. Its subsidiary G-GmbH in Germany produces fruit juices and vegetable juice concentrates of a high
degree of naturalness.
BevBeverage Inc. operates four production plants in Switzerland and one in Germany. It employs approximately
250 people.
Exercises
a) Analyze the statement of financial position and statement of profit or loss of BevBeverage Inc. Describe the fi-
nancial situation with quantitative and qualitative comments.
b) Analyze the strategy of BevBeverage Inc., which is outlined below. As CFO, work out the fundamental finan-
cial consequences of this strategy for the statement of financial position and the statement of profit or loss.
c) Announce your judgment in the next board meeting: is the growth strategy financially viable? To what extent,
yes, and to what extent, no.
Chapter 5:
Strategy of BevBeverage Inc.
1. Focus on customers
• Extension of sustainable customer relations

• Cooperation with strategic customers
• Further diversification of the customer portfolio
• Internationalization of customer relations
2. Strong brands
• Brands that are widely known both at home and abroad

• Successful product range
• Brand conceived of as a synonym for innovation and quality with regard to products, packaging and distri-
bution
• Trendsetter among beverage producers in the fields of convenience, enjoyment and health
3. Leading market position in Switzerland
• No. 1 in the fields of fruit juice and organic vegetable and fruit juices
• Further consolidation of market leadership
4. International growth
• Rapid, sustainable expansion into foreign markets with all the group’s brands
• Concerted corporate acquisitions abroad
• Strategic partnerships and cooperation ventures
5. Success through innovation
• Continuous innovation
• Product concepts adapted to the latest trends
• Concerted marketing mix and recognized advertising media
6. Technological edge
• Solid positioning as the technologically leading subcontracting bottler (bottling for third par-ties) for bever-
ages in Switzerland and in neighboring countries
• Creation of additional value with innovative, environmentally sustainable logistics
• Business activities with respect and consideration for the environment
Chapter 5:
ASSETS (in CHF 1 000) 2_05 2_04

Cash 3 481 1.7% 4 033 2.4%
Receivables from goods and services 24 758 12.3% 25 841 15.2%
Other current receivables 12 908 6.4% 5 831 3.4%
Inventories 57 276 28.4% 45 052 26.5%
Accrued income 3 579 1.8% 2 600 1.5%
Current assets 102 002 50.6% 83 357 48.9%
Financial assets 6^045 3.0% 7 159 4.2%
Tangible assets 90 309 44.8% 77 569 45.5%
Intangible assets 3 164 1.6% 2 220 1.3%
Non-current assets 99 518 49.4% 86 948 51.1%
Total assets 201 520 100.0% 170 305 100.0%
LIABILITIES & EQUITY (in CHF 1 000) 2_05 2_04

Payable for goods and services 31 110 15.4% 20 258 11.9%
Debt to banks 36 296 18.0% 38 216 22.4%
Misc. current liabilities 1 659 0.8% 2 541 1.5%
Accrued liabilities and deferred income 4 204 2.1% 5 482 3.2%
Current liabilities 73 269 36.4% 66 497 39.0%
Long-term debt 54 152 26.9% 29 222 17.2%
Provisions 7 780 3.9% 9 493 5.6%
Non-current liabilities 61 932 30.7% 38 715 22.7%
Liabilities 135 201 67.1% 105 212 61.8%
Shareholders’ capital 9 572 4.7% 9 572 5.6%
Profit brought forward 56 747 28.2% 55 521 32.6%
Equity 66 319 32.9% 65 093 38.2%
Total liabilities and equity 201 520 100.0% 170 305 100.0%
STATEMENT OF PROFIT OR LOSS

(in CHF 1 000) 2_05 2_04
Gross turnover 200 942 94.4% 191 817 95.4%
Reduction of income -5 710 -2.7% -6 076 -3.0%
Other operating income 7 339 3.4% 6 043 3.0%
Net turnover 202 571 95.2% 191 784 95.3%
Changes in inventory 10 316 4.8% 9 369 4.7%
Productive capacity 212 887 100.0% 201 153 100.0%
Expenses for goods -141 810 -66.6% -134 006 -66.6%
Expenses for external personnel -3 784 -1.8% -5 563 -2.8%
Gross profit 67 293 31.6% 61 584 30.6%
Personnel expenses -28 541 -13.4% -25 710 -12.8%
Other operating expenses -24 071 -11.3% -21 600 -10.7%
EBITDA 14 681 6.9% 14 274 7.1%
- Depreciation and Amortization -8 094 -3.8% -7 272 -3.6%
EBIT 6 587 3.1% 7 002 3.5%
+/- Financial Result (financial profit or loss) -1 925 -0.9% -1 651 -0.8%
EBT 4 662 2.2% 5 351 2.7%
+/- Accessory operating result -9 0.0% -949 -0.5%
+/- Extraordinary and non-operating result 628 0.3% 688 0.3%
Profit before taxes 5 281 2.5% 5 090 2.5%
- Taxes -1 308 -0.6% -1 499 -0.7%
Profit of the period 3 973 1.9% 3 591 1.8%
Chapter 6:
Value Adjustments 179
Value Adjustments
Experience shows that values of asset fluctuate. For some assets, the decrease in value is planned, systematical, and
may even be validated with market values such as used-cars with the blue book. Other fluctuations are less foresee-
able, erratic or one-time. Examples include customers that stop paying their invoices because their business is going
bad in times of crises, or production machines become outdated because a competitor brings a new product and/or
technology to the market which makes the current products and therewith their production machines obsolete (ex-
amples may include the LCD TV sets replacing the conventional TV sets, the iPhone ruining the business of Nokia,
Kodak missing the trend of digital imagery, or maybe in the future electricity provider being overrun by prosumer
approaches with homeowners using photovoltaic systems to produce their own energy and electric cars to store the
energy). Even some car manufacturers may come under pressure because of digitalization, and features such as re-
mote control and over-the-air updates are replacing current industry approaches such as marketing annual models,
replacement discounts or company discounts.
6.1 Introduction
1. How do assets lose value and how can such pattern best be reflected in financial reporting?
2. What can a company do if customers do not pay the invoices, how must it be represented financially?
3. What if on selling an asset the sale price does not match the value decreases?
6.2 Depreciation

Note. Own depiction
Chapter 6:
Looking at his machines, Tom notices that he has carried forward the values of “Furniture and facilities” and “Tools
and appliances” unchanged from one year to the next ever since he set up his Cycle Shop. Because the facilities are
no longer according to the latest technological developments, they could certainly no longer be sold at the value re-
ported in the statement of financial position, i.e. at the book value (the value disclosed in the financial statement).
Theory explanation

Value Adjustment and Depreciation of Assets
6.2.1 Value adjustment
Value adjustments link the statement of financial position, i.e. the resources that an organization owns, with the
statement of profit or loss, i.e. the consumption and use of resources to provide customer value.
Value Assets represent the current value of resources that an organization owns for rendering customer value in the fu-
adjustments ture. The value of assets changes over time, typically decreases, for various reasons such as maximum lifetime
(for a car: expected number of kilometers to be driven), becoming technically obsolete, market value (i.e. resell
value) decreasing, customer behavior changing, etc. Value adjustment is the concept of how to account for such
value decreases, and it uses different approaches to map the different reasons of change in value.
Book Value The book value of an asset is the value disclosed in the books, i.e. in the statement of financial position. It is
calculated as initial purchase value (or construction value) minus all previous value adjustments.
Some of the approaches that the concept of value adjustment uses include:
• Depreciation: planned, systematical valued deduction of assets

• Impairment: one-time, unplanned drop in asset value, typically because of a shock or crisis (however, typi-
cally organizations must assess the likelihood of shocks or crises once a year, i.e. they must plan a so called
impairment test)
• Loss of receivables (effective or suspected): considering that some customers will not pay their invoices
• Lower of cost or market: impairment for inventory if the market value of the items (i.e. maximum possible
sales price) falls below the current inventory value
The following paragraphs introduce the concepts of depreciation and loss of receivables in more detail.
6.2.2 Depreciation overview
Depreciation Planned, systematical reduction of non-current asset’s value over their useful time (i.e. the time that the organi-
zation is planning to use the asset for offering customer value). At the time of purchase or creation of an asset,
the depreciation details (i.e. depreciation method, useful life of the asset, as well as booking of depreciation) are
decided and typically not changed. The same depreciation details must be applied to all assets of one type.
Depreciation is an expense, and it reduces the value of non-current assets, e.g. machines (for current assets, the con-
cept of depreciation does not exist). Depreciation is part of a cycle how cash assets turn into machine assets, are then
being used for customer value creation and at the same time leading to depreciation expenses, meaning that after
Chapter 6:
some years the machine has no more value and does not support customer value creation any more. Through the
customer value, the organization receives money from the customer, and a part of this money should be saved to buy
a replacement machine after those years. Depreciation has an effect on profit (reduction of profit), but not on cash.
Personal Opinion
Should a company replace the machine after the useful time?
Yes if … No if …
Personal Opinion
Should a company save money in the first year of using a machine already to later (after 5 or 10 years) buy
a replacement machine?
Yes because … No because …
Regarding depreciation, companies must decide 4 determining facts:
• Expected useful lifetime, i.e. number of years that the machine shall be used for creating customer value
• Value at the end of the useful lifetime (e.g. value that it can be sold to someone else or value of the material
such as copper, metal, etc. if the machine is recycled)
• Annual depreciation amount: 3 general approaches exist that the company can choose from (straight line,
declining balance and other, see below)
• Booking technique: 2 options exist that the company must choose from (direct and indirect booking)
6.2.3 What is the right annual depreciation amount?
First of all: there is not right way to calculate the depreciation amount. Instead, a company must choose the most ap-
propriate and useful calculation for its specific situation and the asset type in question. Also, some assets, e.g. finan-
cial assets such as shares of Apple or bonds of Nestlé that were bought on the stock exchange do not apply for de-
preciation because there is no planned, systematic loss in value (similar for intangible assets such as trademarks or
brands, as well as for the land part of real estate).
Chapter 6:
Companies must choose from 3 general methods for calculation of the depreciation amount:
• Straight Line Method: The depreciation amount is the same for every year of usage. The depreciation
amount is calculated as initial value (purchase value or construction value for a self-constructed machine)
minus the remaining value at the end of the useful lifetime (often times this value is estimated as 0 because
estimation into 10 years is hardly possible), divided by the number of years of useful lifetime. The rule of
thumb example is a chocolate production machine: it is expensive, difficult to install (so it is almost impos-
sible to move the machine to another place), and innovation in the production of chocolate is rather low
(success in the Swiss chocolate market is rather a question of marketing than innovation in production).
• Declining Balance Method: The depreciation amount is a percentage of the current value of each year. The
depreciation amount in the first year is very high, i.e. the asset losses a lot of value because it becomes tech-
nically obsolete or newer version/models are available on the market quickly, and the depreciation amount
becomes smaller every subsequent year because the asset never losses all its value (the value never becomes
0). The rule of thumb example is a car which lose a significant part of its value in the first year but there is
always a used-market which is very active and transparent (prices are well known to anybody).
• Other: while the straight line as well as the declining balance method use essentially the number of years
(i.e. age of the asset) to determine the depreciation amount, companies may choose to use any other factor to
determine the “age”, such as numbers of chocolate bars produced, hours of service, or kilometer driven for
the car. Estimating the total capacity (e.g. 250 000 km for a car), the effective number of kilometers driven
then determines the depreciation amount. Of course, different “age” determinations, as well as different
methods, may be combined using a weighted average calculation.
Table 57 below compares these 3 different methods for a vehicle that is bought at the end of the business year 0. It is
used for 5 years, the expected value after 5 years is CHF 0. For every year, the annual depreciation and the book
value at the end of the year is calculated. For the declining balance method, a 40% depreciation of the book value at
the beginning of the year (i.e. as per end of the previous year) applies. For the kilometers, the planned effective kil-
ometer driven is used. The charts below show the effects of each method graphically.
Table 57: Comparison of Depreciation Amount Calculation Methods
Straight Line Declining Balance Other (kilometer)

Book value Depreciation Book value Depreciation Book value Depreciation
Year 0 60 000 60 000 60 000
Year 1 48 000 12 000 36 000 24 000 51 000 9 000
Year 2 36 000 12 000 21 600 14 400 43 000 8 000
Year 3 24 000 12 000 12 960 8 640 27 000 16 000
Year 4 12 000 12 000 7 776 5 184 11 000 16 000
Year 5 0 12 000 4 665 3 110 0 11 000
Book value Depreciation Book value Depreciation Book value Depreciation
Note. Own depiction
Chapter 6:
6.2.4 What is the right depreciation booking technique?
As for the calculation of booking entries, there is no right booking technique. Instead, companies must understand
the two available techniques and select the one that seems more appropriate for their business. The differences only
concern the disclosure of value deduction in the asset accounts (the expense side of the bookings is identical):
• Direct booking: this technique deducts the depreciation value from the asset value. It is essential the tech-
nique used in Table 57: every year the disclosed value is reduced (e.g. from 60 000 to 48 000, to 36 000,
etc.), and the initial starting value (i.e. the purchase value or construction value) is no longer know (and
maybe no longer relevant). In the example of Table 57 it is easy to remember the initial value of 60 000,
however if a company has 10 or 100 vehicles, all having different useful lifetimes and all having a different
age, remembering seems impossible and not knowing the total initial value might be a disadvantage.
• Indirect booking: this technique introduces new accounts. For each non-current asset account, a value ad-
justment account is introduced (i.e. there is an account «Vehicles» and an account «Value adjustments, ve-
hicles»). These new accounts are also called VA accounts. The asset account and the corresponding VA ac-
count must always be looked at together: the asset account holds the initial value, the VA account holds all
value adjustments, e.g. depreciations. The VA accounts can be understood as corrections to the assets, i.e.
they hold additional information that must also be considered when looking at the asset account. The book
value is calculated as balance of the asset account minus balance of the corresponding VA account.
Table 71 provides the details over 5 years for both straight line as well as declining balance method, as well as for
both direct and indirect method. The example shows that the direct booking (right part) shows the declining book
value as ending balance of the asset account vehicles, while the indirect booking (left part) shows a stable balance
for the vehicles, but an increasing negative balance for the VA vehicles account (so the vehicles and VA vehicles
accounts together show the same as the vehicles account under the direct booking method).
Table 58: comparison of depreciation method
Straight line method, indirect booking Straight line method, direct booking
+ Vehicles - - VA, vehicles + + Depreciation - + Vehicles - + Depreciation -

OB 60 000 OB 0 12 000 OB 60 000 12 000 12 000
B 60 000 B 12 000 12 000 B 12 000 B 48 000 B 12 000
60 000 60 000 12 000 12 000 12 000 12 000 60 000 60 000 12 000 12 000

OB 60 000 OB 12 000 12 000 OB 48 000 12 000 12 000
B 60 000 B 24 000 12 000 B 12 000 B 36 000 B 12 000
60 000 60 000 24 000 24 000 12 000 12 000 48 000 48 000 12 000 12 000

OB 60 000 OB 24 000 12 000 OB 36 000 12 000 12 000
B 60 000 B 36 000 12 000 B 12 000 B 24 000 B 12 000
60 000 60 000 36 000 36 000 12 000 12 000 36 000 36 000 12 000 12 000

OB 60 000 OB 36 000 12 000 OB 24 000 12 000 12 000
B 60 000 B 48 000 12 000 B 12 000 B 12 000 B 12 000
60 000 60 000 48 000 48 000 12 000 12 000 24 000 24 000 12 000 12 000

OB 60 000 OB 48 000 12 000 OB 12 000 12 000 12 000
B 60 000 B 60 000 12 000 B 12 000 B 0 B 12 000
60 000 60 000 60 000 60 000 12 000 12 000 12 000 12 000 12 000 12 000
Chapter 6:
Declining balance method, indirect booking Declining balance method, direct booking

OB 60 000 OB 0 24 000 OB 60 000 24 000 24 000
B 60 000 B 24 000 24 000 B 24 000 B 36 000 B 24 000
60 000 60 000 24 000 24 000 24 000 24 000 60 000 60 000 24 000 24 000

OB 60 000 OB 24 000 14 400 OB 36 000 14 400 14 400
B 60 000 B 38 400 14 400 B 14 400 B 21 600 B 14 400
60 000 60 000 38 400 38 400 14 400 14 400 36 000 36 000 14 400 14 400

OB 60 000 OB 38 400 8 640 OB 21 600 8 640 8 640
B 60 000 B 47 040 8 640 B 8 640 B 12 960 B 8 640
60 000 60 000 47 040 47 040 8 640 8 640 21 600 21 600 8 640 8 640
+ Vehicles - - VA, vehicles + Depreciation - + Vehicles - + Depreciation -

OB 60 000 OB 47 040 5 184 OB 12 960 5 184 5 184
B 60 000 B 52 224 5 184 B 5 184 B 7 776 B 5 184
60 000 60 000 52 224 52 224 5 184 12 960 12 960 5 184 5 184
+ Vehicles - - VA, vehicles + Depreciation - + Vehicles - + Depreciation -

OB 60 000 OB 52 224 3 110 OB 7 776 3 110 3 110
B 60 000 B 55 334 3 110 B 3 110 B 4 666 B 3 110
60 000 60 000 55 334 55 334 3 110 3 110 7 776 7 776 3 110 3 110
Note. Own depiction
The method for calculation of the depreciation amount only influences the amount of the booking entry. The book-
ing technique in contrast does influence the accounts that apply in the booking entry for depreciation:
• Direct booking: Dec 31, depreciation expenses / vehicles, annual depreciation, CHF 12 000
• Indirect booking: Dec 31, depreciation expenses / VA, vehicles, annual depreciation, CHF 12 000
As the depreciation method influences the accounts that must be considered to calculate the book value, selling for
non-current assets is also influenced by the depreciation method because after the sales the amounts concerning the
sold asset must be removed from all applicable accounts, e.g. vehicles or vehicles and VA vehicles.
Personal Opinion
What advantages and disadvantages do you see in the different combinations of booking technique and cal-
culation of depreciation amount? What combination would you suggest to a company?
Advantages Disadvantages
Chapter 6:
6.2.5 Selling of non-current assets
When selling a non-current asset, the company must find an interested buyer. Then a price is negotiated, and the
condition of the non-current assets (e.g. a company car might have a logo or some installation inside for material
transportation that must be removed, a machine must be de-installed, etc.), which might be expensive to achieve.
The price minus the expenses to meet the conditions, i.e. the net sales price, might match (by coincidence) the cur-
rent book value, but more likely it is higher or lower. A higher net sales price is a profit from the sale of non-current
assets, which is recorded as extraordinary income, a lower net sales price is a loss from the sale of non-current assets
and it is recorded as additional depreciation. For the booking, the following steps apply:
1. Calculate the profit or loss from the sale of non-current assets

2. Book the sale: asset swap leading to more cash or bank account and less non-current assets
3. Increase or decrease the book value to the net sales price (through extraordinary income or depreciation,
to the asset account or VA account for indirect booking) and therewith book the profit or loss
4. If indirect booking applied: book the VA account against the asset account
Example: the company sells the vehicle that was bought at the end of Year 0 for CHF 60 000 (purchase value) on
January 1 of Year 2. Current book value is CHF 48 000, the depreciation so far, i.e. the balance of the account «VA,
vehicles», is CHF 12 000. Two options apply: sales price of CHF 50 000, which would lead to a profit from sales of
non-current asset of CHF 2 000, and a sales price of CHF 40 000, which would lead to a loss from sales of non-
current asset of CHF 8 000. Table 59 shows the booking entries of the steps 2 to 4 for indirect booking and for direct
booking technique.
Table 59: Booking entries for sales of non-current assets
Indirect booking Direct booking
Sales price 2. Cash / vehicles 50 000 2. Cash / vehicles 50 000

CHF 50 000 3. VA, vehicles / extraordinary income 2 000 3. Vehicles / extraordinary income 2 000
4. VA, vehicles / vehicles 10 000
Sales price 2. Cash / vehicles 40 000 2. Cash / vehicles 40 000
CHF 40 000 3. Extraordinary expenses / VA, vehicles 8 000 3. Extraordinary expenses / vehicles 8 000
4. VA vehicles / vehicles 20 000
Note. Own depiction
End of Theory Part
By year-end, Tom depreciates his non-current assets as follows:
• Machines: straight line method, direct booking, 25% (because it is straight line method, the 25% are calcu-
lated on the purchasing value)
• Furniture and facilities: declining balance method, indirect booking, 25% (because it is declining balance
method, the 25% are calculated on the book value)
• Tools and appliances: straight line method, direct booking, 25% (because it is straight line method, the
25% are calculated on the purchasing value)
Chapter 6:
Dec 31 Depreciation Machines Depreciation 5 125
Dec 31 Depreciation VA, furniture and facilities Depreciation 1 250
Dec 31 Depreciation Tools and appliances Depreciation 1 500

Note. Own depiction
Theory explanation

Loss from receivables
6.2.6 Loss from receivables from customers
Selling cash to customer has the advantage to complete the transaction immediately (from a marketing perspective
one might argue that with invoices it is positive to stay in touch with the customer for repeated sales, up-selling or
cross-selling). If the customer receives an invoice, there is always a certain risk that the customer does not pay the
invoice. Therefore, companies apply the following process regarding receivables from customers:
1. Calculating expected losses based on experience and book them as expense and value adjustment to the
asset account «Receivables from goods & services» (similar to the indirect booking of depreciation)
2. Remind customers about the outstanding payment
3. Start a debt collection processes for customers that still do not pay after repeated reminders
4. Booking (partial) losses after unsuccessful debt collection
5. Cashing certificate of debt: book as non-operating income.
6.2.6.1 Expected losses of receivables from goods & services
Companies know from experiences that a certain percentage of customer invoices will not be paid. This percentage
depends on the specific customer base and it is booked as expense («losses from receivables») and value adjustment
to «receivables from goods & services» (similar to the indirect booking of depreciation). At every closing, this per-
centage is applied to the current level of receivables, and then the balance of the VA account is adjusted to meet this
year’s amount of expected losses. If the expected loss is 10% and the year-end receivables are CHF 20 000, the ex-
pected «VA, receivables from goods & services» is CHF 2 000. If the opening balance is CHF 1 500, the booking is
(profit-effective, no effect on cash):
Losses from receivables / VA, receivables from goods & services, CHF 500
6.2.6.2 Reminding customers
Reminding customers is an administrative process only without any financial impact. Typically companies write a
letter, list the outstanding invoices and amounts, and maybe add an extra handling charge (this charge is booked as
increase in revenue and additional receivable).
Chapter 6:
6.2.6.3 Debt collection process (according to Swiss law)
In Switzerland, after 2 reminders, a company can start a debt collection process against the non-paying customer. A
government agency will be responsible for the debt collection, however a prepayment to this agency is required (by
the company). The agency then tries to collect the initial invoice amount, the prepayment, as well as interest on the
invoice amount. Because the customer will pay back the prepayment, it is booked as increase in receivables instead
of a prepayment. Assuming an initial invoice of CHF 5 000 on March 10, with 30 days payment term, a first re-
minder on April 18, with 10 days payment term, a second reminder on May 18, with 10 days payment term, the start
of the debt collection process is on June 18 with a prepayment of CHF 120. The customer finally pays by August 10
and the government imposes 6% late payment interest. The bookings are according to Table 66.
Table 61: Bookings for successful debt collection
Mar 10 Receivables from G&S Sales from trading goods Sales, against invoice 5 000
Jun 18 Receivables from G&S Bank account Start of debt collection 120
Aug 10 Receivables from G&S Financial income Late payment interest 100
Bank account Receivables from G&S Payment 5 220

Note. Own depiction
6.2.6.4 Actual loss of receivables from goods & services
There are two main reasons why companies run into cash shortages: either the customer value and therewith the
price that customers were willing to pay was too low. Or secondly a payment that was promised arrives too late. The
first problem is persistent and requires a fundamental change in the goods and services that produce the customer
value, the expenses to provide these services, or the overall business model. The second problem is rather tempo-
rary, as soon as the promised payment arrives the problem is solved (of course, if the payments remains outstanding
for months and months, the problem obviously become permanent and needs significant actions).
Having these two reasons for cash shortages in mind, the outcome of a debt collection process may be different. In
the first case, a successful collection is unlikely. In the second case, the success of the collection is mainly a ques-
tion of time (as a matter of fact, some companies choose to pay invoices very late because they see the supplier in-
voices as an important financing option). In case of unsuccessful debt collection, the remaining cash of the customer
is distributed to all supplier (and employees), following distinct legal rules who gets most of the money. So the
company only receives a part (or none) of the outstanding money, for the remaining money the company receives a
certificate of debt (borrowers’ note) and if the customer sometime in the future collects cash again, the company can
exchange this certificate to cash, i.e. cashing the certificate of debt. But first, the unsuccessful debt collection must
be recorded.
Chapter 6:
Table 62: Bookings for un-successful debt collection
Mar 10 Receivables from G&S Sales from trading goods Sales, against invoice 5 000
Jun 18 Receivables from G&S Bank account Start of debt collection 120
Aug 10 Receivables from G&S Financial income Late payment interest 100
Losses from receivables Receivables from G&S Certificate of debt 4 220

Note. Own depiction
6.2.6.5 Cashing certificate of debt
5 years later the customer gets money again, unexpectedly, and he pays all his former outstanding invoices, i.e. all
the certificates of debt.
Table 63: Bookings for un-successful debt collection
2_11 Cash Extraordinary income Cashing certificate of debt 4 220

Note. Own depiction
End of Theory Part
After having already sent two reminders to the customer, Tom hears rumors that the receivables of CHF 1 710 from
last year, see opening balance in the statement of financial position, will not be paid. He decides to pursue all legal
options and starts a debt collection process. The government is not fully successful, Tom only receives CHF 500, the
remaining amount is an effective loss from receivables. He books the facts according to Table 64.
Mar 8 Receivables from G&S Bank account Start of debt collection 70
Jul 27 Receivables from G&S Financial income Late payment interest 15
Losses from receivables Receivables from G&S Effective loss 1 295
Bank account Receivables from G&S Payment 500

Note. Own depiction
If the government would have been successful, i.e. all money would be collected, the booking entries of Table 65
apply.
Chapter 6:
Mar 8 Receivables from G&S Bank account Start of debt collection 70
Jul 27 Receivables from G&S Financial income Late payment interest 15

Note. Own depiction
With the experience of losing money from invoices not being paid, at the end of the year Tom assesses all customer
invoices and believes that overall CHF 2 000 of invoices will not be paid. The booking of Table 66 apply.
Dec 31 Losses from receivables VA, receivables from G&S Expected losses 2 000
Note. Own depiction
6.2.7 Tom’s transactions and closing
Table 67: Tom’s booking entries F, 2_06, including closing bookings
Dec 31 Cash Sales from produced goods Cash sales, finished goods 13 500
Payables for G&S Cash Payment, due invoices 6 100
Exp. for wages and salaries Private Entrepreneur’s salary 12 000
Expenses for trading goods Inventories, trading goods Change in inventory 8 400
Changes in inventory Inventories, finished goods Change in inventory 4 500
Private Equity Closing, private account 12 000
Statement of profit or loss Expenses Closing, expense accounts 36 070
Revenue Statement of profit or loss Closing, revenue accounts 25 530
Equity Statement of profit or loss Loss of the period 10 540
Statement of fin. position Assets Closing, asset accounts 57 821
Liabilities Statement of fin. position Closing, liability accounts 57 821

Note. Own depiction
Chapter 6:
Expenses Statement of profit or loss 2_06 Revenue

Expenses for trading goods 8 400 Sales from produced goods 13 500
Expenses for wages and salaries 12 000 Sales from trading goods 12 000
Depreciation 7 875 Losses from receivables -3 295
Changes in inventory -4 500
Financial income 30
Loss 10 540
28 875 28 275
Note. Own depiction

Gross income 9 305
EBITDA (earnings before interest, taxes, depreciation and amortization) -2 695
6800 – 6899 - Depreciation and Amortization -7 875
EBIT (earnings before interest and taxes) -10 570
EBT (earnings before taxes) -10 540
Profit before taxes -10 540
8900 – 8999 - Taxes
Profit of the period -10 540
Note. Own depiction

- VA, receivables -2 000 8 290
Inventories, raw materials 3 000 Non-current liabilities 10 000
Equity 45 821
- VA, furniture & fac. -1 250 3 750
57 821 57 821
Note. Own depiction
Chapter 6:
Cash Payables for goods and services Expenses for trading goods Sales from produced goods
OB 1 941 8 692 8 692 OB 10 692 8 400 B 8 400 B 13 500 13 500
13 500 B 6 749 B 2 000 8 400 8 400 13 500 13 500
15 441 15 441 10 692 10 692
Exp. for wages and salaries Sales from trading goods
Bank account Loans 12 000 B 12 000 B 12 000 12 000
OB 5 110 70 B 10 000 OB 10 000 12 000 12 000 12 000 12 000
1 795 70 10 000 10 000
500 B 7 265 Depreciation Financial income
7 405 7 405 Equity 5 125 15
10 540 OB 44 361 1 250 B 30 15
Receivables from G&S B 45 821 12 000 1 500 B 7 875 30 30
OB 1 710 1 795 56 361 56 361 7 875 7 875
12 000 1 295
70 500 Private Changes in inventory
15 B 12 000 12 000 4 500 B 4 500
70 12 000 12 000 4 500 4 500
15 B 10 290
13 880 13 880 VA, receivables Losses from receivables
OB 0 1 295
Inventories, trading goods B 2 000 2 000 2 000 B 3 295
OB 11 200 8 400 2 000 2 000 3 295 3 295
B 2 800
11 200 11 200 VA, furniture and facilities
OB 0
Inventories, raw materials B 1 250 1 250
OB 3 000 B 3 000 1 250 1 250
3 000 3 000
Inventories, finished goods

OB 8 000 4 500
B 3 500
8 000 8 000
Machines
OB 20 500 5 125
B 15 375
20 500 20 500

OB 5 000 B 5 000
5 000 5 000
Tools and appliances

OB 6 000 1 500
B 4 500
6 000 6 000
Personal Opinion
Do you expect a similar loss for he next year??
Rather yes, because … Rather no, because …
Chapter 6:
Theory explanation

Reversal of an incorrect entry
6.2.8 Reversal of an incorrect entry
The interest payment of the bank was booked as follows:
Bank account Financial expenses Financial income

270 270
The correct booking entry would have been Bank account / Financial income 270 (instead of Financial expenses /
Bank account 270).
To correct this mistake, the booking entries are necessary: first reverting the wrong booking which leads to the situa-
tion as it was before and secondly the correct booking entry
Bank account / Financial expenses 270

Bank account / Financial income 270
End of Theory Part
Chapter 6:
6.3 Summary

Current liabilities
liabilities
• Analysis
o Quick ratio
assets Equity
o Equity ratio

Account Designation
EBITDA
EBT
89 - Taxes

of private account)
Transport costs
Transport costs
Decrease in inven-
tory
Chapter 6:
5 Production
6 Value adjustments

Chapter 6:
6.4 Exercises
6.4.1 Sale of an old vehicle, different scenarios
A vehicle with a book value of CHF 10 000 is sold (for depreciation direct booking is used). What are the booking
entries for the following three scenarios?
a) Sale for cash in the amount of CHF 12 000
b) Sale for cash in the amount of CHF 10 000
c) Sale for cash in the amount of CHF 7 000
6.4.2 Expected losses from receivables
Draw up the booking entry list for the change in putative losses from receivables. The VA, receivables account
should always report 10% of the overall amount of receivables at year end.
Overall amount of receivables from goods and services:
1st year CHF 30 000
2nd year CHF 60 000
3rd year CHF 70 000
4th year CHF 70 000
5th year CHF 50 000
6.4.3 Debt collection process
On February 1, ModernFurniture plc. sold a new bedroom interior to Mr. and Mrs. Shawn, the total invoice amount
was CHF 20 000.-. By End of March the invoice is still not paid, ModernFurniture plc. sends a reminder. On May 1
it decides starting a debt collection process. First thing, it must send CHF 200.- to the debt collection authority.
What are the booking entries for the following three scenarios?
a) On June 30, the debt collection authority transfers ModernFurniture plc. a total amount of CHF 21 000.-
b) On June 30, the debt collection authority transfers ModernFurniture plc. only CHF 5 000.- out of the ex-
pected CHF 21 000.-
c) Unexpectedly, two years later on Nov 15, Mr. Shawn transfers CHF 16 000.- to pay of the certificate of debt.
Chapter 6:
6.4.4 AlpineCamper ltd.
AlpineCamper rents 4-wheel-drive campers to tourists in the Alps. It owns many capers of different sizes. What are
the booking entries for the following transactions? Draw the accounts “Vehicles” and “VA, vehicles”.
Opening balances: Vehicles CHF 1 250 000

VA, vehicles CHF 750 000
1. Purchase of a new 6-wheel luxury camper against invoice CHF 250 000
2. The invoice from the garage to repaint and improve the new camper is CHF 15 000
3. Payment of the invoice from the garage by bank transfer.
4. Payment of the invoice for the new camper, less 2% trade discount, by bank transfer.
5. Cash sale of the old camper (acquisition value: 100 000; VA value 80 000) for CHF 25 000
6. The vehicles are depreciated at 50% of the book value.
7. The indirect depreciation of vehicles is converted to direct depreciation.
6.4.5 Booking entries for depreciation and inventory
Assets Statement of financial position, Dec 31, 2_06, before inventory and depreciation Liabilities
Cash, bank account 10 000 Payables for goods + services 82
Receivables from G&S 15 000 Misc. current liabilities 5
Inventories, raw materials (as per Jan 1) 7 000 Current liabilities 87
Inventories, finished goods (as per Jan 1) 8 000
Current assets 40 000 Loans 560
Non-current liabilities 560
Machines (as per Jan 1) 120 000 Total liabilities 647
- VA, F&F (as per Jan 1) -45 000 35 000 Equity 929
Office equipment and IT (as per Jan 1) 75 000 Total equity 929
Vehicles 230 000
- VA, vehicles (as per Jan 1) -160 000 70 000
Land and buildings 900 000
- VA, L&B (as per Jan 1) -350 000 550 000
890 000 1 576
What are the booking entries for the following business transactions at year end?
1. Depreciation of vehicles, 30% of the book value

2. Depreciation of furniture, 20% of the acquisition value
3. Depreciation of machines, 30% of the book value
4. Depreciation of the building (expenses for land and buildings) 3% of the acquisition value
5. Depreciation of the IT facilities 40% of the book value
6. Raw material inventory 9 000
7. Finished goods inventory 5 000
8. The company has improved its own building, at a value of 50 000.
Chapter 6:
6.4.6 Mixed business transactions
Draw up the booking list entries for the following business transactions and keep the “Receivables from goods and
services“, “Losses from receivables“ und “VA, receivables “ accounts.
Opening: Receivables from goods and services CHF 30 000

VA, receivables CHF 3 000
1. Customer Fred has got into solvency difficulties. He settles part of his debt
by supplying goods CHF 1 500
We accept to forego the remaining amount of CHF 500
2. We initiate a debt collection proceeding against customer Chuck.
We transfer an advance on costs by bank CHF 200
3. Owing to the debt collection proceeding, customer Chuck pays
our invoice CHF 3 700
debt collection costs CHF 200
interest on arrears CHF 50
his cash payment CHF 3 950
4. Sales of goods against invoice CHF 195 000
5. The bankruptcy proceeding of the ModernTrade ltd. has been concluded.
25% of our receivables totaling CHF 40 000 is transferred into our bank
account. For the remaining amount we receive a default deed.
6. Customer returns CHF 19 500
7. The debt collection proceeding against customer Joe is unsuccessful.
We write off our balance. CHF 7 000
8. Customers’ payment by bank transfer CHF 117 000
9. The value adjustment of receivables must be raised to CHF 5 000
6.4.7 Year-end addenda for ModernBuilding Ltd.
ModernBuilding Ltd. has the following statement of financial position before the addenda below are entered:
Assets Statement of financial position, ModernBuilding Ltd., before addenda Liabilities

Cash, bank account 41 000 Payables for goods + services 80 000
Receivables from G&S 180 000 Prepayments received 50 000
VA, receivables -18 000 162 000 Debt to bank 20 000
Inventories, raw materials 70 000 Current liabilities 150 000
Inventories, semi-finished goods 20 000
Inventories, finished goods 120 000 Loans 450 000
Current assets 413 000 Non-current liabilities 450 000
Total liabilities 600 000
Machines 400 000
Vehicles 150 000 Equity 500 000
VA, vehicles -110 000 40 000 Reserves 53 000
Land and buildings 500 000 Total equity 553 000
VA, land and buildings -200 000 300 000
1 153 000 1 153 000
Chapter 6:
Addenda in December
1. Our own machinery department improves one of the machines, valued at CHF 20 000.
2. We start a debt collection proceeding against customer Winger and transfer CHF 200 by bank.
3. Customer Walther orders goods in the amount of CHF 200 000 from us and pays CHF 40 000 in advance.
4. We transfer wages to employees through the bank: CHF 38 600
5. We deliver the ordered goods to customer Walther.
6. We sell two of our vehicles in cash. The first one has a book value of CHF 8 000, we sell it for CHF 10 000,
and it has previous depreciation of CHF 15 000. The second also has a book value of CHF 8 000, we sell it for
CHF 7 000, and it has previous depreciation of CHF 11 000.
7. InternationalTrucking Inc, invoices various transport jobs to us:
for freight-in CHF 3 000
for freight-out CHF 2 000
for import duties CHF 5 000
for foreign customs duties CHF 6 000
8. From the debt collection process against customer Miller, who has an outstanding invoice of CHF 10 000.-, we
receive 20% of the outstanding amount plus our advance payment of CHF 250.-.
9. We pay the invoice of InternationalTrucking Inc less 2% trade discount, by bank.
10. Customer Walther pays its invoice less CHF 3 000 for returns of goods (not yet booked) by bank transfer.
11. The new value adjustment for receivables must be CHF 25 000.
12. Inventory values:
Inventories, raw materials CHF 65 000
Inventories, finished goods CHF 131 000
Inventories, semi-finished goods CHF 20 000
13. Depreciation:
Vehicles 30% of the book value
Machines 20% of the book value
Land and buildings 3% of the acquisition value
Exercise
a) What are the booking entries for the addenda in December?

b) Draw up a final statement of financial position after addenda.
c) What must an enterprise consider when choosing the depreciation method (straight line or declining balance
method)?
Chapter 7:
Land + building, accruals, provisions 199
Land + building, accruals, provisions

Real estate, i.e. land and building, is an asset that might or might not be used by the company exclusively: while
production buildings are used by the company exclusively and they are for operational use, apartment building or
buildings with mixed use are owned not for operational reasons only, instead for non-operational reasons too. Such
land + building assets also have an element of money investment and they use specific rules to clearly separate the
operational part and the non-operational part. Additional rules apply for the purchase and sale of real estate, partly
because of a specific handover process, partly because together with the building additional aspects are bought such
as the mortgage, existing insurances, existing rental agreements, and alike. Some of these aspects have different du-
ration than the financial year and therefore they must be considered for the future, i.e. accruals and provisions apply.
7.1 Introduction
1. What are patents and how are they disclosed, if created, if bought, and if sold?
2. What are the detailed transaction of a purchase or sale of real estate, how are they disclosed financially?
3. Howa re the transaction between the operational business and the land + building, as well as with the owner dealt with?
7.2 Patents

Note. Own depiction
Chapter 7:
Theory explanation

Patents
Patent A patent is as set of exclusive rights granted by a sovereign state to an inventor or assignee for a limited time
period in exchange for detailed public disclosure of an invention. An invention is a solution to a specific tech-
nological problem and is a product or a process. Patents are a form of intellectual property.
From a financial perspective, patents can be two very different things: first, it can be an invention of the company
that is protected by the patent. So the company is the inventor and possesses full right over the patent. Secondly, a
company may hold a license to a patent, meaning the company has the right to use the invention/technology which is
protected for the other company (i.e. the inventor) to produce a certain number of goods, over a certain time period,
to be sold in a certain region, etc. The company must pay the inventor a certain amount of money for this license,
and from a financial perspective this license is an intellectual property that defines an asset.
Both types of patents must be disclosed as non-current asset: the patents that the company has applied for itself for
an intention it came up with, as well as the patent licenses that the company holds from another inventor in order to
produce the customer value. However, valuation of the two disclosures, i.e. how to determine the right amount to
disclose in the statement of financial position, is very different.
For self-invented patents, the amount to be disclosed as asset is all the expenses for the patent application, i.e. to get
the legal protection of the technology. These expenses include governmental fees, but also expenses like tests to
prove the technology (which might be required for the patent application), expenses for lawyers supporting the pa-
tent application, etc. While the amount may be significant, especially if patents are applied for in different countries,
the amount is still very small compared to what customer value might be provided with the technology. But the fi-
nancial disclosure typically takes a rater conservative perspective, and therefore these potential future benefits are
not taken into consideration for calculating the value of the asset.
For patent licenses, the valuation is much simpler, the amount that must be paid to the inventor is used as value of
the asset. The idea is that different companies competed to obtain the patent license, and therefore the one who pays
the most did calculate the amount to be paid thoroughly. Therefore, this amount paid to the inventor does serve as a
good estimation also for the asset value.
End of Theory Part
Recently, Tom applied for a patent for his invention for the manufacturing process of spokes and nubs. Now his ap-
plication was accepted and he discloses the value of registration fees as non-current asset.
Chapter 7:
Jan 5 Patents and licenses Misc. cur. liabilities Invoice for registration fees 4 000
Note. Own depiction
When the patent application was published, a well-known bicycle manufacturer’s attention was drawn to the inven-
tion. After tough negotiations, Tom sells the patent for CHF 250 000.
Feb 26 Patents and licenses Accessory operating income Profit from sale 246 000
Bank account Patents and licenses Sale of patent 250 000

Note. Own depiction
7.3 Land + building
Theory explanation

Buying and selling land + building
When buying or selling land + building, i.e. real estate, many additional aspects in addition to the purchase/sales
price must be considered. For land + building transactions, a separate payable/receivable account is used, and all as-
pects until the payment are recorded to this payable/receivable account. All income and expenses are booked against
the account «expenses for land + building» and «income from land + building» because all transactions from non-
operating land + building shall be kept separate in order to better assess the effect and result from owning the land +
building. Table 74 summarizes the relevant aspects and the booking entries (for buyer and seller).
Table 74: Aspects relevant when buying and selling land + building
Nr Aspect Description
While there is typically a market price, there is always room for negotiation
Purchase/sales because of specific needs of offerings.
1
price
Land + building / Misc. cur. liability // Other cur. rec. / Land + building
Land + building is typically financed with a special (low-interest) bank

loans, called mortgage. The mortgage is bound to the land + building, and
also to the owner. If the owner changes, banks typically have an interest to
2 Mortgage also offer the mortgage to the new owner. If so, the mortgage amount is de-
ducted from the purchase/sales price, instead the buyer has more liability and
the seller loses his liabilities.
Misc. cur. liabilities / Loans // Loans / Other current receivables
Chapter 7:
If the mortgage is handed over to the mortgage, the interest must be consid-
ered: Interest is paid at the end of the period, so the seller has not yet paid
Accrued mortgage the mortgage interest for the months since the last payment. Instead, the
3 buyer will have to pay it. Therefore, this part of the interest reduces the
interest
payment from the buyer to the seller.
Misc. cur. liabilities / Expenses f. L+B // Expenses. f. L+B / Other cur. rec.
If the building is using oil-based heating, typically the seller bought the oil in
the past and some of it is still available by the hand-over day. This remaining
4 Heating oil stock oil must be paid to the seller and thus increases the payment from the buyer
to the seller.
Expenses f. L+B / Misc. cur. liabilities // Other cur. rec. / Expenses f. L+B
The building insurance is related to the building, not to the owner. The in-
surance must be paid in advance, so the seller has already paid the insurance
Share of building and the buyer will benefit from the insurance coverage for some future
5 months. This benefit must be paid to the seller and thus increases the pay-
insurance
ment from the buyer to the seller.
Expenses f. L+B / Misc. cur. liabilities // Other cur. rec. / Expenses f. L+B
If the building includes rentals, tenants may have already paid their lease for
Prepaid rental the next month. However, these prepayments are owed to the buyer, and
6 therefore they reduce the payment from the buyer to the seller.
income
Misc. cur. liabilities / Income f. L+B // Income. f. L+B / Other cur. rec.
Buying and selling or land + building includes official registration of change

in ownership. So the seller wants prove for payment before the registration,
the buyer wants transferring the money after the registration. In such cases,
Irrevocable bank banks offer irrevocable guarantees, so the money is blocked on the buyers
7
guarantee account and reserved for the seller, and if the registration is successful, the
money will be automatically transferred.
Misc. cur. liabilities / Bank account // Bank account / Other cur. rec.
The government charges a fee for the official registration of change in own-
8 Estate transfer fee ership. This fee is typically split equally by the buyer and seller.
Land + building / Bank account // Land + building / Bank account
Note. Own depiction
For the seller, an additional booking for profit or loss applies:
• Profit from sale of land + building: Land + building / Accessory operating income
• Loss from sale of land + building: Accessory operating expenses / Land + building
For land + building, four accounts apply: the asset account land + building, the liability account loans (i.e. mort-
gage), revenue account income from land + building, and expense account expenses for land + building. The tables
below show the structure and position of these four accounts.
Chapter 7:
+ Land and buildings (1600) -

Opening balance Sale
Purchases Depreciation, buildings
New buildings Damage
Value-increasing conversions
Expenses on purchases and sales Closing balance
- Loans (2400) +
Repayments, amortisation Opening balance
Closing balance Loans
- Income from land and buildings (7500) +

Reductions of income Rental income
Rental value:
• Rooms used by the company
Balance • Entrepreneur’s flat
+ Expenses for land and buildings (7510) -

Depreciations of land and buildings Reductions in expenses
Mortgage interest
Maintenance and repairs
Tax on land and buildings
Insurance for land and buildings
Light, cleaning, heating, etc. Balance
If a company owns non-operational land + building, typically the business as well as the owner of the company rent
space in the building. Such rent requires special considerations:
• The business is renting space in its own non-operating land + building: as all expenses and income from
land + building are recorded in respective, non-operational accounts, the operational lease must be booked
into the respective accounts. This booking does not change the overall profit or loss, but it discloses expens-
es at the right level in the statement of profit or loss in reporting format:
Lease expenses / Income from land + building
• The owner is renting space in the company’s non-operating land + building: the owner of the company
must consider the value of this lease, even if he does not pay. In sole proprietorships or partnerships, the pri-
vate account is used to record such value exchange without payment between the owner and the business:
Private / Income from land + building
End of Theory Part
7.3.1 Tom purchases land + building
From the sales of his patent, Tom has a lot of money on the bank account. On the bank account, the money is un-
productive. As he has no real ideas how to grow his business, Tom decides to buy a building because the real estate
market seems successful and profitable in the long term (at least in the past). He believes that he can buy a building
(with land) for a purchase price of up to CHF 800’000.
Chapter 7:
Personal Opinion
With roughly CHF 250 000 earned from the sale of his patent, do you think that a purchase price of CHF
800 000 for land and building is reasonable?
A price level of CHF 800 000 is reasonable because … He should look for CHF 250 000 instead of 800 000 …
On 1 March, Tom purchases a property with three rental flats and a garage from Albert Amman (vendor). The pur-
chase agreement contains the following conditions (the property transaction is entered into the books through the ac-
count “Miscellaneous current liabilities, Ammann”, which is temporarily kept exclusively for this purpose):
• The purchase price is CHF 700 000.

• In consultation with the bank that has provided the mortgage, purchaser Tom takes over the mortgage on the
property of CHF 480 000, annual interest rate 4.0 % (p.a.), interest payment day: 31 May.
• The mortgage rate accrued to date is debited to the vendor.
• Tom takes over the heating oil stock in the value of CHF 1 900.
• The building insurance premium for the current year was paid by the vendor in advance. CHF 500 of this
premium is debited to purchaser Tom.
• Rental income in the amount of CHF 3 000 paid to the vendor in advance is debited to him. The rental con-
tracts are continued unchanged.
• Tom pays the balance by means of an irrevocable payment guarantee.
• The real estate transfer fees totaling CHF 5 000 are borne by the purchaser and the vendor in equal parts and
paid by bank transfer with immediate effect.
Table 75: Tom’s booking entries D, 2_07, purchase of land + building
Mar 1 Land + building Misc. cur. liab., Ammann Purchase price 700 000
Misc. cur. liab., Ammann Loans Continuation of mortgage 480 000
Misc. cur. liab., Ammann Expenses for land + building Accrued mortgage interest 14 400
Expenses for land + building Misc. cur. liab., Ammann Heating oil stock 1 900
Expenses for land + building Misc. cur. liab., Ammann Share of building insurance 500
Misc. cur. liab., Ammann Income from land + building Rents received in advance 3 000
Misc. cur. liab., Ammann Bank account Bank transfer 205 000
Land + building Bank account Real estate transfer expenses 2 500

Note. Own depiction
Chapter 7:
7.3.2 The transactions for seller of land + building
Assuming that Albert Amman reports the property at CHF 650 000 in his statement of financial position, these are
the bookings from the seller’s perspective:
Table 76: Booking entries for selling of land + building
Mar 1 Other cur. receivables, Tom Land + building Selling price 700 000
Loans Other cur. receivables, Tom Continuation of mortgage 480 000
Expenses for land + building Other cur. receivables, Tom Accrued mortgage interest 14 400
Other cur. receivables, Tom Expenses for land + building Heating oil stock 1 900
Other cur. receivables, Tom Expenses for land + building Share of building insurance 500
Income from land + building Other cur. receivables, Tom Rents received in advance 3 000
Bank account Other cur. receivables, Tom Bank transfer 205 000
Land + building Bank account Real estate transfer expenses 2 500
Land + building Accessory operating income Profit from sale 47 500

Note. Own depiction
7.3.3 Tom partially uses the land + building for private and business purposes
One flat is empty; Tom occupies it privately. CHF 1 500 are debited for the monthly rent; this amounts to
CHF 15 000 for the ten months until the end of the year.
Tom uses the garage that belongs to the property for additional storage space for his company. The market-based
rent amounts to CHF 180 per month or CHF 1 800 until the end of the year.
Table 77: Tom’s booking entries E, 2_07, land + building used by his business and by himself
Dec 31 Private Income from land + building Tom’ s flat 15 000
Lease expenses Income from land + building Rent garage 1 800

Note. Own depiction
Chapter 7:
7.4 Accruals
Theory explanation

Accruals
The fundamental idea of accounting is to map business transactions into financial disclosures, i.e. booking entries.
Looking at the timing effect of business transaction and financial transaction, there are three options:
1. The business transaction leads to a one-time booking entry and this booking entry is fully completed at
this one time. These are most of the transactions, e.g. sales in cash (cash / sales from services), etc.
2. The business transaction leads to a set of subsequent booking entries, and each of these subsequent trans-
actions is fully completed upon booking. Examples include purchase of assets which leads to the asset
swap (machine / cash) and then to depreciation in all subsequent years (depreciation / machine), as well
as sales against invoice (receivables / sales from services, and later cash / receivable, and this second
transaction is looked at separately, i.e. probability of customer payments is assessed, customers are re-
minded, etc.)
3. The business transaction leads to a booking entry that spans over a longer time. Examples include pay-
ment for insurance (the payment is on e.g. April 1, but the benefit, i.e. the insurance coverage, spans over
12 months), service agreement to repair machines over the next 6 months (the agreement is signed on Oc-
tober 30 and the customer pays on November 1, but the obligation to render repair services spans until
End of April of the next year).
While the booking entries of the options 1 and 2 must not be of concern after their recording, the booking entries of
option 3 must be considered if their period spans across the year-end. While the payment of the transaction applies
in one year (so the payment side of the transaction correctly applies at one point in time), the service side spans over
multiple months and the some of these months concern the following business year (i.e. benefit from the service of
insurance coverage, and obligation for rendering customer repair services). This part of the services must be
‘moved’ to the next year.
• Insurance: payment does apply on April 1 (which is correct and completed), but expenses must be shared
between the current year (April to December) and the next year (January to March). So the expense side of
the booking of April 1 (expenses / cash) must be corrected: only ¾ instead of all expenses should be allo-
cated to the current year. This correction booking entry must be ??? / expenses (and on January 1 of next
year the expenses must increase, i.e. expenses / ???).
• Repair agreement: payment does apply on October 30 (which is correct and completed), but sales must be
shared between the current year (November and December) and the next year (January to April). So the rev-
enue side of the booking of October 30 (cash / sales) must be corrected: only ⅓ instead of all revenue
should be allocated to the current year. This correction booking entry must be sales / ??? (and on January 1
of the next year the sales must increase, i.e. ??? / sales)
This concept of ‘moving’ revenue and expense from one year to another (i.e. increasing/decreasing in the current
year and consequently decreasing/increasing in the next year) is called accruals. Accruals apply if the payment cor-
rectly applies in one business year, but the respective service period spans across two (or more) financial years. Fi-
gure 51 shows the 4 generic cases for accruals. The vertical arrows indicating the payment (i.e. the point in time
when the normal booking entry applies) and the boxes indicating the service period (for rendering income or con-
suming expenses). Because the normal booking entry recognizes the revenue or expense at the point of payment (i.e.
Chapter 7:
together with the cash transaction) a part of the revenue or expense must be moved into the other year. The insur-
ance example above represents case the case of «pre-paid expenses», the repair agreement represents «pre-paid rev-
enue».
Figure 51: 4 cases for accruals
Note. Own depiction
Financial accounting uses so called accrual accounts as second account to increase/decrease revenue/expense in the
current year and then decrease/increase in the next year. Two accrual accounts exist, one is an asset account, the
second is a liability account:
• Pre-paid revenue or post-paid expense: decrease of revenues or increase of expenses (i.e. left-side entries in
the profit account, i.e. revenue or expense), the accrual account is «Accrued liability and deferred in-
come» (right-side entry in the correction account, i.e. it is a liability account). The booking entries are:
sales from services / accrued liabilities and deferred income or
administrative expenses / accrued liabilities and deferred income.
• Post-paid revenue or pre-paid expense: increase of revenue or decrease of expense (i.e. right-side entries in
the profit account, i.e. revenue or expense), the accrual account is «Accrued income and deferred liabili-
ties» (left-side entry in the correction account, i.e. it is an asset account). The booking entries are:
accrued income and deferred liabilities / sales from services or
accrued income and deferred liabilities / administrative expenses.
The booking entry on January 1 in the following year is the reverse booking, i.e.
• Pre-paid revenue or post-paid expense:

accrued liabilities and deferred income / sales from services or
accrued liabilities and deferred income / administrative expenses.
• Post-paid revenue or pre-paid expense:
sales from services / accrued income and deferred liabilities or
administrative expenses / accrued income and deferred liabilities.
Chapter 7:
So for each case, three bookings apply: the normal booking (upon payment), the accrual booking on Dec 31 (for cor-
recting the revenue/expense of this year), and the respective reverse booking on Jan 1 of the following year, as
summarized below for a each case.
Figure 52: 4 bookings for different accrual cases
Note. Own depiction
In Switzerland, the there is a legal requirement for considering and booking accruals:
Art. 958b(1) Swiss Code of Obligations

1
Expenditure and income must be entered separately depending on the date and nature of the transaction.
End of Theory Part
7.4.1 Tom’s operating business
At the beginning of the year, Tom employed his cousin Anja. She herself competes in cycling races. With her prac-
tical experience and her flair for sales, she is a genuine reinforcement in the company and Tom hires her as part-time
employee. For her part-time job, she is paid CHF 3 600 per month plus 25% of the profit of the core business.
Tom keeps the account to the end of the year …
Table 78: Tom’s booking entries F, 2_07, operational business
Cash Sales from trading goods Sales against cash 3 900
Receivables from G&S Sales from trading goods Sales against invoice 188 200
Chapter 7:
Cash Sales from services Repairs against cash 89 200
Expenses for material Payables for G&S Purchases, spare parts 12 300
Expenses for trading goods Payables for G&S Purchases, trading goods 90 300
Expenses f. wages and sal. Bank account Wages, Anja 43 200
Expenses f. wages and sal. Private Wages, Tom 73 800
Lease expense Bank account Rent business premises 36 000
Administrative expenses Bank account Office material, web hosting 6 800
Advertising expenses Bank account Customer presents 7 500
Other operating expenses Bank account Odds and ends 3 050
Depreciation VA, furniture and facilities Depreciation (see last year) 938
Depreciation Tools and appliances Depreciation (see last year) 1 500
Financial expenses Bank account Bank fees 250
Bank account Financial income Interest 150
Loans Bank account Paying back of loan 10 000
Financial expenses Bank account Interest for loan 500
Expenses for land + building Bank account Mortgage interest 19 200
Expenses for land + building Bank account Misc. operating costs 5 780
Bank account Income from land + building Rental income 30 000
Bank account Receivables from G&S Customer payments 150 000
Payables for G&S Bank account Payment of supplier invoices 60 000
Misc. current liabilities Bank account Payment of supplier invoices 4 000
Bank account Cash Cash deposit 70 000
Losses form receivables VA, receivables Increase doubtful customers 3 500

Note. Own depiction
Chapter 7:
Table 79: Statement of profit or loss for January to December 2_07, in reporting format, before accruals

Gross income 175 200
6000 – 6799 - Other operating expenses -55 150
6900 – 6999 +/- Financial Result (financial profit or loss) -600
7000 – 7999 +/- Accessory operating result 282 820
8900 – 8999 - Taxes
Note. Own depiction
Tom is annoyed and disappointed. He expected a substantially better result from the core business, particularly also
because of employing Anja and moving to the new, centrally located sales room. Although he checks his calculation
several times, he does not find an error in the statement of prof-it or loss. “How on earth am I supposed to explain
this to Anja?” She expects a substantially higher share in the profit than CHF 3 (25% of CHF 12.00).
7.4.2 The effect of cross-year-end-transactions
Anja is extremely disappointed. Tom shows her all the books and explains to her that he expects a bigger profit next
year. He gives her the following reasons:
1. Since 1 May 2_07, there has been a service agreement between Tom’s Cycle Shop and the Bikemail bi-
cycle courier service. Tom repairs the bicycles of the courier services for a lump sum of CHF 18,000 a
year, exclusive of materials. This payment is due at the end of April for the preceding 12 months.
2. In addition, the supplier of the bicycles that Tom deals with prospects a quantity discount for purchases in
2_07; this will be credited at the end of January 2_08.
Anja checks those business transactions more closely in which both the past year and the new year are somehow in-
volved. She finds a payment for customer presents (expense of CHF 7 500) and payment from rental income (reve-
nue of CHF 30 000). Thinking further about these transactions, she finds:
3. About half of the customer presents for Christmas are still on stock.
4. CHF 3 000 of the rental payments totaling CHF 30 000 concern January 2_08.
5. Anja notices that the accrued mortgage interest since the last payment on 31 May 2_07 has not been
booked. 7 months at CHF 1 600 = CHF 11 200.
Anja draws up a table with the costs concerned and accrues amounts in the profit/loss items of 2_07, which Tom did
not book according to the right periods. These accrual considerations lead to the booking entries in Table 81.
Chapter 7:
Table 80: Anja’s consideration of accruals 2_07
Nr Account Accrual Old amount New amount
1 Sales from services +12 000 89 200 101 200
2 Expenses for trading goods -8 000 90 300 82 300
3 Advertising expenses -3 750 7 500 3 750
4 Income from land + building -3 000 49 800 46 800
5 Expenses for land + building +11 200 12 980 24 180

Note. Own depiction
Table 81: Tom’s booking entries G, 2_07, accruals
Accrued income Sales from services Accrual for service agreement 12 000
Accrued income Expenses for trading goods Accrual for discount 8 000
Accrued income Advertising expenses Accrual for customer presents 3 750
Income from land + building Accrued liabilities Accrual for rental income 3 000
Expenses for land + building Accrued liabilities Accrual for mortgage interest 11 200
Note. Own depiction
7.5 Provisions
Theory explanation

Provisions
While accruals shift income and expenses from one year to another, i.e. it is exactly known for what periods the in-
come and expenses apply and when the payments occur. Provisions are a similar concept for situations when the
amount as well as the point in time of a payment are (still) unknown, however, the expenses apply today (without a
return value in the future at the time of payment). Examples are legal court cases or necessary renovations of build-
ings in order to comply with new regulations (and without the renovation the building can no longer be used). First
of all, there are two different times of renovations (which similarly apply for repairs and for all non-current assets):
• Expenditures that retain the asset value: examples here would be checkups or changing the breaks on a car.
They do not fundamentally increase the value of the car (the value of the car remains the same and offers the
same level of service), but they ensure smooth, uninterrupted, problem-free use of the car. Such expendi-
tures are booked as expenses (i.e. vehicle expenses / cash or maintenance and repair / cash).
Chapter 7:
• Expenditures that increase the asset value: If the owner installs a new trailer hook, this (potentially) changes
fundamentally how and for what the car can be used. Such an expenditure increases the value of the car and
is booked as asset swap (i.e. vehicle / cash or land + building / cash).
Renovation of land + building can take either form. However, oftentimes, instead of maintenance owners wait for
some year and then build something new. Examples include heating systems, or a roof over a passage from one
building to another (instead of fixing the roof every year, the owner might stop doing so and after 5 years, when the
passage is needs replacement he constructs a connection between the houses with additional rooms).
In a situation where (future) constructions apply, but the point in time or the amount are still unclear, and the con-
struction is NOT increasing the building value (e.g. a new law requires outside emergency stairs and they do not ex-
ist yet), provisions apply. So the expenses are booked as provision, i.e. the booking applies today (because the law is
in place now), but the exact time of the law coming in power, e.g. the stair must be built, and the exact cost, are still
unknown. For provisions a separate liability account exist, called provisions. The booking entry is: expenses / provi-
sions.
Figure 53: comparison of accruals and provisions
Amount and point in time Amount and point in time

of payment known of payment unknown
Accrual Provisions
Note. Own depiction
End of Theory Part
The Swiss government passed a new law, indicating that likely buildings like the one Tom owns also need outside
emergency stairs. Because of the special fire-prove construction of his building, an exception may apply for Tom,
but this is not very likely, it must be further discussed with the authorities (so the effective time of start of the con-
struction is difficult to estimate, but construction is likely). The expenditures for a simple outside emergency stair is
estimated at CHF 15 000.-. The expenses must apply now, because the cause (the new law), but as the effective time
of construction and the amount are still unknown, Tom must book a provision, i.e. a liability for a future payment.
Table 82: Tom’s booking entries H, 2_07, provision
Expenses for land + building Provisions Planned renovation 15 000

Note. Own depiction
Chapter 7:
7.6 The profit and cash effect of the year 2_07
With the year-end transactions, Tom compiles the statements below.
Table 83: Tom’s booking entries I, 2_07, year-end bookings
Dec 31 Private Equity Closing private account 58 800
Statement of profit or loss Expenses Closing expense accounts 308 868
Income Statement of profit or loss Closing revenue accounts 586 250
Statement of profit or loss Equity Profit of the year 277 382
Statement of fin. Position Assets Closing asset accounts 935 803
Liabilities Statement of fin. Position Closing liability accounts 935 803

Note. Own depiction
Expenses Statement of profit or loss 2_07 Income

Expenses for material 12 300 Sales from trading goods 192 100
Expenses for trading goods 82 300 Sales from services 101 200
Expenses for wages and salaries 117 000 - Losses from receivables -3 500
Lease expenses 37 800 Financial income 150
Admin expenses 6 800 Income from land & bldgs. 46 800
Advertising expenses 3 750 Accessory operating income 246 000
Other operating expenses 3 050
Depreciation 2 438
Financial expenses 750
Expenses for land and bldgs. 39 180
Profit of the year 277 382
582 750 582 750
Note. Own depiction
Chapter 7:

Gross income 195 200
6900 – 6999 +/- Financial Result (financial profit or loss) -600
8900 – 8999 - Taxes
Note. Own depiction
… and Anja is pleased with her share in the profit of CHF 5 941 (25% of the core business profit of CHF 23 762).
This share in the profit will be paid at the beginning of the business year 2_08, it therefore has no influence on cash
in this business year.

Bank account 103 635 Accrued liabilities and deferred inc. 14 200
Inventories, raw materials 3 000 Provisions 15 000
Inventories, finished goods 3 500 Non-current liabilities 495 000
Accrued income and deferred liab. 23 750 Total liabilities 553 800
Equity 382 003
Land + building 702 500
935 803 935 803
Note. Own depiction
Chapter 7:
Personal Opinion
In the first year we summarized that change in cash and profit are the same, they are two sides of the same
medal. Now, cash and profit are very different. Are cash and profit tow sides of the same medal or not?
Yes, because No, because
Personal Opinion
How do you assess Tom’s situation after year 7?
Theory explanation

Fundamental concepts of year-end closing
The following two fundamental concepts lead to the concepts of accruals and provisions:
The prudence principle:
All business transactions must be booked with prudence. This means that liabilities have to be disclosed as soon as
they are likely, i.e. before they have actually occurred. In contrast, profits are only entered once they have actually
been generated.
True and Fair View:
The supreme goal of modern accounting standards is to ensure that financial statements provide a picture of the as-
sets, liabilities, equity, and the income situation that best reflects the actual reality. This provides outsiders with the
advantage of being in an even better position to assess and compare a company’s financial situation. With financial
statements in accordance with the True and Fair View principle, it is regarded as particularly important that account-
ants allocate all expenses and income exactly to the periods in which they actually occur. In certain situations, the
prudence principle may then take second place.
End of Theory Part
Chapter 7:
7.7 Summary

Current liabilities
liabilities
• Analysis
o Quick ratio
assets Equity
o Equity ratio

Account Designation
EBITDA
EBT
89 - Taxes

of private account)
Transport costs
Transport costs
Decrease in inven-
tory
Chapter 7:
5 Production
6 Value adjustments

Chapter 7:
7.8 Exercises
7.8.1 Mixed exercises
At the end of the year, the following business transactions occur with regard to property (accounts used: Land and
buildings, Value adjustment, land and buildings, Expenses for land and buildings, Income from land and buildings).
Book the accruals below.
1. The value of the heating oil stock is given as CHF 4 300.
________________________________ / ________________________________ CHF ____________
2. The invoice for electricity and water is paid every year at the end of March and at the end of September; we es-
timate that on the basis of the water and electricity readings, the unpaid consumption since September is
CHF 2 500.
________________________________ / ________________________________ CHF ____________
3. Tenant Patzen paid her monthly rent of CHF 800 for January and February of the following year in advance on
December 20.
________________________________ / ________________________________ CHF ____________
4. The interest payment on the mortgage of CHF 480 000 at 3% is paid every six months at the end of February
and at the end of August.
________________________________ / ________________________________ CHF ____________
5. The window repair invoice is still outstanding. The quotation was CHF 440.
________________________________ / ________________________________ CHF ____________
6. Ms Proll, our cleaning lady for the foyer, staircase and cellar, received an additional advance on her wages of
CHF 500. We will offset this advance with her compensation at the beginning of next year.
________________________________ / ________________________________ CHF ____________
Chapter 7:
7.8.2 Mixed exercises
What are the booking entries for the following transactions?

1. Mortgage interest still unpaid at year end CHF 7 500
2. We pay cash for the renovation of the staircase CHF 6 000
2/3 of this amount increases the property value, 1/3 preserves its value.
3. Advance rental payments received by year end CHF 9 000
4. Rental value of the private flat CHF 1 200
5. Payment for furniture insurance CHF 800
6. Our tenant Meier is a plumber. The settlement for the past month is as follows:
• Rent for his flat CHF 2 000
• less his repairs of the toilet CHF 500
• less his repairs of the business owner’s bathroom CHF 400
• less his wife’s work in the stock-taking of our firm CHF 300 CHF 1 200
his cash payment CHF 800
7. Prepaid of insurance for the building CHF 950
8. Heating material inventory at year end
(we only keep the Expenses for land and buildings account) CHF 2 000
9. Our premises have been burgled. We pay cash
• for the repair of the door CHF 200
• for the repair of furniture CHF 500
10. The insurance company transfers the indemnification for the above loss by post.
11. Indirect depreciation of the business building CHF 20 000
12. We mistakenly posted the mortgage interest debited to us by the bank with CHF 356
instead of CHF 536. Reverse the wrong entry and post the correct entry.
7.8.3 Land and buildings accounts
Draw up the booking entries for the following business transactions.

1. We pay by bank transfer for an uninsured breakage of glass CHF 800
2. The bank debits us for the mortgage interest due CHF 5 000
and for the partial repayment of the mortgage CHF 40 000
3. We pay the electricity invoice by transfer from our post bank account CHF 500
• of which for business premises CHF 300
• of which for business owner’s private flat CHF 150
• of which for staircase lights CHF 50
4. We pay cash for the staircase to be cleaned CHF 800
and for the business premises to be cleaned CHF 700
5. We pay by bank transfer for the conversion of one of the flats. Half of the
conversion is seen as increase in value, the remaining half as expenses. CHF 34 000
6. The rental value of the business premises amounts to CHF 9 000
Chapter 7:
7.8.4 Selling land and buildings transactions above and below book value
Our Land and buildings account reports two properties with book values of CHF 1 700 000 and CHF 950 000.
We sell both properties. For the first one, we receive CHF 1 900 000; for the second, CHF 800 000 is credited to our
bank account (sales fees have already been taken into account). What are the booking entries?
7.8.5 Purchase of a property
A property is for sale. Purchase price of the building: CHF 750 000
Mortgages:
1. CHF 500 000, interest rate 3%, payable on December 31 every year
2. CHF 120 000, interest rate 3½ %, payable on December 31 every year
The property is sold on October 31. What are the purchaser’s booking entries under the following assumptions?
1. The mortgages are taken over, and any accrued interest will be debited to the vendor.
2. One tenant paid the November and December rent in advance. CHF 3 500
3. The purchaser takes over the old heating stock for CHF 4 000
4. The purchaser gives the following securities in payment:
• 200 shares in Janu AG at a price of CHF 80 per share
• CHF 30 000, 2% bonds of Febi AG, price CHF 110, coupon due date October 31.
5. The purchaser pays the balance due in cash.
6. The purchaser pays the real estate transfer tax in full; ⅓ of the fees are paid by the
vendor, ⅔ by the purchaser (cash payments):
• Real estate transfer tax CHF 3 500
• Notarial fees CHF 600
• Land registry fee CHF 300
Chapter 7:
7.8.6 Provisions for litigation (legal court case)
A company is currently engaged in a lawsuit against a competitor on account of unfair competition. Since there is a
risk of losing the lawsuit, provisions in the amount of CHF 30 000 were made when the accounts are closed in the
year 20_1. All the payments are effected through the bank account.
1. What was the booking entry for the creation of the provision, and what were the corresponding closing entries in
the year 20_1?
2. In 20_2, litigation is concluded with a defeat. The estimate turns out to be correct; legal costs of CHF 30 000
have to be paid at once. What are the opening entries for 20_2, and what booking entries apply in connection
with the procedural defeat?
3. Assume that (contrary to exercise 2), the company will win the lawsuit in 20_2 and that its competitor will have
to bear all the costs in connection with this litigation. How will the company enter these facts in its accounts?
4. Assume that the legal costs actually to be paid amount to CHF 40 000 and are therefore higher than estimated.
What booking entries apply in connection with the procedural defeat?
5. Assume that the lawsuit will be concluded with a defeat on December 12, 20_2. The estimate for provisions in
the amount of CHF 30 000 turns out to be correct. Legal costs of CHF 12 000 must be paid with immediate ef-
fect; the remaining CHF 18 000 will only become due on January 12, 20_3. List the booking entries that are re-
quired to enter these facts in the accounts.
6. Assume that the litigation will not be concluded in 20_2. The ruling of the court is only expected for 20_3. What
booking entries apply for 20_2?
7.8.7 Accrual of rents
Magnum the auto part dealer has for some years been renting a warehouse for which he pays lessor Imperial a rent
of CHF 12 000 for 6 months in advance. Payments are made on March 31 and September 30.
a) What are the booking entries for all transactions in 20_1 up to and including March 31, 20_2 from the perspec-
tive of the dealer Magnum?
b) What are the booking entries for all transactions in 20_1 up to and including March 31, 20_2 from the perspec-
tive of the lessor Imperial?
c) Assume that Magnum and Imperial have agreed to have the rent paid in arrears. What are the booking entries for
all transactions in 20_1 up to and including March 31, 20_2 from the perspective of the dealer Magnum?
Chapter 7:
7.8.8 Various accruals in a trading company
What are the booking entries for the following business transactions as per December 31?
1. The interest for the 4th quarter has not yet been debited to the bank account CHF 800
2. The outstanding rental payments for the flats amount to CHF 2 800
3. An invoice is still outstanding from the advertising agency CHF 5 000
4. We transferred the January and February rental for the copy machine in late December CHF 400
5. We agreed with the lessor that we would only pay the December rent for the
office premises in January CHF 4 000
6. In mid-December, we took out a transport insurance policy for an import shipment.
The invoice has not arrived yet but will amount to CHF 500
7. Heating oil stock at year end, entered into Expenses for land and buildings.
This must be accrued to the new business year CHF 1 800
8. Decrease of goods in stock CHF 6 400
9. The overtime wages for December are only paid in January CHF 3 400
10. Our supplier informs us that we will get a sales credit for our purchases of goods.
The transfer will be effected in mid-January CHF 2 600
11. We have not yet made out an invoice for goods delivered to one of our
regular customers in late December CHF 6 500
12. The interest that has accrued on our loan debt must be taken into consideration. The loan amount
is CHF 400 000, Interest dates are March 31 and September 30, and interest rate is 3% CHF ?
7.8.9 Accrual of loan interests
A company grants a business partner a loan of CHF 400 000 at a rate of interest of 3% on July 1, 20_1. Interest
payment and loan repayment will become due after expiry of 12 months as per agreement.
a) Book the following business transactions in the lender’s accounts:
July 1, 20_1 Payment of the loan to the business partner by bank transfer.
December 31, 20_1 Closing of accounts, taking into consideration accrued interest.
January 1, 20_2 Reopening of accounts.
June 30, 20_2 Repayment of the loan and annual interest by bank transfer.
b) What are the corresponding booking entries in the borrower’s accounts?
Chapter 8:
Marketable securities 223
Marketable securities
There are different reasons why companies may buy and own marketable securities, i.e. shares and bonds that are
traded on capital markets such as stock exchanges. The financial considerations depend on the intentions, still offer-
ing different alternatives to accommodate the specifics of the marketable securities, the capital markets and the
company.
8.1 Introduction
1. What are securities, marketable securities, and what are the roles of the issuer and the borrower?
2. How are sales, purchases and values of marketable securities financially recorded?
3. What contributions from marketable securities exist and how are they disclosed?
8.2 The second part of accruals and bonus payment
8.2.1 Reversing accrual bookings
Note. Own depiction
Chapter 8:
And with the accruals last year, the second thing is to reverse book these accruals:
Table 88: Tom’s booking entries B, 2_08, reversing accrual bookings
Jan 1 Sales from services Accrued income, def. liab. Reverse entry, service agrem. 12 000
Jan 1 Expenses for trading goods Accrued income, def. liab. Reverse entry, discount 8 000
Jan 1 Advertising expenses Accrued income, def. liab. Reverse entry, presents 3 750
Jan 1 Accrued liability, def. inc. Income from land + building Reverse entry, rental income 3 000
Jan 1 Accrued liability, def. inc. Income from land + building Reverse entry, mortgage interest 11 200
Note. Own depiction
During the course of the first months, the final part of the transactions that lead to accruals applies: the customer
Bikemail courier pays for the service agreement, the discount from the bicycle supplier arrives, the mortgage interest
must be paid, and all three rentals apply (from tenants, from Tom and from the business. With these booking entries
and the reversal accrual entries, all expenses and revenues show the level that is correct for this year.
Table 89: Tom’s booking entries C, 2_08, final part of the accruals
Bank account Sales from services Payment Bikemail courier 18 000
Payables for G&S Expenses for trading goods Discount for 2_07 8 000
Expenses for land + building Bank account Mortgage interest 19 200
Bank account Income from land + building Rental income 15 000
Private Income from land + building Tom’s flat 9 000
Lease expenses Income from land + building Rent for garage in own building 1 080
Note. Own depiction
8.2.2 Disbursement of the share in last year’s profit
The disbursement of Anja’s share in the profit of 2_07 is still outstanding. It amounts to CHF 5 941 (25% of the
profit of the core business of CHF 23 726). When closing the accounts for the business year 2_07, Tom credited the
entire profit of the year to equity. The disbursement of Anja’s share in the profit must therefore be debited to equity.
Chapter 8:
Table 90: Tom’s booking entries D, 2_08, bonus for last year’s profit
Equity (profit brought forward) Cash Anja’s profit share 2_07 5 941
Note. Own depiction
What is important for Tom is to know that the disbursement of Anja’s share in last year’s profit will have an impact
on the liquidity, but not on the profit/loss situation (neither of the last business year, nor of the current business year)
because it is a matter of profit distribution, not a matter of profit making.
8.3 Marketable securities
8.3.1 Financing companies and capital markets
Lately, Tom is more and more fascinated by the stock market. He would like to invest a part of the liquid funds in
securities in order to generate a higher yield.
Theory explanation

Marketable Securities
Securities Securities are any form of financial instruments, i.e. a borrower is lending money to the issuer, with varying
specific definitions by different country jurisdictions. Different types exist, and they describe different rights
and obligations between issuer and borrower. Securities used to be represented by a certificate (i.e. the certifi-
cate secured the interest of both borrower and issuer), today they may be electronically only.
Besides bank notes, the two dominant types of securities are shares and bonds. Shares constitute a stake in the equi-
ty of the issuing joint-stock company. The investors are called shareholders, and as co-owners of the company they
have a voice (right for participation in voting at the general assembly) and are entitled to a part of the profit (divi-
dend, if the general assembly decides on a profit distribution). The nominal value of a share is its amount as part of
the total shareholders’ capital of the company; in Switzerland, it must be at least 1 centime (Art. 622(4) Swiss Code
of Obligations). Shares may be traded on a public stock exchange. Purchase and sale of shares are both subject to
charges (e.g. taxes, bank fees, and stock exchange fees). Bonds constitute a liability of the issuing company. Inves-
tors are usually entitled to an interest payment and a reimbursement of the capital, both of which have been set in
advance. When bonds are bought and sold, any interest accrued since the last interest payment is also due. The nom-
inal value of a bond is the amount which will be redeemed at the end of its maturity. The market value is indicated
in per cent of the nominal value. While accrued interest applies for bonds, no accrued dividend applies for shares,
because interest must be paid for bonds (according to the agreed conditions), but there is no obligation, i.e. right of
the shareholder, to receive dividend payments (the shareholder only has the right to receive his part if the general as-
sembly does decide on profit distribution through dividend payments). For the issuer, shares and bonds are two al-
ternative options to finance the business. Both may be sold to other investors, however for selling, i.e. trading on a
public secondary market, i.e. capital market, shares and bonds as well as the respective issuing companies must meet
Chapter 8:
certain criteria (e.g. the Swiss stock exchange market in Zurich requires companies to disclose various details re-
garding the compensation of the top management, and many other). The price paid on the secondary market, i.e. the
current market price of the security is negotiated by investor A and investor B, without the issuing company. So if
the price increases, none of this additional money goes to the company. However, it the market price of the security
is high, the company can issue shares and bonds at higher prices and better conditions the next time it issues new se-
curities.
Figure 54: primary and secondary market for securities
Primary market Secondary market
Security Security
Issuer: Shareholder A Shareholder B
Company XY Bondholder A Bondholder B
Money Money
Note. Own depiction
8.3.1.1 Financing companies with equity

The company must first decide how much equity it needs to start the business (or to grow the business in case of an
increase of share). Then the total equity must be divided into parts (shares), e.g. 300 000 shares with each with a
nominal value of CHF 10. During the founding process, the initial shareholders agree on the total amount as well as
number of shares and the nominal value. Each shareholder then pays the value of the shares that he agreed for to the
company’s bank account, and the received the respective shares (and therewith the voting power and the right for
dividend). If an existing company increases the equity, e.g. for pursuing growth opportunities, the shareholder must
pay a higher price than the nominal value (and therewith compensate for all previous profits). This premium pay-
ment is allocated to the equity account «Legal capital reserves».
Table 91: Shares: equity financing
Assets Statement of financial position Liabilities
Current assets Liabilities

Shareholders’ capital 30 000 000
Legal capital reserves
Other reserves
Profit brought forward
Profit of the year
Note. Own depiction
8.3.1.2 Financing companies by debt

The company must first decide how much equity it needs to finance the initiative (typically bonds are rather for fi-
nancing growth of an established business instead of starting a new business). Then the conditions must be defined,
Chapter 8:
and the total amount must be split into different parts, which are then offered on the primary market. Typically, issu-
ers pay interest to the borrower, which is accrued when sold on the secondary market (the interest is also called cou-
pon, because originally the security paper had actual coupons attached to it and with such a coupon the interest was
collected at the bank or at the issuer); zero-coupon bonds do not pay interest, instead they pay back a significantly
higher amount of money, and this difference in amount represents the total interest. Companies may define any kind
of conditions for lending money, paying interest and paying back, i.e. details of the bond. However, they typically
try to follow the standard types:
• straight bonds • callable bond

• perpetual / consul bond • floating rate note / bond (floater)
• exchangeable bond • mandatory convertible securities
• income bond • inflation-linked bond
• zero-coupon bond • bearer bond / registered bond
• convertible bond • Eurobond
Table 92: Shares: equity financing
Assets Statement of financial position Liabilities
Current assets Liabilities

Accounts payable
Loans
Bonds 5 000 000
Note. Own depiction
8.3.2 Investment on the capital market
While the above paragraph introduces the issuance of share and bonds and their financial disclosure as liability and
equity, also borrowers must consider financial disclosure of the securities. The financial disclosure of securities at
the borrower considers if the security is traded on the secondary market (i.e. it is a marketable security) or not, and
the intention of the borrower:
• Marketable securities that are held as cash reserve or cash alternative, and that are going to be sold at the
next good opportunity, are disclosed as current assets, in the account «Short-term marketable securities».
• Marketable securities that are held for strategic reasons, i.e. there is no intention to be sold anytime soon, or
non-marketable securities, are disclosed as non-current assets, in the account «Financial assets». There
might be different reasons why companies hold shares of another companies, e.g. to have a seat on the board
of a competitor and therewith having some insights into their strategy, or a e.g. 30% stake in a competitor
prevents the competitor to be taken over and therewith prevents monopolies or oligopolies to evolve.
• If the company holds more than 50% of shares or the issuer, with the shares being marketable or non-
marketable, are disclosed as non-current assets, in the account «Investments». Typically, if a company
holds more than 50% of another company, there is typically some form of business relation.
As the holding of securities is not usually part of a company’s core business, expenses for and income from financial
assets are reported in Financial income (6900) and Financial expenses (6950).
Chapter 8:
Table 93: Booking accounts for borrower’s marketable securities
+ Short-term marketable securities / Financial assets / Investments -

Opening balance Sales (according to bank statement)
Purchases (according to bank statement) Redemption of matured bonds
Reduction in the nominal value of shares
Price gains (if direct booking applies) Price losses (if direct booking applies)
Balance
- VA, short-term marketable securities / VA, financial assets / VA, investments +

Price gains (if indirect booking applies) Opening balance
Balance Price losses (if indirect booking applies)
+ Financial expenses -
Bank fees and interest payments
Deposit fees
Price losses Balance
- Financial income +
Bank account interests and late payment income
Dividends and interest credited
Interest accrued on bonds
Balance Price gains
Note. Own depiction
End of Theory Part
8.3.3 Tom’s investment on the capital market
On 31 January, Tom buys (as a liquidity investment, through his bank): 30 shares of Zafling AG (nominal value per
share CHF 500.-, price CHF 2 000.-, bank charges of CHF 145.-). And a bond of UpWeGo AG (CHF 75 000.- nom-
inal value, at a price of 102%, interest 4% p.a., coupon due date 31 March, bank charges CHF 183.-).
Tom receives the calculations for the purchase of the marketable securities from the bank (see Table 94) disclosing
the amount that was withdrawn from his bank account for this purchase, as well as the purchase value to be used for
financial valuation. Table 95 shows the respective booking entries.
Table 94: Purchase of marketable securities: Bank information
Position Shares Bond
Price (30*2000.- / 75000.-*1.02) 60 000 76 500
+ Accrued interest n/a 2 500
+ Expenses 145 183
= Bank debit (withdrawal) 60 145 79 183
Purchase value 60 145 76 683

Note. Own depiction
Chapter 8:
Jan 31 Short-term marketable securities Bank account Purchase of shares 60 145
Jan 31 Short-term marketable securities Bank account Purchase of bond 79 183

Note. Own depiction
Theory explanation

Sales of marketable securities
As Tom buys the securities on the secondary market, there must be a seller of the shares and bond. He also uses a
bank for the transaction, and the following is the bank information that he receives:
Table 96: Sales of marketable securities: Bank information
Position Shares Bond
Price (30*2000.- / 75000.-*1.02) 60 000 76 500
+ Accrued interest n/a 2 500
- Expenses 145 183
= Bank credit (deposit) 59 855 78 817

Note. Own depiction
There are different methods for calculating the accrued interest. In Europe, the method used most often is that the in-
terest for the selling/buying day belongs to the seller, and every month has 30 days (regardless how many calendar
day the month effectively has). So if Tom sells the bonds again on April 10, he has the right for 70 days interest, i.e.
70/360 of the annual interest (70 is calculated as follows: the right starts on Feb 1 and 30 days for February, 30 days
for March and 10 days in April).
End of Theory Part
8.3.4 Bond interest and share dividend
As Tom still owns the bond as per the coupon day, March 31, the interest is paid to the bank account of Tom. As
discussed, Switzerland applies the anticipatory withholding tax for financial income, so only 65% is paid to Tom’s
bank account. The same applies to the dividend, which is decided by the annual general meeting of Zafling AG. On
April 10, a dividend of 8% of the share’s nominal value will be paid to the shareholders. The gross interest for the
bond is 4% of CHF 75 000, i.e. CHF 3 000; the dividend for the shares is 30 times 8% of CHF 500, i.e. CHF 1 200.
Chapter 8:
Mar 31 Bank account Financial income Net interest paid 1 950
Receivables, anticipatory tax Financial income Deduction of anticipatory tax 1 050
Apr 8 Bank account Financial income Net dividend paid 780
Receivables, anticipatory tax Financial income Deduction of anticipatory tax 420

Note. Own depiction
8.3.5 Valuation of marketable securities
During Uni Sport, Tom gets to know the passionate yachtsman with an instructor’s license, Peter. Tom and Peter
would like to pool the goods and services provided by Tom’s Cycle Shop and Peter’s Sailing School in a single
company. For this purpose, they choose the legal form of a joint-stock company. Anja is intended as co-owner.
The new company B&S Ltd. – which stands for “Bike and Sail” – is established as per July 1, 2_08. Tom, Peter and
Anja contribute the following assets (cf. “Establishment of a joint-stock company”):
• Tom his sole proprietorship, without the real estate, at a value of CHF 180 000;
• Peter two training yachts and a charter yacht at a value of CHF 180 000;
• Anja pays CHF 90 000 in cash.
Tom draws up the financial statements for his sole proprietorship as per the end of June. Therefore, he must assess
different options for the valuation of securities, with the shares having a current market price of price of CHF 2 200
each and the bonds having a market price of 100.5%, plus interest accrued since the end of June.
Theory explanation

Valuation of Securities
As with all assets, securities must be assessed regarding their change in value. For securities without an active mar-
ket, i.e. not listed at any stock exchange such as daughter companies 100% by the company, securities are valued at
purchasing price, which does not change. For securities with an active market, two options exist regarding valuation
(market value or purchase value), and two options exist regarding booking (direct or indirect booking).
The decision for direct or indirect booking is similar to the argumentations for direct or indirect booking of deprecia-
tion, with indirect booking being preferred today. The decision for valuation at purchase value or market value
needs additional considerations. Most companies choose to disclose financial assets and investments (even with ac-
tive markets) at purchase values, marketable securities at market values. The argumentation is, that for financial as-
sets and investments, current price fluctuations do not influence decisions because they are hold for long-term stra-
tegic reasons. In contrast, high market prices may lead the decision makers to sell the securities, i.e. the market value
Chapter 8:
has significant influence on decision and therefore seems the ‘true and fair’ valuation approach. However, any valu-
ation approach is possible for any type of securities, however, the decision must apply for all securities of the same
type and it must be applied in all years (changes are possible upon significant events).
End of Theory Part
Tom looks at the valuation options (see table Table 98) and he decides for valuation at purchase price with direct
booking.
Table 98: Valuation alternatives for marketable securities
Valuation Option Shares Bond Total
Purchase value 60 145 76 683 136 828
Market value 66 000 75 375 141 375

Note. Own depiction
The current balance of the marketable securities account is CHF 139 328, and therewith he must reduce this value
by CHF 2 500 to arrive at the purchase value valuation. This amount equals the accrued interest as per purchase.
This valuation reduction is booked as financial expenses. The interest payment on March 31 was booked as financial
income, and the full annual interest amount was booked, i.e. CHF 3 000. Looking at the financial result, i.e. finan-
cial income minus financial expenses, the result will be CHF 500, which is the correct applicable interest for the 2
months that Tom did hold the shares (February and March). However, for the period April to June, the respective in-
terest may be accrued again (3 months, i.e. CHF 750).
Table 99: Tom’s booking entries G, 2_08
Jun 30 Financial expenses Short-term marketable securities Valuation 2 500
Accrued income Financial income Bond accrued interest 750

Note. Own depiction
In order to fulfill the agreement for funding the new limited company, Tom changes the property to his private ac-
counts (and consequently also the mortgage and the provisions) and he withdraws CHF 3 262 so the net assets
match the agreed value of CHF 180 000 (net assets being calculated as total assets minus liabilities).
Chapter 8:
Table 100: Tom’s booking entries H, 2_08
Jun 30 Equity Land + building Removal property 702 500
Loans Equity Removal mortgage 480 000
Provisions Equity Dissolution provisions 15 000
Private Cash Tom’s cash withdrawal 3 262

Note. Own depiction
The closure of the interim statement as per June 30, 2_08 is identical with the year-end closing.
Table 101: Tom’s booking entries I, 2_08, interim closing
Jun 30 Equity Private Closing private 12 262
Statement of profit or loss Expenses Closing expense accounts 15 330
Income Statement of profit or loss Closing income accounts 39 030
Statement of profit or loss Equity Profit or the year 23 700
Statement of fin. position Assets Closing asset accounts 235 763
Liabilities Statement of fin. position Closing liability accounts 235 763

Note. Own depiction
Table 102: Statement of profit or loss for January to June 2_08, in T-account format
Expenses Statement of profit or loss 2_08 Income

Lease expenses 1 080 Sales from services 6 000
Advertising expenses 3 750 Financial income 4 950
Financial expenses 2 500 Income from land + building 28 080
Expenses. for land and bldgs. 8 000
39 030 39 030
Note. Own depiction
Chapter 8:
Table 103: Statement of profit or loss for January to June 2_08, in reporting format

Gross income 6 000
6900 – 6999 +/- Financial Result (financial profit or loss) 2 450
8900 – 8999 - Taxes
Note. Own depiction
Table 104: Interim statement of financial position per June 30, 2_08
Assets Statement of financial position as per Jun 30, 2_08 Liabilities

Cash 23 238 Debts to bank 19 163
Short-term marketable securities 136 828 Payables for goods + services 36 600
Receivables, anticipatory tax 1 470 Equity 180 000
Inventories, trading goods 2 800 Total equity 180 000
Inventories, raw materials 3 000
Inventories, finished goods 3 500
Accrued income and deferred liab. 750
Machines 15 375
235 763 235 763
Note. Own depiction
Chapter 8:
8.4 Summary

Current liabilities
liabilities
• Analysis
o Quick ratio
assets Equity
o Equity ratio

Account Designation
EBITDA
EBT
89 - Taxes

of private account)
Transport costs
Transport costs
Decrease in inven-
tory
Chapter 8:
5 Production
6 Value adjustments

Chapter 8:
8.5 Exercises
8.5.1 Purchase and sale of securities
Calculate the amounts in the bank statement: price, accrued interest, expenses, withdrawal/deposit, value
Purchase of bonds
Date Nominal Interest rate Interest date Market price Expenses

value
a) Jun 26 40 000 2.00% Apr 23 98% 400
b) Nov 8 30 000 3.25% Mar 19 105% 240
Sales of bonds
Date Nominal Interest rate Interest date Market price Expenses

value
c) Aug 16 50 000 2.50% Mar 2 102% 400
d) Dec 10 20 000 1.75% Jul 20 99% 120
Purchase of shares
Date Number of shares Nominal value Market price Expenses
e) May 15 100 10 23 80
Sale of shares
Date Number of shares Nominal value Market price Expenses
f) Oct 27 2 000 0.10 5.70 120
Chapter 8:
8.5.2 Securities accounts
Opening balances (valuation at historic purchasing prices)
• 100 shares of UpWeGo Ltd. at a purchase price of CHF 196, market price CHF 215
• Bond of Canton of St.Gallen, 2011-2039 (purchased in 2011 during the initial placement), nominal value
CHF 60 000, 2% interest per March 12, price 101.
Jan 1. ______________________________ / ______________________________ CHF ____________
______________________________ / ______________________________ CHF ____________
______________________________ / ______________________________ CHF ____________
Encashment, bond coupons
Mar 12. ______________________________ / ______________________________ CHF ____________
______________________________ / ______________________________ CHF ____________
Encashment, dividend for 100 shares of UpWeGo Ltd., CHF 1 000 gross
Apr 30. ______________________________ / ______________________________ CHF ____________
______________________________ / ______________________________ CHF ____________
Purchase of 10 shares in Zafling Ltd. at a price of CHF 940, expenses CHF 80
Sep 12. ______________________________ / ______________________________ CHF ____________
Sale of nominal value CHF 20 000, Canton of St.Gallen, 2%, at a price of 105, expenses CHF 160
Oct 18. ______________________________ / ______________________________ CHF ____________
The bank charges deposit fees, CHF 120
Dec 31. ______________________________ / ______________________________ CHF ____________
Statement of financial position values as per Dec 31
100 bearer shares in UpWeGo Ltd.: CHF 210 CHF ____________
10 bearer shares in Zafling Ltd.: CHF 920 CHF ____________
nominal value CHF 40 000, 2% government bond, Canton of St.Gallen,

2011-19, interest date Mar 12, price 104.50 CHF ____________
Accrued interest (to be reported accordingly) CHF ____________
Chapter 8:
Determination of the profit/loss at year end
Value according to account (provisional balance) CHF ____________
Value reported in the statement of financial position CHF ____________
Profit/loss reported in the statement of financial position CHF ____________
Closing: accrued interest on bonds
Dec 31 ______________________________ / ______________________________ CHF ____________
Closing: profit/loss reported in the statement of financial position
Dec 31 ______________________________ / ______________________________ CHF ____________
Closing: income/expenses from securities
Dec 31 ______________________________ / ______________________________ CHF ____________
Dec 31 ______________________________ / ______________________________ CHF ____________
Closing: value reported in the statement of financial position
Dec 31 ______________________________ / ______________________________ CHF ____________
Closing: accrual
Dec 31 ______________________________ / ______________________________ CHF ____________
Profit/loss from securities
Financial income CHF ____________
- Financial expenses CHF ____________
= Profit/loss of financial assets CHF ____________
Short-term marketable securities Bank account
Chapter 8:
Financial expenses Financial income
Receivables, anticipatory tax Accrued income
8.5.3 Marketable securities or financial assets
(B & S Ltd. has taken over a substantial amount of securities from Tom’s Cycle Shop.) The securities are sold, and
with the money shares of the cycle courier Bikemail plc. are bought, a total stake of 40% as long-term investment.
What effects does this have on the statement of financial position of B & S Ltd.?
8.5.4 Security portfolio valuation in the statement of financial position
What was the value of the security portfolio as per Dec 31, valuation at market price, with accrued interest reported
accordingly?
• 5% bond, Acountry, nominal value CHF 30 000, interest date 30 June, price 95
• 2% bond Bcountry, nominal value CHF 70 000, interest date 30 September, price 102
• 1000 shares in Acompany, nominal value CHF 100, price 735, last dividend 5%
• 70 shares in Bcompany, nominal value CHF 10, price 298, last dividend 7%
8.5.5 Financial accounts
At the end of the year, the financial accounts are checked and corrected if necessary. Add the booking entries for
corrections where necessary.
a. The loan of CHF 40 000 that was taken up five months ago is paid back with marketable securities.
b. A loan granted to our board member Miller for CHF 20 000 which has become due is extended for two years.
c. The loan to the supplier Kenth, CHF 70 000 at 2% p.a., which is due in two years, is changed into a 5% p.a. loan
lasting for six more years.
d We own a 30% stake of our main supplier (value of CHF 300 000). We sell 20% to a business partner which
pays by bank transfer.
Chapter 8:
8.5.6 Value and closing of a security portfolio
A portfolio consists of the following two positions, disclosed at market value, direct booking:
• 20 shares in BestProfit plc at a price of CHF 500
• nominal value CHF 40 000, 6% bonds, Nestfee Ltd , interest date September 30, price 98
The relevant accounts before closing are shown below. What are the closing bookings and entries in the accounts?
Short-term marketable securities Financial expenses Financial income

100 000 50 000 350 50 100 6 000
_________________________________ / _________________________________ CHF ____________
_________________________________ / _________________________________ CHF ____________
_________________________________ / _________________________________ CHF ____________
_________________________________ / _________________________________ CHF ____________
_________________________________ / _________________________________ CHF ____________

What does the profit/loss from the financial assets amount to?
8.5.7 Closing securities
The marketable security portfolio holds 2 000 shares of NewChem Ltd.. Purchase value is CHF 321 000. The port-
folio management fee is CHF 1 000 p.a. Dividends in the first year are CHF 20 000. At year end the market value is
CHF 350 000 (disclosure is at market value). In the second year no dividend is paid, market value is CHF 330 000.
Keep the following accounts:
Year 1
Chapter 8:
Year 2
Calculate the profit/loss of the financial assets for each year. Indicate the book profits/losses and the realized prof-
its/losses.
8.5.8 Securities accounting
a) Make the booking entries for opening, business transactions and closing in the Short-term marketable securi-
ties, Financial income, Financial expenses and Receivables, anticipatory tax accounts. Disclosure of marketa-
ble securities is at market value.
b) Analyze the profit/loss of the financial assets according to the financial statement by dividing it into:
1) yields from assets and price gains,
2) realized profit/loss and book profit/loss of the financial assets.
Jan 1 Opening: bond from InterShip Ltd. nominal value CHF 100 000, 6% interest, June 30, price 105; Antici-
patory tax due to be repaid CHF 2 500
Feb 25 Purchase of 500 shares in Materials plc. (nominal value CHF 1.00) at a price of CHF 90, purchasing ex-
penses CHF 700
May 18 Bank credit note of 800% dividend on the Materials plc. shares
Jul 2 Bank credit note of annual interest on the 6% InterShip Ltd. bonds
Aug 8 Repayment of the preceding year’s anticipatory tax, credited to bank account
Oct 13 Sale of 400 Materials plc. shares at a price of CHF 110, selling expenses CHF 240
Dec 15 Bank’s portfolio management charges of CHF 140
Dec 31 Closing: InterShip Ltd. market value 98, Materials plc. share price 80
Chapter 8:
8.5.9 Closing financial assets
The marketable security portfolio holds 2 000 shares of NewChem Ltd. Purchase value is CHF 321 000. The portfo-
lio management fee is CHF 1 000 p.a. Dividends in the first year are CHF 20 000. At year end the market value is
CHF 350 000 (disclosure is at purchase value). In the second year no dividend is paid, market value is CHF 310 000.
Keep the following accounts:
Year 1
Financial assets VA, financial assets Financial expenses Financial income
Year 2
Financial assets VA, financial assets Financial expenses Financial income
Calculate the profit/loss of the financial assets for each year. Indicate the book profits/losses and the realized prof-
its/losses.
Chapter 9:
Joint-stock Companies 243
Joint-stock Companies
In the middle ages businesses were either sole proprietorships or owned by the royalty. The concept of private peo-
ple combining their money into a company, having decision rights in return, i.e. forming joint-stock companies, al-
lowed companies to operate at new levels and was one of the significant economic achievements of the renaissance
(without the concept of joint-stock companies, e.g. the first industrial revolution would not have been possible in the
way that it unfolded). Joint-stock companies are a specific legal form for businesses, and the legal framework of a
country defines what legal forms are available and what their conditions are. A joint-stock company has its own le-
gal entity. While many booking entries are identical as for any legal structure, two types of business transactions are
distinct: first the founding of the joint-stock company (including increasing the capital or adding a shareholder), and
distribution of profit.
9.1 Introduction
1. What is the process to form a joint-stock company, how must it be financially mapped?
2. What must be considered when distributing profit?
3. Which alternatives and options exist when distributing profits, what must be considered for these options?
9.2 Founding B&S Ltd. as joint-stock company
B&S Ltd. is founded with a shareholders’ capital of CHF 450 000. The three entrepreneurs contribute the following:
• Tom his sole proprietorship, without the real estate, at a value of CHF 180 000;
• Peter two training yachts and a charter yacht at a value of CHF 180 000;
• Anja subscribes shares in the value of CHF 90 000 and transfers half of this amount onto a special bank ac-
count that was established for the foundation of the B&S Ltd.
The law firm which conducts the foundation of B&S Ltd. invoices a lump sum of CHF 5 000 (such legal expenses
for the funding process are considered as administrative expenses; in Switzerland they may be offset against any ap-
plying share premium; share premium being the difference between share price and nominal value if the shares are
sold to the shareholders at a price higher than their nominal value).
Chapter 9:
Table 105: B&S Ltd. booking entries A, 2_08 founding entries
Jul 1 Non paid-in share capital Shareholders’ capital Subscription of shareh. capital 450 000
Various assets Non paid-in share capital Payment in full, Tom 235 763
Non paid-in share capital Various liabilities Payment in full, Tom 55 763
Vehicles Non paid-in share capital Payment in full, Peter 180 000
Bank account Non paid-in share capital Payment in half, Anja 45 000
Admin expenses Misc. current liabilities Legal fees 5 000

Note. Own depiction
Table 106: Founding statement of financial position per July 1, 2_08
Assets Founding statement of financial position as per Jul 1, 2_08 Liabilities

Short-term marketable securities 136 875
Receivables from G&S 48 490 Shareholders’ capital 450 000
- VA, receivables -5 500 42 990 Total equity 450 000
Receivables, anticipatory tax 1 470
Inventories, raw materials 3 000
Inventories, finished goods 3 500
Accrued income and deferred liab. 750
Machines 15 375
Vehicles 180 000
Non paid-in share capital 45 000
486 600 486 600
Note. Own depiction
9.3 Profit distribution in joint-stock companies
Theory explanation

Profit distribution
As joint-stock companies have their own legal entity, the profit belongs to the company (in contrast to partnerships
or sole proprietorship, which are not legal entities, where the profit is considered as belonging to the owners and
partners as of December 31). The joint-stock company, i.e. the annual general assembly, must decide if and how to
distribute the profit. For this decision process of profit distribution, different legal rules exist. One reason for these
Chapter 9:
rules is the fact that, in contrast to partnerships, joint-stock companies are only liable with their own capital, the
owners are not liable with their private assets. So one rule is to build up reserves as the company is making profit
and therewith building up the capital basis of the company, i.e. protect creditors from payment default.
In Switzerland, Art. 671 of the Swiss Code of Obligations defines the allocation of reserves when distributing prof-
its. Depending on the level of existing legal reserves that the company has, compared to the paid-in capital, addi-
tional reserves must be allocated for different types and levels of profit distribution as follows:
a) Legal reserves are lower than 20% of the paid-in capital: both, first and second reserve allocation apply
5% of the profit of the year (first reserve allocation), plus
10% of all profit distributions that exceed the basic dividend of 5% (second reserve allocation).
b) Legal reserves are between 20% and 50% of the paid-in capital: only second reserve allocation applies
10% of all profit distributions that exceed the basic dividend of 5% (second reserve allocation).
c) Legal reserves are higher than 50% of the nominal shareholders’ capital:
no further legal profit reserves apply.
Legal profit reserves Part of the equity, Swiss law requires to build up reserves from the profit before distributing profits.
Legal capital reserves Part of the equity, part of the price for newly issued shares that is above the nominal value
Paid-in capital Calculated as shareholders’ capital minus non paid-in share capital.
The legal rules show that for young companies that have not had much profit yet, higher reserve allocation (first al-
location) applies, i.e. as soon as the companies start making profits, they must strengthen the capital base. At the
same time, shareholders may be compensated with a 5% dividend (called base dividend) without the requirement of
further reserve allocation for this dividend. So additional legal profit reserves only apply for ‘excessive’ profit dis-
tribution to shareholders and board members. As soon as the legal reserves are very high, i.e. 50% of the sharehold-
ers’ capital, no further strengthening of the capital base is require, i.e. profit distribution may be decided without
considering any allocation of legal profit reserves.
The profit distribution process must decide if and how to allocate the profit. While many stakeholders claim having
a right for a part of the profit, e.g. worker unions, the legal rules foresee considering the 4 directions of profit distri-
bution listed below. It is important to keep in mind, that distribution to shareholders (dividend) and board member
(profit-sharing bonus) lead to an outflow of money, and this money is then no longer available to the company i.e.
for investments or growth. While the allocation to the legal profit reserves is ruled by the Swiss Code of Obliga-
tions, the other 3 directions can be decided upon freely depending on the available profit and money:
• Increase legal profit reserves according to first and second reserve allocation
• Distribute to shareholders, through dividend, repayment of capital or reduction of nominal value;
• Distribute to board members through profit-sharing bonus; and
• Leave the money in the company as profit brought forward and therewith have the money available for e.g.
further growth.
Chapter 9:
For deciding the profit distribution for these 4 directions, especially for calculating the first and second allocation to
the legal profit reserves, Table 107 offers the appropriate calculation scheme. It specifically helps to calculate the
maximum possible surplus dividend and the additional legal profit reserves that must apply.
Table 107: Profit distribution calculation scheme (with fictive example)
Profit of the year 100

Loss brought forward from preceding years -
= 100
First reserve allocation if necessary, max. 5% of profit (e.g. 100) - 5

= 95
Profit brought forward from previous year + 7

= 102
Basic dividend 5% of paid-in capital (e.g. 1 000) - 50

= 52
Profit-sharing bonus (e.g. promised amount) 30

Second reserve allocation 10% of bonus + 3 - 33
= 19
Surplus dividend x% of paid-in capital 10

Second reserve allocation 10% of surplus dividend + 1 - 11
Amount brought forward to new year = 8

Note. Own depiction
End of Theory Part
9.3.1 B&S Ltd. profit distribution in the year 2_11
B&S Ltd. showed a successful start. After the end of the third business year (i.e. 2_11), it arrives at the following –
summarized – figures:
Table 108: Statement of financial position before profit distribution per December 31, 2_11
Assets Statement of financial position before profit distribution as per Dec 31, 2_11 Liabilities
Liquid funds 170 000 Various payables 8 000
Various receivables. 81 000 Liabilities 8 000
Shareholders’ capital 450 000
Various non-current assets 300 000 Legal profit reserves 50 000
Non paid-in share capital 0 Profit brought forward 1 000
Non-current assets 300 000 Profit or the year 42 000
Total equity 543 000
551 000 551 000
Note. Own depiction
Chapter 9:
Tom, Peter and Anja wish to distribute the profit as follows:
1. The shareholders are to be paid a dividend of as many whole percentage points as possible.
2. The board of directors is to be paid a profit-sharing bonus in the overall amount of CHF 8 000.
3. Only the mandatory minimum amounts are to be allocated to legal profit reserves.
This requirement leads to using the calculation scheme above as follows:
Table 109: Profit distribution calculation scheme (with fictive example)

= 42 000
First reserve allocation if necessary, max. 5% of profit - 2 100

= 39 900
Profit brought forward from previous year + 1 000

= 40 900
Basic dividend 5% of paid-in capital - 22 500

= 18 400
Profit-sharing bonus 8 000

Second reserve allocation 10% of bonus + 800 - 8 800
= 9 600
Surplus dividend 1% of paid-in capital 4 500

Second reserve allocation 10% of surplus dividend + 450 - 4 950
Amount brought forward to new year = 4 650

Note. Own depiction
So the member of the boards receive all together another CHF 8 000 which is considered as salary and social securi-
ty applies, the payment of CHF 27 000 dividend to the shareholders is subject to anticipatory tax and income tax for
the shareholder (contribution as repayment of capital or reduction of nominal value has no income tax effect).
Table 110: B&S Ltd. booking entries A 2_11, profit distribution
Dec 31 Statement of profit or loss Profit of the year Profit (already booked) 42 000
Profit of the year Profit brought forward Forward profit 42 000
Profit brought forward Receivables, anticipatory tax Anticipatory tax 9 450
Profit brought forward Profit distributions Dividend, profit sharing bonus 25 550
Profit brought forward Legal profit reserves Reserve allocation 3 350

Note. Own depiction
Chapter 9:
Table 111: Statement of financial position after profit distribution per December 31, 2_11
Assets Statement of financial position after profit distribution as per Dec 31, 2_11 Liabilities
Various receivables. 81 000 Receivables, anticipatory tax 9 450
Current assets 251 000 Profit distributions 25 550
Liabilities 43 000
Various non-current assets 300 000
Non paid-in share capital 0 Shareholders’ capital 450 000
Non-current assets 300 000 Legal profit reserves 53 350
Profit brought forward 4 650
551 000 551 000
Note. Own depiction
9.3.2 Profit distribution in case of a loss
Theory explanation

Paying off a loss (loss distribution)
A loss of the year reduces the profit brought forward and the legal profit reserves.
Table 112: Example statement of financial position before profit distribution
Assets Statement of financial position before profit distribution Liabilities

Non paid-in share capital 0 Profit brought forward 1 000
Non-current assets 300 000 Loss or the year -11 000
498 000 498 000
Note. Own depiction
Table 113: Booking entries loss distribution
Dec 31 Loss of the year Statement of profit or loss Loss (already booked) 11 000
Profit brought forward Loss of the year Payoff loss of the year 1 000
Legal profit reserves Loss of the year Payoff loss of the year 10 000
Note. Own depiction
Chapter 9:
Table 114: Example statement of financial position after profit distribution
Assets Statement of financial position after profit distribution Liabilities

Non paid-in share capital 0 Profit brought forward 0
Non-current assets 300 000 Total equity 490 000
498 000 498 000
Note. Own depiction
End of Theory Part
9.3.3 Essential legal basis in Switzerland
Art. 671 Swiss Code of Obligations: General reserve

1
Five per cent of the annual profit must be allocated to the general reserve until this equals 20 per cent of the paid-in
capital.
2
Even after it has reached the statutory level, the following must be allocated to the general reserve:
1. any share issue proceeds in excess of the nominal value remaining after the issue costs have been met, unless
used to fund write-downs or for staff welfare purposes;
2. any amount remaining from sums paid in on forfeited shares after any shortfall in the shares issued in return has
been met;
3. ten per cent of the amounts distributed as the share in the profit above and beyond payment of a dividend of 5
per cent.
3
To the extent that it does not exceed one-half of the shareholders’ capital, the general reserve may only be used to
cover losses or for measures designed to sustain the company through difficult times, to prevent unemployment or to
mitigate its consequences.
Art. 672 Swiss Code of Obligations: Statutory reserves

1
The articles of association may stipulate that amounts greater than 5 per cent of the annual profit are to be allocated
to reserves and that the reserve must contain more than the 20 per cent of paid-in capital required by law.
2
They may provide for the formation of further reserves and specify the purpose and use thereof.
Art. 674 Swiss Code of Obligations: Ratio of the share in the profit to the reserves
1
The dividend may be determined only after the allocations to reserves required by the law and the articles of asso-
ciation have been deducted.
2
The general meeting may resolve on the formation of reserves which are not provided for by law or by the articles
of association or which go beyond the requirements thereof, provided that
1. this is necessary for replacement purposes;
2. with a view to the long-term prosperity of the company or the desirability of a stable dividend, such reserves are
justified and in the best interests of the shareholders.
3
Similarly, the general meeting may resolve on the allocation of disposable profit to form reserves for the founda-
tion and funding of welfare schemes for the company’s employees or for other welfare purposes even where such
reserves are not provided for in the articles of association.
Chapter 9:
Art. 677 Swiss Code of Obligations: Shares of profits
Shares of the profit may be paid to members of the board of directors only out of the disposable profit and only after
the allocation to the legal reserve has been made and a dividend of 5 per cent or a higher percentage laid down by
the articles of association has been paid to the shareholders.
9.3.4 Excerpt from the Swiss Auditing Manual concerning reserves of joint-stock companies
The first allocation to the legal profit reserve

According to Art. 671(1) of the Swiss Code of Obligations, the company must allocate 5% of the profit of the year
to the legal profit reserve; this is called the first allocation. This must be done year after year until this reserve, to-
gether with the legal capital reserve, amounts to 20% of the paid-in capital. The following points must be taken into
consideration:
• The amount on which this must be based is the profit of the year as reported in the financial statements and ap-
proved by the annual general assembly; apart from the exceptions mentioned below, this amount must neither be
decreased nor increased for the calculation of the first allocation.
• The profit brought forward from the preceding year’s statement of financial position need not be taken into ac-
count since it has already been the object of a first allocation. In contrast, a loss brought forward from the
preceding year’s statement of financial position may be deducted from the profit of the year. If the loss
brought forward from the preceding year exceeds the profit of the year, i.e. the statement of financial position
continues to report a loss, no first allocation has to be conducted.
• Withdrawals from statutory reserves or reserves based on decisions (i.e. from dividend compensation reserves)
that are used for the distribution of dividends, need not be included in the calculation of the first allocation either
since the first allocation already applied when they were built.
The first allocation applies as long as the legal profit reserve and the legal capital reserve together are lower than
20% of the paid-in capital, regardless of whether profits are distributed or not. If the profit of the year is very small,
the first allocation may be omitted, but it must be accounted for in one of the following years. The calculation of
whether the legal reserves have reached the required threshold of 20% must always be based on the paid-in capital
on the reporting date.
The first allocation stipulates a minimum amount; it is permissible to allocate higher amounts.
The second allocation to the legal profit reserve

In addition to the first allocation, Art. 671(2)(3) of the Swiss Code of Obligations provides that the company must
allocate 10% of the amounts which is distributed as part of the profit, and which exceeds the based dividend of 5%
of the paid-in capital, to the legal profit reserve. These parts of the profit include dividends exceeding 5% of the
shareholders’ capital, payments on participation certificates and founders’ shares, profit-sharing bonuses for direc-
tors and possibly other profit shares provided by the articles of association.
For this second allocation, there is no maximum limit. Never the less, further allocations are omitted as soon as the
legal profit reserves and the legal capital reserves are higher than 50% of the shareholders’ capital. If so, it is sug-
gested to add the following sentence to the suggestion of the allocation of profit, for clarity reason: “As the legal
profit reserves and legal capital reserves exceed 50% of the shareholders’ capital, further allocations are omitted.”
Additional requirements and regulations may apply based on specific laws and they must be followed in addition to
these general rules for reserves.
Chapter 9:
9.4 Summary

Current liabilities
liabilities
• Analysis
o Quick ratio
assets Equity
o Equity ratio

Account Designation
EBITDA
EBT
89 - Taxes

of private account)
Transport costs
Transport costs
Decrease in inven-
tory
Chapter 9:
5 Production
6 Value adjustments

Chapter 9:
9.5 Exercises
9.5.1 Formation of a joint-stock company on the basis of contributions in kind
The shareholders’ capital of Young & Fun AG is divided up into 400 bearer shares with a nominal value of CHF
500 each. The five minority shareholders Bettina, Carlos, Dominique, Ella and Friedrich together take 150 shares,
while majority shareholder Alex takes the remaining 250 shares. The shares are issued at a price of CHF 550 each.
The lawyer invoices foundation modalities: CHF 3 000. Half of the remaining share premium (capital reserves) is
used for the depreciation of real estate; the balance is allocated to legal capital reserves. The majority shareholder
pays in as follows: goods in the amount of CHF 37 500, real estate valued at CHF 160 000 and a mortgage loan of
CHF 60 000.
What do the foundation booking entries look like? Draw up a foundation statement of financial position.
____________________ / ____________________ Subscription, joint stock, nom. __________
____________________ / ____________________ Subscription, capital reserves __________
____________________ / ____________________ Bank transfer for 150 shares CHF 82 500
____________________ / ____________________ Contribution, Alex CHF 137 500
____________________ / ____________________ Payment through goods CHF 37 500
____________________ / ____________________ Payment through real estate CHF 160 000
____________________ / ____________________ Payment through mortgage loan CHF 60 000
____________________ / ____________________ Lawyer’s invoice CHF 3 000
____________________ / ____________________ Capital reserves: legal expenses CHF 3 000
____________________ / ____________________ Capital reserves: depreciation, real est. __________
Foundation statement of financial position
Chapter 9:
9.5.2 Nominal value repayment
A company decides to reduce the nominal share value from CHF 100 to CHF 80 instead of paying a 20% dividend.
a) How does the joint-stock company enter this nominal value reduction in its accounts?
b) A shareholder holds 200 shares in this company. How would she book the payment of a dividend?
c) How does this shareholder book the nominal value reduction?
d) What difference does this make for the shareholder?
9.5.3 Profit distribution
In exercises A-D below, the following transactions must be considered (if possible):
• allocation of CHF 50 000 to voluntary profit reserves,

• distribution of a profit-sharing bonus of CHF 24 000 to the board of directors,
• payment of as many whole percentage points as possible as a dividend to shareholders.
Draw up the profit distribution plan for exercises A-D and, in addition, formulate the booking entries for exercise A.
9.5.3.1 Case A
Statement of financial position A-AG before profit distribution
Current assets … Liabilities …
Non-current assets … Equity

Shareholders’ capital 2 000 000
Legal profit reserves 250 000
Voluntary profit reserves 620 000
_________________________________ / _________________________________ CHF ____________
_________________________________ / _________________________________ CHF ____________
_________________________________ / _________________________________ CHF ____________
_________________________________ / _________________________________ CHF ____________
_________________________________ / _________________________________ CHF ____________
_________________________________ / _________________________________ CHF ____________
_________________________________ / _________________________________ CHF ____________
Chapter 9:
Profit of the year

=
First reserve allocation if necessary, max. 5% of profit -

=
Profit brought forward from previous year +

=
Basic dividend 5% of paid-in capital -

=
Profit-sharing bonus
Second reserve allocation 10% of bonus + -
=
Surplus dividend _% of paid-in capital

Second reserve allocation 10% of surplus dividend + -
Amount brought forward to new year =
9.5.3.2 Case B
Statement of financial position B-AG before profit distribution

Non paid-in share capital 200 000 Shareholders’ capital 1 500 000
Statutory profit reserves 240 000
Loss brought forward -4 000
Profit of the year

=

=

=

=
=

Chapter 9:
9.5.3.3 Case C
Statement of financial position C-AG before profit distribution

Profit of the year

=

=

=

=
=

Chapter 9:
9.5.3.4 Case D
Statement of financial position D-AG before profit distribution

Profit of the year

=

=

=

=
=

9.5.4 Statute-barred dividends
BestChocolate Ltd. reports the following figures at the end of the business year:
• Shareholders’ capital: CHF 25m

• Legal profit reserves: CHF 500m
• Voluntary profit reserves: CHF 1 200m
• Profit brought forward: CHF 20m
• Profit of the year: CHF 160m
What does the new profit brought forward amount to if the following has to be taken into account?
• 400% dividend
• Profit-sharing bonus: CHF 1m
• Allocation to voluntary profit reserves: CHF 50m
• Allocation to legal profit reserves: CHF 20m
• Statute-barred dividends: CHF 1m
Chapter 9:
9.5.5 Loss entry
9.5.5.1 Cass: loss

The annual general meeting resolves to completely pay off the loss of the year. What do the booking entries look
like?
Statement of financial position 1 before profit distribution

Various assets 750 000 Liabilities 500 000
Equity
Loss of the year -90 000
750 000 750 000
_________________________________ / _________________________________ CHF ____________
_________________________________ / _________________________________ CHF ____________
9.5.5.2 Case: significant loss

like?
Statement of financial position I1 before profit distribution

Equity
590 000 590 000
_________________________________ / _________________________________ CHF ____________
_________________________________ / _________________________________ CHF ____________
_________________________________ / _________________________________ CHF ____________
Chapter 9:
9.5.5.3 Case: excessive loss

like?
Statement of financial position III before profit distribution

Equity
550 000 550 000
_________________________________ / _________________________________ CHF ____________
_________________________________ / _________________________________ CHF ____________
_________________________________ / _________________________________ CHF ____________
9.5.5.4 Case: after the loss, profit again

The annual general meeting resolves to completely pay off the loss of the year and to pay a dividend of 5%. What do
the booking entries look like?
Statement of financial position IV before profit distribution

Equity
650 000 650 000
_________________________________ / _________________________________ CHF ____________
_________________________________ / _________________________________ CHF ____________
_________________________________ / _________________________________ CHF ____________
_________________________________ / _________________________________ CHF ____________
Chapter 9:
9.5.6 Adding a new shareholder
Which are the applicable booking entries for Fred Miller becoming a new shareholder of CreaTech Ltd.?
1. The general assembly of CreaTech Ltd. agrees to have Fred Miller as a new shareholder. For this reason they
also agree to issue 2 000 new share with a nominal value of CHF 5. Fred Miller agrees to pay a total amount of
CHF 30 000.- (by contributing marketable securities in the future).
2. The bank statement indicates that Fred Miller has transferred the marketable securities.
3. CreaTech Ltd. receives the invoice from the lawyer for his services concerning the increase in capital. The total
invoice amount is CHF 2 500.-.
4. CHF 7 500 of the legal capital reserve is used for an additional indirect depreciation of furniture.
9.5.7 Increase in capital and subsequent profit distribution
9.5.7.1 Case: increase in capital

EduAll Ltd. wants to strengthen its equity for future growth. It decides to offer its shareholders 5 000 shares with a
nominal value of CHF 40 for CHF 100. What are the booking entries for the following transactions?
1. The new shareholders pay the money for the new shares that they have subscribed to into the bank account.
2. The additional payment (= share premium) must be disclosed in the legal capital reserve account.
3. The bank withdraws its commission for the capital increase services from the bank account, CHF 8 000.-.
9.5.7.2 Case: profit distribution

In the year in which the participation certificates have been issued, Spectrum AG reports the following figures in its
final statement of financial position:
Various assets CHF 2 300 000
Various liabilities CHF 1 400 000
Shareholders’ capital CHF 400 000
Legal capital reserves CHF 292 000
Legal profit reserves CHF 143 000
Profit brought forward CHF 2 000
1. Calculate the profit of the year.
2. Calculate the profit distribution plan taking into consideration:
a) Only the legally required reserves shall apply.
b) The board of directors receives a profit-sharing bonus of CHF 28 000.
c) As many whole percentage points as possible are paid out as dividends.
3. Calculate the return of the new shares.
9.5.8 Profit distribution after loss
Pfister Ltd. reports the following statement of financial position as per Dec 31, before profit distribution:
Statement of financial position before profit distribution
Various assets 162 000 Various liabilities 53 300
162 000 162 000
Chapter 9:
a) What significance has the loss brought forward account?

b) Prepare the profit distribution plan and the booking entries considering:
1. only the legally required reserves shall apply,
2. the board of directors is paid CHF 2 000 in profit-sharing bonuses,
3. as many whole percentage points as possible are paid as dividends.
c) The majority shareholder Pfister wants to know what the maximum possible profit shares that could be paid
out would be (in CHF 100).
9.5.9 Dividends versus nominal value repayment
ABC Ltd. reports the following statement of financial position before profit distribution:
Cash 21 000 Payable for G&S 83 000
Bank account 39 000 Loans 130 000
-VA, receivables -15 000 145 000 Legal profit reserves 98 000
Inventory, trading goods 190 000 Profit reported in statement of fin.pos.
Furniture and facilities 32 000 Profit brought forward 4 000
Land and buildings 348 000 Profit of the year 60 000 64 000
975 000 975 000
a) Draw up the profit distribution plan on the basis of the following assumptions:
1. Only the legally required reserves shall apply.
2. As many whole percentage points as possible are paid out as dividends.
3. If possible, the board of directors receives a profit-sharing bonus of CHF 10 000.
b) How many percentage points of dividends are paid out?
c) Make the necessary booking entries.
d) At the Annual General Meeting of ABC Ltd. a shareholder proposes that to avoid private income tax for the
shareholder, the entire profit of the year should be allocated to legal profit reserves. Shareholders should re-
ceive CHF 30 000 in nominal value repayments. How would ABC Ltd. book this decision?
9.5.10 Comparison of different profit distributions
Calculate the profit distribution (incl. anticipatory taxes) for each of the cases a-e in the following table:
a) b) c) d) e)
Profit of the year 20 000 20 000 30 000 30 000 30 000
Shareholders’ capital 300 000 400 000 500 000 500 000 500 000
Legal profit reserves 15 000 100 000 99 500 154 200 312 000
Profit brought forward 3 000 500 1 000 6 000 6 000
1. Only the legally required reserves apply.
2. Dividends of as many whole percentage points as possible shall apply.
Chapter 10:
Valuation Reserves 262
Valuation Reserves
While in theory a distinct value calculation exists for all assets and liabilities (e.g. using a depreciation). However,
various cases are not less obvious, or different representatives (e.g. departments) within the company have different
opinions how to proceed, how to use the assets in the future, and/or reactions from the market/customers. One such
example might be the ‘Dieselgate’ where the effective situation and therefore the full financial consequences are
disclosed to the general public only slowly, i.e. the customer reactions are difficult to predict over 2 to 5 years, and
therefore the effective future perspective of Diesel technology and therewith the value of the respective machines
and production capacities is hard to assess. In such cases, the rules for external disclosure of the value and the domi-
nant internal valuation opinion might differ. These differences between internal estimation and external reporting
requirement are called valuation reserves. This chapter introduces how they are generated, how they are dissolve,
and what they can be used for.
10.1 Introduction
1. What are valuation reserves, why are they important?
2. How can a company decide to generate/increase valuation reserves?
3. Why and how are valuation reserves dissolved?
10.2 Valuation reserves
Theory explanation

Valuation Reserves
Valuation Reserves Valuation reserves are differences between actual value and externally disclosed book value. Valua-
(undisclosed reserves) tion reserves are created by undervaluing or omitting assets or by overvaluing liabilities. They are
not visible in the statement of financial position.
Chapter 10:
10.2.1 Arguments for and against valuation reserves
Arguments pro
• Cautious valuation (i.e. continuous valuation reserves) reinforces creditor protection.

• Self-financing for the purposes of replacing assets is strengthened (guaranteed maintenance of assets).
• Guarantee of a stable dividend policy
• Possibility of a stable dividend policy
• General provision for risk to guarantee continued corporate operations (“lasting prosperity”)
Arguments con
• The determination of profit and loss on an accrual basis is thwarted (valuation reserves as loss concealment
potential, manipulation of the profit/loss statement).
• As reliable as possible an insight into the company's assets and income situation is prevented (infringement
of the True and Fair View Principle, cf. part 07).
• Reduction of the distribution assessment basis (profit of the year, infringement of shareholder protection in-
terests)
• Power shift from the annual general assembly to the board of directors
• Impairment of the assessment of creditworthiness
10.2.2 Legal basis in Switzerland
Art. 960 Swiss Code of Obligations: Valuation – principles

1
Assets and liabilities are normally valued individually, provided they are significant and not normally consolidated
as a group for valuation purposes due to their similarity.
2
Valuation must be carried out prudently, but this must not prevent the reliable assessment of the economic position
of the undertaking.
3
If there are specific indications that assets have been overvalued or that provisions are too low, the values must be
reviewed and adjusted if necessary.
Art. 960a Swiss Code of Obligations: Valuation of assets in general

1
When first recorded, assets must be valued no higher than their acquisition or manufacturing costs.
2
In any subsequent valuation, assets must not be valued higher than their acquisition or manufacturing costs. Provi-
sions on individual types of assets are reserved.
3
Loss in value due to usage or age must be taken into account through depreciation, while other losses in value must
be taken into account through valuation adjustments. Depreciation and valuation adjustments must be applied in ac-
cordance with generally recognised commercial principles. They must be deducted directly or indirectly from the
relevant assets and charged to the profit and loss account and may not be shown under liabilities.
4
For replacement purposes and to ensure the long-term prosperity of the undertaking, additional depreciation and
valuation adjustments may be made. For the same purposes, the cancellation of depreciation and valuation adjust-
ments that are no longer justified may be dispensed with.
Art. 960e Swiss Code of Obligations: Valuation of liabilities

1
Liabilities must be entered at their nominal value.
2
If past events lead to the expectation of a cash outflow in future financial years, the provisions probably required
must be made and charged to the profit and loss account.
Chapter 10:
3
Provisions may also be made in particular for:
1. regularly incurred expenditures from guarantee commitments;
2. renovations to tangible fixed assets;
3. restructuring;
4. securing the long-term prosperity of the undertaking.
4
Provisions that are no longer required need not be cancelled.
10.2.3 Generating valuation reserves
The generation, i.e. increase, of valuation reserves reduces the profit that the company reports externally. There are
4 general ways how to generate valuation reserves: undervaluing assets, overvaluing liabilities, one-off depreciation
and willy-nilly.
10.2.3.1 Generation through undervaluing assets

In objective terms, a machine has lost CHF 20 000 in value. Additional valuation reserves of CHF 5 000 are created.
Depreciation / Machines CHF 25 000
10.2.3.2 Generation through overvaluing liabilities

A competitor has filed a lawsuit against our company. The damages that we will have to pay are valued at an objec-
tive CHF 18 000. Additional valuation reserves of CHF 3 000 are created.
Other operating expenses / Provisions CHF 21 000
10.2.3.3 Generation through immediate one-off depreciation

In the case of assets of little value, it is customary in practice for companies to report the object in the statement of
financial position (i.e. capitalize it) but depreciate it by its entire value or directly book the purchase as an expense.
Computers are a typical example of this. Although they are used by the company for several years, they are often not
reported as an asset in the statement of financial position.
IT expenses / misc. cur. liabilities CHF 2 100
10.2.3.4 Valuation reserves generated willy-nilly

An item in the statement of financial position may increase in value but is still reported at its low-er nominal value
or acquisition value (cf. Art. 960b Swiss Code of Obligations, in particular). Thus valuation reserves are quite often
created in practice, for instance with properties (even without depreciation).
Chapter 10:
10.2.3.5 Summary of valuation reserves by different positions of the statement of financial position
Position Examples
Current assets
Liquid resources and securities • Convert foreign securities and currencies at a price/exchange rate that leads to
a rather low value (lower value than the actual price/exchange rate).
Receivables • Set value adjustment for receivables too high.

• Convert credit balances in foreign currencies at a price/exchange rate that
leads to a rather low value (lower value than the actual price/exchange rate).
Inventories • Set book value below the purchase value.
Work in process • Set book value below the production costs.
Accrued income • Value accrued incomes as too low or do not report them in the statement of
financial position at all.
Non-current assets
Financial assets • Set the book value below market value.
Equipment • Set depreciation higher than the actual decrease in value.
Land and buildings • Set depreciation higher than the actual decrease in value.
Intangible assets • Set depreciation higher than the actual decrease in value.
Liabilities
Current liabilities • Convert debts in foreign currencies at a price/exchange rate that leads to a ra-
ther high value (higher value than the actual price/exchange rate).
• Set accrued liabilities and deferred income too low.
Non-current liabilities • Create more provisions than a risk analysis would call for.
• Convert debts in foreign currencies at a price/exchange rate that leads to a ra-
ther high value (higher value than the actual price/exchange rate).
Chapter 10:
10.2.4 Dissolving valuation reserves
The dissolving, i.e. decrease, of valuation reserves increases the profit that the company reports externally. There are
3 general ways how to dissolve valuation reserves: ‘automatically’ in the course of time, accounting dissolving and
through an outflow of assets.
10.2.4.1 Dissolving through devaluation in the course of time – without an inflow of money
The disclosure of valuation reserves happens automatically if an asset is used in the company until it has completely
lost its value.
Let us assume that in the statement of financial position, an asset has already been depreciated down to the pro me-
moria franc although the actual value is still higher. Since the actual value de-creases year after year, however, it
approximates the book value. The valuation reserves simultaneously decrease by the same amount, too, until finally
the actual value and the book value are identical and thus all the valuation reserves have been disclosed.
10.2.4.2 Accounting dissolving – without an inflow of money

Without any removal of items from the statement of financial position, the valuation reserves on the undervalued as-
sets or the overvalued liabilities are disclosed intentionally.
Machines / Accessory operating income CHF 5 000

or
Provisions / Accessory operating income CHF 3 000
The entry for the disclosure has an influence on the profit/loss of the year but not on the profit/loss of the core busi-
ness.
10.2.4.3 Dissolving through an outflow of assets

A vehicle reported at a value of CHF 23 000 in the statement of financial position can be sold for CHF 29 000.
Other cur. receivables / Vehicles CHF 29 000

Vehicles / Accessory operating income CHF 6 000
Basically, every entry to “accessory operating income” from selling non-current assets with a profit constitutes a
disclosure of valuation reserves.
End of Theory Part
Chapter 10:
10.3 Summary

Current liabilities
liabilities
• Analysis
o Quick ratio
assets Equity
o Equity ratio

Account Designation
EBITDA
EBT
89 - Taxes

of private account)
Transport costs
Transport costs
Decrease in inven-
tory
Chapter 10:
5 Production
6 Value adjustments

Chapter 10:
10.4 Exercise
10.4.1 Actual and reported profit of the year
The actual profit of the business year 20_1 amounts to 130. Work out the reported profit of the year.
January 1, 2_01 December 31, 2_01 2_01

Existing valuation Existing valuation Change in valua-
External Internal External Internal
reserves reserves tion reserves
VA, receivables 50 10 10 10
Inventory, trading goods 227 340 240 300
Furniture and facilities 110 180 90 170
Provisions 110 10 60 10
Total
10.4.2 Adjustment of valuation reserves
Adjust the external closing accounts on the basis of the information about the valuation reserves.
Valuation reserves
Opening balance Closing balance Change
VA, receivables 1 2
Inventory, trading goods 20 15
Provisions 4 6
Sum total 95 99
Opening statement of financial position

Adjustment Adjustment
values values values values
Cash 10 Debts to Bank accounts 30
Receivables from G&S 45 Payables 35
Inventory, trading
60 Provisions 8
goods
Furniture and facilities 20 Equity 162
Land and buildings 100 Valuation reserves
235 235
Chapter 10:
Statement of profit or loss

Expenses for trading
460 Sales from trading goods 700
goods
Expenses for wages
150 - Losses from rec. -10
and salaries
Depreciation 12
Other operating ex-
80 Loss 13
penses
702 702
Closing statement of financial position

Cash 10 Debts to Bank accounts 28
Receivables from G&S 50 Payables 38
Inventory, trading
45 Provisions 10
goods
Furniture and facilities 30 Equity 159
Land and buildings 100 Valuation reserves
235 235
10.4.3 Dissolution of valuation reserves and adjustment of the statement of financial position
a) In the current year valuation reserves in the amount of 5 were generated on trading goods inventories for the
first time.
b) The valuation reserves on the property have amounted to 50 for years.
Published statement of financial position

Cash and short-term marketable securities 100 Liabilities 720
Inventory, trading goods 500 Shareholders’ capital and reserves 800
Land and buildings 300 Profit of the year 80
Various assets 700
1 600 1 600
Published statement of profit or loss

Various expenses 1 520
Profit of the year 80
3 000 3 000
c) Appraise, from an accountant’s point of view, the board’s request to buy a vehicle with the valuation reserves.
Chapter 10:
10.4.4 Buying into valuation reserves
The two shareholders of HerbImport Ltd. accept a third co-owner into their company. The new partner subscribes
CHF 50 000 in shareholders’ capital but only needs to con-tribute CHF 40 000.
The new partner participates in all reserves pro rata in that the property he has contributed to and which has a market
value of CHF 360 000 is undervalued accordingly. The basis for the determination of reserves is constituted by the
following statement of financial position before profit distribution:

Cash 6 800 Payables for G+S 25 400
Securities 31 800 Debts to Bank accounts 31 000
- VA, receivables -10 000 39 600 Legal profit reserves 4 400
Inventory, trading goods 66 000 Profit brought forward 540
Furniture and facilities 13 400 Profit of the year 16 260
177 600 177 600
The following has to be taken into consideration: in the statement of financial position before profit distribution ...
• ... the securities listed have a current price of CHF 53 800.

• ... the VA, receivables is twice as high as necessary.
• ... the Inventory, trading goods is valued at 66 ⅔ % of its actual value.
• ... the goodwill, which is not reported in the statement of financial position, is taken into account at
CHF 60 000 by agreement.
• ... the profit brought forward and the profit of the year of this business year are not taken into ac-count.
The new partner leaves the difference as a loan to the company.
a) How high are the valuation reserves in the statement of financial position of HerbImport Ltd.?
b) What booking entries are required for the acceptance of the new shareholder?
Chapter 10:
10.4.5 Existing valuation reserves and changes to them
Book value Actual value Valuation reserves

(external value) (internal value) Existing Change
Jan 1, 2_10 Dec 31, 2_10 Jan 1, 2_10 Dec 31, 2_10 Jan 1, 2_10 Dec 31, 2_10 2_10
Inventory,
trading 600
goods
Machines 2 560
Land and
5 600 6 170 450 - 120
buildings
Taking into consideration the additional information, determine the missing amounts in the above table. The chang-
es in valuation reserves must be indicated by the + sign for an increase and the - sign for a decrease in valuation re-
serves.
Additional information:
1. The goods are reported in the statement of financial position at two thirds of their value. In 2_10, the acquisi-
tion value of the purchased goods amounted to CHF 15 750, of which goods in the acquisition value of CHF 15
450 were sold on by Dec 31, 2_10.
2. In early 2_08, a new machine was put into operation. Internally, this machine was depreciated using the declin-
ing balance method (at a rate of 20%). Conversely, the external values are based on a straight line method over
five years. The first depreciation was effected on Dec 31, 2_08.
3. In the course of renovation work in 2_10, an air-conditioning system was installed in one building, which was
reported as an increase in value of 50 both internally and externally. The depreciation of land and buildings re-
ported externally amounted to 200.
Chapter 10:
10.4.6 Questions concerning valuation reserves
The following statements must be marked with a cross as either true or false.
Statement True False
a) No valuation reserves can be generated in the Cash account.
b) The disclosure of valuation reserves lessens the loss of the year.
An investment item in the financial accounts, which is depreciated using the declining balance
c) method, although in real terms the investment value decreases by a straight line method, always
contains valuation reserves in the first few years.
d) Valuation reserves are generated when the VA, machines account is undervalued.
If the market value of a property increases, the valuation reserves increase even if no deprecia-
e)
tion is carried out.
Someone who does not generate any accrued income is also unable to generate valuation reserves
f)
there.
Valuation reserves are always generated when expenses and yields are booked at too high a val-
g)
ue.
Someone who generates valuation reserves also always “puts money by” with which purchases
h)
can be paid for at a later stage.
Someone who books a “profit from sale of non-current assets” always also discloses valuation
i)
reserves by doing so.
j) No valuation reserves can be generated on accrued liabilities and deferred income.
Chapter 10:
10.4.7 Adjustment of valuation reserves
To adjust the statement of financial position and the profit and loss statement after closing the business year on De-
cember 31, 2_10, use the information below to indicate those accounts with the correct figures, which change as a
consequence of the information below. The next page contains a template into which you can enter your solution.
External statement of financial position of BestTrade Ltd. as per December 31, 2_10 after profit distribution

Bank account 47 700 Misc. cur. liabilities 19 400
Receivables 95 300 Loans 350 000
- VA, receivables - 11 800 83 500 Loans 100 000
Inventory, trading goods 84 000 Shareholders’ capital 300 000
Accrued income 12 000 Legal reserves 88 100
Vehicles 220 000
- VA, vehicles - 130 000 90 000
901 800 901 800
External statement of profit or loss of BestTrade Ltd. as per December 31, 2_10 after profit distribution
Expenses for trading goods 3 416 300 Sales from trading goods 5 696 000
Expenses for wages and salaries 1 361 600 Losses from receivables - 62 500 5 633 500
Lease expenses 64 600 Other operating income 84 000
Vehicle expenses 59 800 Financial income 2 400
Administrative expenses 389 000 Income from land and buildings 87 500
Advertising expenses 98 700
Financial expenses 13 200
Depreciation 33 200
Expenses for land and buildings 76 800
Profit 237 400
5 807 400 5 807 400
Existing valuation reserves in CHF on Dec 30, 2_09 Dec 30, 2_10
Inventory, trading goods 25 000 36 000
VA, receivables 3 500 5 000
Vehicles 32 000 27 000
Land and buildings 75 000 75 000
Accrued income (advertising material inventory) 16 500 8 000
Chapter 10:
Internal statement of financial position of BestTrade Ltd. as per December 31, 2_10 after profit distribution
Cash Payables for G+S

Bank account Misc. cur. liabilities
Receivables Loans
- VA, receivables Shareholders’ capital
Inventory, trading goods Legal reserves
Accrued income
Vehicles
- VA, vehicles
Land and buildings
Internal statement of profit or loss of BestTrade Ltd. as per December 31, 2_10 after profit distribution

Expenses for wages and salaries Losses from receivables
Lease expenses Other operating income
Vehicle expenses Financial income
Administrative expenses Income from land and buildings
Advertising expenses
Other operating expenses
Financial expenses
Depreciation
Expenses for land and buildings
Profit
10.4.8 Valuation reserves booking entries
What are the booking entries for the following transactions changes in valuation reserves.
1. Disclosure of valuation reserves by CHF 8 000 on furniture, which were generated in earlier years.
2. The putative losses from receivables are decided as CHF 5 000 too high.
3. Generation of valuation reserves of CHF 5 000 on the material inventories.
4. CHF 4 000 reduction of the valuation reserves on provisions for lawsuits.
5. CHF 6 000 generation of new valuation reserves on the machines, which are depreciated indirectly.
6. Increase of the land and building valuation reserves by CHF 20 000.
Chapter 10:
10.4.9 Dissolution of valuation reserves through devaluation over time
Within 5 years, a machine with a purchasing price of CHF 100 000 is depreciated to 0, using the straight line meth-
od with indirect booking. The machine’s operating life time is 10 years.
a) What are the valuation reserves at the end of the 1st year?
b) What are the valuation reserves at the end of the 7th year?
10.4.10 Statement of financial position after disclosing valuation reserves
Pete Hollister thinks about selling his trading business. For this reason he needs a statement of financial position
with internal values, i.e. all valuation reserves dissolved.
Final statement of financial position

Bank 24 000 Misc. current liabilities 5 000
Short-term marketable securities 15 000 Accrued liabilities and deferred income 3 000
Receivables from G&S 10 000 Loans 100 000
- VA, receivables -2 000 8 000 Provisions (renovations) 20 000
Inventory, trading goods 40 000 Shareholders’ capital 150 000
Accrued income 2 000 Legal reserves 40 000
Furniture and facilities 50 000 Profit of the year 13 000
- VA, furniture and facilities -30 000 20 000
363 000 363 000
Details regarding the existing valuation reserves:

1. A value adjustment of 10% on the receivables is appropriate.
2. The trading goods inventory is reported at 50% of its actual value in the financial accounts.
3. The market value of securities is CHF 5 000 higher than the purchasing value at which they are disclosed.
4. The furniture is 3 years old and the economic depreciation is10% per year.
5. The property is valued CHF 100 000 too low at the end of the year.
6. Of the material, which all was booked as expenses, at the end of the year CHF 8 000 is still available.
7. The foreign-currency liabilities have been valued as CHF 4 000 too high for years.
9. The provisions are overestimated by CHF 15 000.
10.4.11 Valuation reserves decision
Below are the financial statements before changes in valuation reserves:
Provisional statement of financial position (before valuation reserve)

Bank account 27 000 Provisions 15 000
Receivables from G&S 86 000 Shareholders’ capital and reserves 100 000
Inventory 36 000 Profit of the year 20 000
Furniture 50 000
210 000 210 000
Chapter 10:
Provisional statement of profit or loss (before valuation reserve)

Expenses for wages and salaries 70 000 Losses from receivables -8 000
Expenses for social security 15 000
Advertising expenses 8 000
Depreciation 10 000
Tax expenses 2 000
485 000 485 000
Regarding valuation reserves, the CEO decides as follows:

1. on receivables CHF 5 000
2. on the provisions CHF 10 000
3. on furniture CHF 3 000
What are the booking entries for the CEO’s decision and the resulting closing financial statements (after valuation
reserves)?
10.4.12 Depreciation method, valuation reserve, and profit
The CFO of a SME assesses options to minimize taxes short term. She considers using a declining balance deprecia-
tion method (50% of the book value) for the newly bought machine (CHF 100 000.-,) in the financial accounting
(economic life is 4 years with straight line decline in value).
Complete the following table for valuation reserves and impact on a hypothetical profit before depreciation of
CHF 50 000 for the first three years.
Actual values Financial accounts Valuation reserves

Year
Depreciation Final value Depreciation Final value Change Final value
1 25 000 50 000 50 000
2 25 000
3 25 000
Change in valuation Profit of the year

Year Actual depreciation
reserves Without machine Actual External
1 25 000 50 000
2 25 000 50 000
3 25 000 50 000
Chapter 10:
In early January of the fourth year, the packaging machine is sold. What are the applicable booking entries?
Option 1: the packaging machine (depreciated directly) is sold for CHF 5 000.
_________________________________ / _________________________________ CHF _____________
_________________________________ / _________________________________ CHF _____________
Option 2: the packaging machine (depreciated indirectly) is sold for CHF 20 000.
_________________________________ / _________________________________ CHF _____________
_________________________________ / _________________________________ CHF _____________
_________________________________ / _________________________________ CHF _____________
Chapter 11:
Multi-year Perspective 279
Multi-year Perspective
While the financial books are closed every quarter or every year1 (according to legal requirements and/or rules im-
posed by the capital markets such as stock exchanges), many facts and financial decisions taken span over multiple
years. While many such facts have already been introduced and technically discussed, this chapter now looks at the
multi-year dynamics and consequences of such decisions and subsequent decisions being necessary to take.
11.1 Introduction
1. Which financial facts and decisions exist that span over multiple years?
2. How do financial decisions of the past influence the future statement of profit or loss and statement of financial position?
3. How do indicators from the statement of profit or loss and the statement of financial position shape multi-year decisions?
11.2 Business transactions with multi-year consequences, previously introduced
The very nature of the business, and therefore financial accounting because financial accounting largely mirrors the
business transaction, is ongoing from one year to another: the money accumulated during one year is still in the bank
account at the beginning of the next year, machines that were produced or purchased can still be used in the coming
year (maybe to a lower extend because the machine becomes old and/or technologically outdated or other reasons),
customers can typically be served again in the coming year, and many more. Most business activities have a certain
repetitive character, and therefore anything prepared and built up in the former year can (potentially) be used in the
subsequent years.
As financial accounting follows a somewhat rigid valuation approach, some ‘long-term’ aspects cannot be disclosed
as a financial value, e.g. key knowledge built up with/for employees, key customer contacts, even long service
agreements with customers and supplies are not ‘valuable’ in an accounting sense, despite its potentially key role for
the even long-term success of the company.
In the previous chapters, the following business transactions have been introduced which are disclosed in accounting
and all of which have a certain level or aspect of multi-year consequences. Therefore, the decision taken in the first
year (e.g. purchase of a machine), does not only have a significant influence on the statement of financial position
and statement of profit or loss of the first year, but also on the ones from multiple subsequent years.
1
For internal purposes, financial books may be closed every month.
Chapter 11:
Table 115: Introduced Multi-year business transactions
Transaction First year Subsequent year Chapter
Increased money and in- Paying back after the agreed time, i.e. reducing
Bank loan 3
creased liability to pay back the money (and the liability)
Receiving money from share-

Founding a joint Distributing profits (if profits are made and dis-
holders and report sharehold- 9
stock company tribution is decided) and reducing money
ers’ capital
Recording the use of machine (i.e. the consump-

Purchase, i.e. reducing money tion of resources) as depreciation expenses, and
Depreciation 6.2
increasing assets (resources) reduction of asset (i.e. resources). But no reduc-
tion in money.
Marketable securi- Market value: adjustment Market value: upon selling small adjustment
8.3
ties disclosure Historic value: no adjustment Historic value: upon selling high adjustment
Note. Own depiction
So any decision taken for bank loans (level of loan, pay-back condition), foundation of the company (selection of
shareholders) depreciation (duration and annual depreciation amount), as well marketable securities disclosure in the
first year, will (potentially) affect all subsequent year until termination of the bank loan, going public with the com-
pany, selling of the asset or selling the marketable securities.
Consequently, even if the customer processes, i.e. how many customers are served with which goods and services, at
what price, and how these goods and services are produced, including sourcing and pricing of raw material, does not
change from one year to the next, the statement of financial position as well as the statement of profit or loss still
changes from one year to the next, e.g. because the depreciation amount is smaller (because of declining balance
method used for depreciation), the level of cash increases because some of the expenses (namely depreciation) is not
cash effective, or because the market value of a marketable security changes and a gain (i.e. financial income) ap-
plies.
11.3 Decisions under stable operating business

Multi-year Perspective
Know that profit (i.e. statement of profit or loss) as well as cash and equity (i.e. statement of financial position) will
change year by year even if there would be no change in the operating business, i.e. serving the same clients with the
same products and services, at stable prices, with the same production methods, and with the same suppliers, incl.
purchasing prices, the company has to take at least the following decisions every few years:
• Purchase of a new machine: the concept of depreciation leads to the fact that the machine, i.e. asset, will
have a value of 0 (or close to 0) after the pre-defined depreciation period. Therefore, a replacement must be
considered.
Chapter 11:
• Financing, i.e. ensure financial resource: when paying back a loan or when purchasing a machine, 3 scenari-
os may apply.
1. The company has enough cash available for paying back the loan (and the loan is no longer required for
the business), or for the purchase the replacement machine.
2. The company needs to extend the loan (at a similar level, by extending the existing loan or replacing the
loan with a loan from another investor, i.e. bank) because the loan is still needed to continue the busi-
ness (i.e. not enough cash was generated during the previous years to become independent from outside
investors), or for the purchase of the replacement machine.
3. The company uses the termination of the loan or the machine’s end of useful life to restructure respec-
tive business, i.e. issue new share capital instead of taking up a new bank loan, invest in a more modern
machine with e.g. automation, digitalization and Artificial Intelligence, or even not invest in a machine
but decide to purchase the respective products from a supplier.
The current statement of financial position and statement of profit or loss may indicate the need for such multi-year
decision regarding investment (i.e. need for new machines, as well as what type of machine, rather replacement ma-
chine of new machine for innovation), as well as regarding financing (i.e. need for new money, as well as which
sources of money and what types of investors may be most likely). The statements may also indicate which options
exist or are more or less likely for investment and financing decisions does likely exist. The following table summa-
rizes four such indications.
Table 116: Indicators regarding multi-year decisions need and options
Indicator Scenario: high Scenario: low
The machine must be leases or a new

Level of cash Purchase of machine is possible
bank loan must be taken up
Taking up new bank loan is diffi-

Level of debt (loans) versus equity New bank loan seems easily possible
cult and expensive
Replacement is likely (soon), cash Further development of production

Age of machine and/or debt
should be available process is possible
More efficient production (ma- Continuation of production process

Decreasing sales (sales price pressure,
chine) or innovation is required, and business model is possible (how-
decreasing number of customers)
long-term planning is difficult ever evolvement is advised)
Long-term planning is possible Restructuring is necessary (i.e. new

Margin (margin may serve as buffer for machine, new venture with new inves-
pressure from competition) tors)
Note. Own depiction
The statement of financial position and the statement of profit and loss suggest, that investment and financing deci-
sions may be considered and taken in parallel. The type of machine (i.e. highly automated machine versus replacing
existing machine) may influence the financing options and partners (i.e. leasing from machine manufacturer versus
existing bank). Also, investment decisions, and to a certain extend also financing decisions, always have strategic
and operational aspects, in addition to the financial aspects discussed above (e.g. availability of skilled or unskilled
Chapter 11:
personnel may influence the automation level of the machine, the expected level of customization by the customer
may influence the level of craftmanship, or political considerations may influence the supply chains and sourcing of
raw material, and subsequently the production method). However, the above financial consideration assume a sce-
nario where operations is (relatively) stable. If strategic or operational conditions change, e.g. development of new
production methodology or new production material, investment and financing decisions are more influenced by fu-
ture agreements than by previous financial results. Of course, even in times of change and restructuring, the previous
financial results are considered by partners and may therefore influence investment and financing options or condi-
tions to a limited degree.
End of Theory Part
11.4 Exercise
11.4.1 Marketable Securities over multiple years
The 4 questions below refer to the following five transactions:
Year Transaction/facts for «FBook Ltd.» (average ROS of 40%)
1 Purchase of 10 shares of Apple at CHF 100.- each
2 At year end, the shares of Apple are traded at CHF 130.-
5 Selling the 10 shares of Apple at CHF 120.-
Which of the following statements regarding the account in which the share-holding is disclosed, does apply?
Shareholder’s capital because this represents the investments of equity-investors
Marketable securities because 10 shares of Apple do not represent a strategic influence
It must be changed if the reason of share-holding changes
Investments because buying shares is considered a financial investment
Chapter 11:
Which of the following statements regarding equity applies?
The total year-end change of «FBook Ltd.»’s equity is independent of the transactions 2 to 5.
The transactions 2 to 4 above lead to the same overall change in equity regardless if the market value approach
or the purchase value approach is used for year-end valuation.
Generally, valuation using the purchase value approach (compared to the market value approach) leads to
fewer changes in equity, however the total amount of change is likely the same.
If the general assembly of Apple decides differently than what «FBook Ltd.» voted, «FBook Ltd.» must book a
provision for the risk from this decision which «FBook Ltd.» see to be wrong.
Which of the following statements applies if «FBook Ltd.» uses market value approach for valuation?
The valuation increased is only disclosed when realized.
In year 4, no profit can be disclosed because there is still a loss compared to year 2.
Market valuation approach allows increasing the value above the initial purchase value.
Taxes are calculated on CHF 200, the net differences between the initial purchase and final sale.
Which of the following statements applies if «FBook Ltd.» uses purchase value approach for valuation?
The highest annual profit is in the year of selling, year 5.
Losses only apply if the market value falls below the purchase value.
In year 4, a net profit from all the transactions with the Apple shares over all years is booked.
In the year of selling, year 5, the profit is CHF 400.-.
Chapter 11:
11.4.2 Sales and depreciation over multiple years
«CloudPrinting Ltd.» prepares a virtual printing shop: customers can upload their documents, they will be printed
and automatically delivered to the customer by «DHL» (material, supplies and delivery charged by «DHL» on a
case-by-case basis). No human interactions required. During the first year, the website for uploading documents is
created and paid by «DHL» («DHL» considers the website as marketing investment for the future delivery business).
In year 2, «CloudPrinting Ltd.» can start its business.
«CloudPrinting Ltd.» plans the business as follows:
Year Transaction/facts for «CloudPrinting Ltd.»
1 End of the year: purchase of a new printing machine, by bank transfer (paid with the founding capital),
TCHF 1 200, straight line depreciation over 4 years (year 2 to year 5), after 4 years the supplier’s service
ends, and it cannot be used any longer.
2 Total of the year: sales of TCHF 600, expenses for material and delivery of TCHF 200
The following 3 questions refer to «CloudPrinting Ltd.»’s 5-year plan:
Which of the following statements regarding profit applies?
There are more years in which «CloudPrinting Ltd.» shows a loss than years in which «CloudPrinting Ltd.»
shows a profit.
The number of years in which «CloudPrinting Ltd.» shows a loss is the same number as the number of years
in which «CloudPrinting Ltd.» shows a profit.
There are more years in which «CloudPrinting Ltd.» shows a profit than years in which «CloudPrinting Ltd.»
shows a loss.
Based on the information provided, the profit and loss for each year cannot be calculated.
Which of the following statements regarding cash applies (considering an annual price increase i.e. inflation of 2%
for a new replacement machine in the year 6)?
The net cash accumulated until end of year 5 is not sufficient to buy a replacement machine.
The net cash accumulated until end of year 5 is about sufficient to buy a replacement machine.
The net cash accumulated from the printing business is sufficient to finance significant growth (i.e. at least
+20%)
In every year, the cash inflow is higher than the cash outflow.
Chapter 11:
Which of the following statements regarding depreciation method applies?
The declining balance method leads to a lower total depreciation amount than the straight balance method.
If «CloudPrinting Ltd.» would use the declining balance method instead of the straight line method, the cash
at the end of year 5 would be higher.
If «CloudPrinting Ltd.» would use the declining balance method instead of the straight line method, the profit
in period 5 would be lower.
In order to assess the answers above for applicability, the exact percentage used for the declining balance
method must be known.
11.4.3 Make of Buy
The 6 questions below refer to the following financial statements of «ConnectCar», a software startup having devel-
oped software to equip existing cars to connect to street infrastructure such as red-lights, street signs, and alike.
Which of the following statements regarding the level of cash applies?
The current financial statements indicate an inflow of cash in the next year of 100.
At the current level of sales and expenses, the current cash available last for at least 2 years.
At the current level of sales and expenses, the net outflow is around 440.
The cash ratio is below 100%.
Chapter 11:
Which of the following statements regarding depreciation applies?
On average, the non-current assets have a lifetime of more than 10 years.
For vehicles, indirect depreciation applies.
The intangible assets at the end of the year of 0 indicates that during the year no depreciation applied for in-
tangible assets.
The data presented shows explicitly that depreciation for vehicles is higher than for machines.
Which of the following statements regarding profit applies?
Lowering expenses for material shows the biggest leverage to reach profitability.
The equity shows that the in the previous year, more profits were made than losses.
Knowing that the company expenses increase 50% every year since its existence, the company is younger than
5 years.
If this year the inventory would have been sold, the company would have made a profit.
Which of the following statements regarding the «buy»-option in a «make or buy» decision applies?
The «buy»-option decrease financial results.
The «buy»-option is advised for non-core components, which are required within a short period of time.
The «buy»-option increases the personnel expenses.
The «buy»-option leads to relatively higher personnel expenses than the «make»-option.
Which of the following statements regarding the «make»-option in a «make or buy» decision applies?
A higher cash earning power support the «make»-option.
A bank loan is required in order to decide for the «make»-option.
If higher flexibility is required, the «make»-option is preferable.
If no additional sales can be expected, only the «make»-option can be considered.
Chapter 11:
Which of the following statements regarding the situation of «ConnectCar» applies?
For the adaptation of the current software to the Chinese market, which is the world’s biggest car market and
complex street conditions, the «buy»-option is preferable.
For a snow-prove, light-weight box mounted below the car, the «make»-option is preferable.
The current high cash ratio suggests a «make»-option.
Any new activity, regardless if «make» or «buy», should focus to increase sales of attractiveness for increas-
ing shareholder’s capital.
11.4.4 CapEx or Leasing
The 4 questions below refer to the following financial statements of «ConMat», a company producing and selling
material and equipment for the construction industry (similar to «Hilti» and «Leica»).
Which of the following statements regarding the level of equity applies?
The debt-to-equity ratio is slightly higher than 100%.
The golden rule of financing is met.
The equity suggests the company to rather be a high-tech company instead of a production company in a ra-
ther traditional industry such as construction.
The maximum accumulated profit of all previous years is 1000.
Chapter 11:
Which of the following statements regarding the «CapEx»-option applies?
Compared to the «Leasing»-option, the «CapEx»-option lowers the mark-up.
Compared to the «Leasing»-option, the «CapEx»-option lowers personnel expenses.
If further and significant CapEx decisions are expected in the future, the «CapEx»-option is preferrable in or-
der to ride the learning curve.
The influence on financial result is rather triggered by the financing instead of the «CapEx»-option compared
to the «Leasing»-option.
Which of the following statements regarding the «Leasing»-option applies?
In order to increase profit, the «Leasing»-option is only preferrable if it serves as marketing tool.
The «Leasing»-option inherently increases the risk for subsequent efficiency increase programs to increase ef-
ficiency.
The flexibility offered by the «Leasing»-option repeatedly increases customer satisfaction.
The «Leasing»-option increases the probability of valuation reserves.
Which of the following statements regarding the situation of «ConMat» applies?
Given the relatively low profit compared to the financial result, a «CapEx»-option with high additional interest
payment is difficult to justify.
If for the replacement of a rather standard production machine for 100 the «CapEx»-option is used, the «equity
and long-term dept to non-current asset» ratio most likely remains equal.
For a new business venture considering artificial intelligence for predictive maintenance of the products, the
«Leasing»-options seems preferrable.
In order to choose between «CapEx»-option and «Leasing»-option, the differences in sales projections must be
considered.
Chapter 11:
11.4.5 Automation or Customization
The 2 questions below refer to the following financial statements of «MWHSS», Modern Warehousing and Storage
Systems, a company producing and selling logistical systems (hardware and software) for warehousing and storage
solutions. Customers include all sizes of business, on 5 continents.
Which of the following statements regarding the «Automation»-option applies?
Compared to the «Customization»-option, the «Automation»-option increases depreciation.
The «Automation»-option may be decided regardless of margin considerations.
For «MWHSS», the «Automation»-option unlikely has an influence on financial results.
For «MWHSS», the «Automation»-option likely increases the average skill level of employees.
Which of the following statements regarding the «Customization»-option in a decision applies?
The «Customization»-option typically requires increasing output from production in the near future.
The «Customization»-option is likely influencing «MWHSS»’s future customer base.
«MWHSS»’s current Statement of Profit or Loss indicates high pressure for product innovation, i.e. it favors
the «Customization»-option.
The «Customization»-option inherently increases the risk of future price decreases.
Annex I:
Chart of Accounts 290
Annex I:
Chart of Accounts
1 Assets 2 Liabilities
10 Current assets 20 Current liabilities
100 Cash and cash equivalents 200 Liabilities from goods and services
1000 Cash 2000 Payables for goods and services
1020 Bank account 2030 Prepayments received
106 Short-term marketable securities 210 Financial liabilities
1060 Short-term marketable securities 2100 Debts to banks
110 Receivables from goods and services 220 Other current liabilities
1100 Receivables from goods and services 2200 Payables, VAT
1109 Value adjustment, receivables 2206 Payables, anticipatory tax
1110 Receivables, card organizations 2208 Payables, direct taxes
114 Other current receivables 2210 Miscellaneous current liabilities
1140 Advancements and loans 2261 Profit distributions
1170 Receivables, VAT 2270 Payables, social security
1176 Receivables, anticipatory tax 230 Accrued liabilities and deferred income
1190 Other current receivables 2300 Accrued liabilities and deferred income
1192 Prepayments paid 24 Non-current liabilities
1199 Value adjustment, other current receivables 240 Financial liabilities
120 Inventories and work in process 2400 Loans (incl. bank loans and mortgages)
1200 Inventories, trading goods 2430 Bonds
1210 Inventories, raw materials 260 Provisions
1230 Inventories, supplies 2600 Provisions
1260 Inventories, finished goods 28 Equity (legal entities)
1270 Inventories, semi-finished goods 280 Capital
1280 Work in process 2800 Shareholders’ capital (joint-stock company)
130 Accrued income 2800 Capital (limited-liability company)
1300 Accrued income 2800 Capital (foundation)
14 Non-current assets 290 Reserves, net earnings
140 Financial assets 2900 Legal capital reserves (incl. share premium)
1400 Financial assets 2950 Legal profit reserves
1440 Loans granted 2960 Other reserves
148 Investments in subsidiaries Profit
1480 Investments in subsidiaries 2970 Profit brought forward / loss brought forward
1489 Value adjustment, investments in subsidiaries 2979 Profit of the period
150 Equipment 28 Equity (sole proprietorship / partnerships)
1500 Machines 2800 Capital
1509 Value adjustment, machines 2850 Private
1510 Furniture and facilities 2891 Profit of the period
1519 Value adjustment, furniture and facilities
1520 Office equipment and IT
1529 Value adjustment, office equipment and IT
1530 Vehicles
1539 Value adjustment, vehicles
1540 Tools and appliances
1549 Value adjustment, tools and appliances
160 Land and buildings
1600 Land and buildings
1609 Value adjustment, land and buildings
170 Intangible assets
1700 Patents and licenses
1770 Goodwill
180 Capitalized expenditure
1850 Non paid-in share capital
Annex I:
Chart of Accounts 291
3 Sales from goods and services

3000 Sales from produced goods
3200 Sales from trading goods
3400 Sales from services
3600 Other operating income
3700 Goods and services on own account
3710 Captive consumption
3805 Losses from receivables
3900 Changes in inventory
4 Material and goods expenses
4000 Expenses for materials
4010 Expenses for supplies
4200 Expenses for trading goods
4400 Expenses for third-party services
4500 Expenses for energy (production)
5 Personnel expenses
5000 Expenses for wages and salaries
5700 Expenses for social security
5800 Other personnel expenses
5900 Expenses for external personnel
6 Other operating expenses
6000 Lease expenses
6100 Maintenance, repairs, replacements
6200 Vehicle expenses
6300 Property insurance, fees and charges expenses
6400 Energy* and waste disposal expenses
6500 Administrative expenses
6570 IT expenses
6600 Advertising expenses
6700 Other operating expenses
68 Depreciation and Impairment

6800 Depreciation
69 Financial Results
6900 Financial expenses (incl. securities expenses)
6950 Financial income (incl. securities income)
7 Accessory operating income and expenses

7500 Income from land and buildings
7510 Expenses for land and buildings
8 Extraordinary & non-operating income and expenses
80 Non-operating income and expenses
8000 Non-operating expenses
8010 Non-operating income
85 Extraordinary income and expenses
8500 Extraordinary expenses
8510 Extraordinary income
89 Taxes
8900 Direct taxes
* general energy use, energy used for production process is accounted for under 4500
Annex II:
Statement of profit of loss in reporting format 292
Annex II:
Statement of profit of loss in reporting format
Statement of profit or loss in reporting format

Account Description
3000 – 3999 Sales from goods and services
Gross income
Profit before taxes
8900 – 8999 - Taxes
Annex III:
Description of Accounts 293
Annex III:
Description of Accounts
ASSETS
Cash (1000)
Inventory of cash and cash equivalents.
Banks account (1020)

All kinds of short term available bank accounts that hold a positive value as per reporting date.
See also depth to banks (2100)
Short-term marketable securities (1060)

Securities that are listed on a stock exchange and that serve as cash reserve or as short term investment.
Receivables from goods and services (1100)

Outstanding money from customers, resulting from the main activity of the organization.
Value adjustment, receivables from goods and services (1109)

Value adjustment of receivables at risk.
Receivables, card organizations (1110)

Outstanding money from credit card organizations.
Advancements and loans (1140)

Short-term loans (that the organization offered to customers), wage advances (that the organization offered to the
employees), etc.
Receivables, VAT (1170)

Receivables against the government for input tax on bought material and services and VAT (value added taxes) re-
spectively.
Receivables, anticipatory tax (1176)

Amounts of anticipatory tax that were deducted by finance-intermediaries (e.g. banks) that the organization can
claim back from the tax authority.
Annex III:
Other current receivables (1190)

Outstanding money that the organization can claim to be paid back, which is not directly linked to the core business,
purpose, and service of the organization.
Prepayments paid (1192)

Payments paid to suppliers for material, goods, facilities, and services that were paid to the supplier before the re-
spective due dates.
Inventories, trading goods (1200)

Stock on hand of trading goods, i.e. goods that the organization will resell in unchanged condition.
Inventories, raw materials (1210)

Stock on hand of raw materials, i.e. goods that are used for the production of the organizations main goods and ser-
vices.
Inventories, supplies (1230)

Stock on hand of supplies, i.e. goods which make up only a small percentage of the product’s or service’s total val-
ue, or the respective characteristics (e.g. nails, paint, etc.), or which are consumed during production and/or sales
process without becoming part of the goods and services (e.g. packaging, lubricant, etc.).
Inventories, finished goods (1260)

Stock on hand of finished output of the organization’s production.
Inventories semi-finished goods (1270)

Stock on hand of partly finished output of the organization’s production.
Work in progress (1280)

Efforts to produce a service, order or charge that have started, but that have not yet been charged to the customer,
e.g. real estate construction.
Accrued income (1300)

Accrues expenditures and earnings, which show a time difference to the current reporting period or which partly ap-
ply to another reporting period, to the applicable reporting period.
Financial Assets (1400)

Long-term investment (i.e. more than 1 year) of cash in other organizations or investment projects, e.g. shares,
bonds, obligations, etc.
Loans granted (1440)
Annex III:
Loans granted to third parties.
Investments in subsidiaries (1480)

Shares in capital of other companies aiming for a long lasting investment and a significant influence in the company
(voting share of at least 20%).
Machines (1500)
Machined facilities and appliances, and establishments that serve the organization’s production.
Furniture and facilities (1510)

Workshop facilities, shop infrastructure, office furniture, etc.
Office equipment and IT (1520)

Office machines, data processing facilities, communication systems, automated control systems, safety facilities,
electrical measurement devices and testing equipment, etc.
Vehicles (1530)
Vehicles of all kind that are used for the organization’s main purpose.
Tools and appliances (1540)

Tools of all kind and hardware.
Land and building (1600)

Buildings, floor-level property, and real estate.
Value adjustment, machines (1509)

Value adjustment, furniture and facilities (1519)
Value adjustment, office equipment and IT (1529)
Value adjustment, vehicles (1539)
Value adjustment, tools and appliances (1549)
Total amount of depreciation and impairment of the respective asset account as per reporting period date.
Value adjustment, land and building (1609)

Total amount of depreciation of the account land and building (1600) as per reporting period date.
Annex III:
Intangible assets (1701, 1770)

Intangible assets such as patents, licenses (which were obtained to be allowed using respective production methods
or alike) or goodwill (i.e. difference of the price that was paid for purchasing another company minus all assets (mi-
nus liabilities) that are disclosed in the statement of financial position).
LIABILITIES
Payables for goods and services (2000)

Unpaid financial obligations of the organization towards suppliers from supply transactions that are in relation to the
organization’s purpose.
Prepayments received (2030)

Payments received from customers for goods and services that have not been delivered or rendered yet.
Debts to banks (2100)

Bank loans in the form of current accounts (i.e. negative balance on the bank account).
See also Loans (incl. bank loans and mortgages) (2400)
Payables, VAT (2200)

VAT (value added tax) liabilities that arisen from the organization’s activities.
Payables, anticipatory tax (2206)

Liabilities of withholding tax which is deducted on earnings at their source.
Payables, direct taxes (2208)

Due payments arising from taxes on earnings and capital to the tax administration.
Miscellaneous current liabilities (2210)

Unpaid financial obligations of the organization that do not fall under payables (2000).
Profit distribution (2261)

Due payments arising from profit distribution to third parties (i.e. equity-owners).
Payables, social security (2270)

Debts towards social security institution from employee’s and employer’s contributions.
Annex III:
Accrued liabilities and deferred income (2300)

Accrues expenditures and earnings, which show a time difference to the current reporting period or which partly ap-
ply to another reporting period, to the applicable reporting period.
Loans (incl. bank loans and mortgages) (2400)

Long-term (i.e. duration of more than 12 months) liabilities to banks.
See also debts to bank (2100)
Bonds (2430)
Long-term liabilities from bonds issued.
Provisions (2600)
Liability with an uncertainty as per the reporting period date regarding amount and maturity, and impending losses
from pending transactions (incl. onerous contracts).
Equity legal entities

Shareholders’ capital (joint-stock company) (2800)
Sum of the nominal value of the issued shares.
Capital (limited-liability company) (2800)

Agreed capital (for funding and agreed increase/decrease) of a limited-liability company.
Capital (foundation) (2800)

Endowment capital (Art. 80 ff. Swiss Civil Code)
Legal capital reserves (2900)

Reserves (required by law) due to capital payments (e.g. increase in capital).
Legal profit reserves (2950)

Reserves (required by law) due to profit making and profit distribution (Art. 671 Code of Obligations)
Other reserves (2960)

Reserves (voluntary, i.e. not required by law) due to profit making.
Profit brought forward / Loss brought forward (2970)
Annex III:
Net profit or loss that have brought forward of the previous years (i.e. that have not been distributed or not been
used to purchase own shares).
Profit of the period (2979)

Profit or loss (also called net profit or net income) of the reporting period (e.g. of the year).
Equity sole proprietorships / partnerships

Capital (2800)
Mathematical amount of net assets, i.e. of which the assets exceed the liabilities.
Private (2850)
A private clearing account is required for each partner for respective transactions.
Profit of the period (2891)

Profit or loss (also called net profit or net income) of the reporting period (e.g. of the year), of a sole proprietorship
of partnership.
REVENUE: SALES FROM GOODS AND SERVICES
Sales from produced goods (3000)

Income from sales of produced goods.
Sales from trading goods (3200)

Income from sales of trading goods.
Sales from services (3400)

Income from rendering services to customers.
Other operating income (3600)

Income from activities that are not related to production, trading, or services.
Goods and services on own account (3700)

Production efforts that serve the organization itself, e.g. production or extension of own machines.
Captive consumption (3710)

Goods and services used for own consumption, typically paid at production price (e.g. pencils).
Annex III:
Losses from receivables (3805)

Losses in receivables (i.e. customers will definite not pay) are disclosed as income deduction.
Changes in inventory (3900)

Offset account for changes in inventory (finished goods, semi-finished goods, or work in progress).
EXPENSES: MATERIAL AND GOODS EXPENSES
Expenses for materials (4000)

Purchase costs for raw and basic material, instruments, devices, accessories, and purchased inter-mediate goods that
become an essential part of the product through the production process.
See also inventories, raw material (1210)
Expenses for supplies (4010)

Purchase costs for goods that only hold a minor part of the produced goods or services (nails, col-or, etc.), or which
are consumed during production and sales (packaging, lubricant, etc.).
See also inventories, supplies (1230)
Expenses for trading goods (4200)

Purchase costs for goods that will be resold to customers with a mark-up in unchanged condition.
See also inventories, trading goods (1200)
Expenses for third-party services (4400)

Expenses for services that are rendered by third parties in relation to the production process.
Expenses for energy (4500)

Energy costs that are needed for the main business-activity of the organization.
EXPENSES: PERSONNEL EXPENSES
Expenses for wages and salaries (5000)

Compensations to employees in return to their contribution of workforce.
Annex III:
Expenses for social security (5700)

Contributions to institutions of social security.
Other personnel expenses (5800)

Expenses that arise in connection with personnel (e.g. job advertisements, traveling expenses)
Expenses for external personnel (5900)

Bought services (e.g. consulting service, temporary staff, etc.).
EXPENSES: OTHER OPERATING EXPENSES
Lease expenses (6000)

Expenses for lease of premises (offices, shops, etc.) including additional costs such as heating, cleaning, and
maintenance of such lease premises.
Maintenance, repairs, replacements (6100)

Expenses for assets that remain their value (but do not increase their value).
Vehicle expenses (6200)

Expenses for vehicle fleet including maintenance, fuel, insurance, and leases.
Property insurance, fees and charges expenses (6300)

Expenses for insurances that cover property that is related to the organizations purpose.
Energy (non-production) and waste disposal expenses (6400)

Expenses for energy in any form, fresh water, and disposal of all type of waste.
Administrative expenses (6500)

Expenses for administrative activities of an organization.
IT expenses (6570)
Expenses related to operating and maintaining hard- and software (information technology).
Advertising expenses (6600)
Annex III:
Expenses related to advertising activities and other measures to increase sales.
Other operating expenses (6700)

Expenses related to the organizations purpose that do not fall into any of the above accounts.
Depreciation (6800)
Decrease of value of assets.
Financial expenses (incl. securities expenses) (6900)

Expenses for money transactions, interest on debt, as well as losses on securities and expenses for securities
Financial income (incl. securities income) (6950)

Income from monetary transactions such as interest income from bank deposits, and interest for delay.
The total of Financial expenses and financial income is also referred to as Financial result.
RESULT: ACCESSORY OPERATING INCOME AND EXPENSES
Income from land and buildings (7500) and expenses from land and buildings (7510)
Serves the separation of real estate transaction as own profit center. It includes rental income as well as expenses in
connection with buildings used for business operations (incl. depreciation and mortgage interest).
RESULT: EXTRAORDINARY AND NON-OPERATING INCOME AND EXPENSES
Non-operating expenses (8000) and non-operating income (8010)

Non-operating means to not be casually related with the organizations main purpose. This decision is highly context
specific to the transaction and the point in time when it applies.
Extraordinary expenses (8500) and extraordinary income (8510)

Extraordinary means that the transaction applies only once and it is not recurring.
Direct taxes (8900)

Paid or owed direct taxes (income taxes, capital taxes, etc.).
Annex III:
Bibliography 303
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FinancialAccounting Book 2022

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FinancialAccounting Book 2022

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Financial Accounting

Why financials matter

Dr. Simon Pfister

Table of Contents ....................................................................................................................................... II

List of Figures ............................................................................................................................................ IX

List of Abbreviations ............................................................................................................................... XV

Introduction .......................................................................................................................................... XVII

Why Financials Matters ....................................................................................................... 20

Starting a small Business and Cash Book........................................................................... 49

Asset Accounts ...................................................................................................................... 76

2.5.5 Accounts “Cash” and “Bank” of an advertising agency ................................ 101

Financing and Statement of Financial Position ............................................................... 103

Sole Proprietorship and Trading Company ..................................................................... 130

4.6.6 Entrepreneur’s income ................................................................................... 147

Payment Transactions and Production ............................................................................ 154

Value Adjustments.............................................................................................................. 179

6.3 Summary ..................................................................................................................... 193

Land + building, accruals, provisions ............................................................................... 199

Marketable securities ......................................................................................................... 223

8.5.3 Marketable securities or financial assets ........................................................ 239

Joint-stock Companies ....................................................................................................... 243

Valuation Reserves ............................................................................................................. 262

10.2.4 Dissolving valuation reserves ........................................................................ 266

Multi-year Perspective ....................................................................................................... 279

Annex I: Chart of Accounts................................................................................................................... 290

Annex II: Statement of profit of loss in reporting format .................................................................. 292

Annex III: Description of Accounts ...................................................................................................... 293

Bibliography ............................................................................................................................................ 303

List of Internet sources ........................................................................................................................... 304

Figure 35: Return on Sales ................................................................................................................ 113

Table 36: Comparison of Trading Business booking approaches ............................................................. 135

Table 73: Tom’s booking entries C, 2_07 ................................................................................................. 201

NGO Non-governmental Organization

Start of Theory Part

How do you assess the financial statements of Tom?

Positive aspects Critical aspects

Assets Statement of financial pos. Liabilities

2 Statement of profit or loss Statement of profit or loss in reporting format

• Sole proprietorship: private account as sub-account of equity account

7 Land and building, accruals and provisions

Why Financials Matters

2. How does finance interrelate with other aspects of organizations?

0.2 An introduction to companies

Figure 1: Input-Output business model

Note. Own depiction

Figure 2: St. Gallen Management Model, 1st generation

Customer)oﬀering)concept) Financial)concept) Social)concept)

development( • Secure(ﬁnancing( employees(

Note. Own depiction

Table 1: Business Model components

Value aspect Business task Components Description

0.4.1 Introduction to the mechanics behind the financials: bookkeeping

0.4.2 Basic definitions related to bookkeeping

0.4.3 Linking bookkeeping back to the business transactions: example

Table 2: business transactions and effects on account types

Business transaction Effect on account types

Note. Own depiction

0.4.4 Linking bookkeeping to hierarchical levels

0.5 The history of financials

0.5.1 The beginning: Mesopotamia

0.5.2 The contribution of the Roman empire

• Assets and stocks

• Expenses including details

development( •  Secure(ﬁnancing( employees(