Random Question - not job related

#1

Ok, this is the only place I could think of that amassed such a large amount of competent accountants. I’m a novice financial student and I don’t understand how you balance a balance sheet when you have a business loan. When you have a loan (20,000 (assume you’ve had it for a year, no repayments)) your assets will be 20,000 higher, and so will your liabilities but how do you factor in interest charged?? Do you acknowledge interest on a balance sheet at all? Or do you represent all the inerest you owe as a loss in your p/l?? Please help

#2

Interest payments wont appear on the balance sheet directly. It will obviously appear in the profit and loss account. The interest figure will also be recognised as reduced figure for cash at bank/retentions etc in the balance sheet depending on where the cash comes from used to pay the charge. As you already mentioned the loan will appear on both sides of the balance sheet.

#3

Interested owed but not yet paid. Debit profit and loss account (Finance costs; interest on loans)with the amount payable. Credit current liabilities, surely? Why would you net it off against cash at bank/retentions?

#4

I was assuming that it had been paid at b/s date. At which point there would have been a drop in either of those to reduce the current liabilities. I jumped a bit to far ahead - apologies.

#5

How do you represent corporation tax you need to pay from the previous year on the balance sheet?

Do you put taxation from the previous year as an expense on the p/l??

#6

Two answers:

  1. In the previous year you will have calculated current year CT. Debit p&l charge in respect of current period.
    credit B/S under current liablities. Notes to the accounts will analyse the charge if necessary.
    In the current year do we assume that the tax is still not paid? If so, the current liability remains on the balance sheet. When the tax is paid Debit current liabilities, Credit cash.

  2. In this scenario are you suggesting that there is a prior year adjustment to increase the previous year’s tax charge (eg if after a Revenue enquiry there is an increase in the tax due on the previous year’s profits).
    The entries would be Debit p/l tax (in the notes to the accounts the p/l charge will be analysed between current and prior years). Credit current liabilities.

Hope this helps.

#7

I’m sure that according to the rules you can’t set corp. tax to be an expense in the p/l ??

#8

Nope.You are a little confused. Tell me what rules you are looking at and this may shed some light on things.However, I’m looking at the annual reports of GlaxoSmithKline Plc, Shell plc , SEGRO plc (Slough Estates) and Xchanging plc, and all of them show in their Consolidated Income Statements: Profit (or loss in SEGRO’S case) before tax, then the charge or( write back if there’s a pya or tax loss carry back etc) for tax then Profit for the year.

Certainly if you are talking about profit or loss for the purposes of PCTCT (Profits Chargeable To Corporation Tax) then tax (obviously) like many other adjusting items, eg Depn, general provisions, entertainment, write done of R&D etc. is not an allowable expense.

Are you studying at uni or ICAEW?

I would recommend that you take a look at some Annual Reports and Accounts. If you google any company you can find their accounts online. It will assist greatly with studies because it is a lot easier to see how all the classroom theory is put into practice. The notes to the accounts are equally important to understand.

Hope this helps?