8. Interest from Bank Loan and Taxes

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Do curso por IESE Business School

Accounting: Making Sound Decisions

719 classificações

IESE Business School

Accounting: Making Sound Decisions

719 classificações

Curso 1 de 5 em Specialization Foundations of Management

Financial Accounting is often called the language of business; it is the language that managers use to communicate the firm's financial and economic information to external parties such as shareholders and creditors. Nobody working in business can afford financial illiteracy. Whether you run your own business, work as a manager or are just starting your career, you want to understand financial information and be able to interact with accountants, controllers, and financial managers. You want to talk business! This course will provide you with the accounting language's essentials. Upon completion, you should be able to read and interpret financial statements for business diagnosis and decision-making. More importantly, you will possess the conceptual base to keep learning more sophisticated accounting and finance on your own. Do not forget that, as with any other language, becoming proficient with accounting requires constant practice.

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Week 2: The Income Statement

Now that you are familiar with the balance sheet, in week two we'll learn how to account for a variety of transactions. In addition, I'll introduce you to another key financial report: the income statement. Course objectives: To be able to recognize a broader range of transactions on the balance sheet and to become familiar with the income statement.

1. Introduction to Week 21:01

2. Recap of Week 11:52

3. Purchasing More Inventory3:26

4. Sales and Cost of Goods Sold7:04

5. Selling, General and Administrative Expenses4:43

6. Some Collections and Payments of Cash3:58

7. Depreciation and Amortization8:29

8. Interest from Bank Loan and Taxes3:46

9. Preparing the Balance Sheet3:51

10. Introducing the Income Statement6:59

11. Recap of Week 2 and Conclusions3:56

Conheça os instrutores

Marc Badia
Assistant Professor
Accounting and Control

[MUSIC]

On the last day of year x0,

the campus bookstore received a loan from the bank of 20,000 euros.

This loan is now on the balance sheet.

As a liability.

So we have an obligation to repay the loan in three years.

During these three years, the bank is going to charge us 5% as the interest for

the use of this loan.

So that's the cost of financing.

Now let's see how to account for this interest.

By the end of your X1 the campus book store has to

recognize this cost of financing which

is 5% of the principle of the amount that we are using which is 20,000.

So that's the total amount of 1,000 euros.

This is the interest that we need to pay to the bank.

And so the first thing that we're going to less recognize are decreasing cash

by 1,000.

So by the end of year X-1, the campus bookstore has to recognize an interest

cost of 5% of the 20,000 Euros it has received from the bank,

the principle of the loan.

The total amount is going to be 1,000 Euros.

Now the campus bookstore has to pay this amount,

therefore we're going to recognize a decreasing cash.

What is the other account involved in this transaction?

The interest we are paying is for

a service that we have already received, a loan of 20.000 euros for one year.

So by paying this interest we are not really generating any future value,

we are just paying something that we have consumed in the past.

Therefore we are not generating an asset.

At the same time by paying the interest we are returning principal.

The principal is still on our balance sheet, and it's 20,000 euros.

What we need to do here is to recognize an expense,

an interest expense, so a decrease in the profit and loss account.

So after this transaction, the shareholders of this company

are poorer in 1,000 euros because of the cost of financing.

And at the same time,

the company's less liquid because cash has decreased by the same amount.

By looking at the balance of the profit and

loss account, we see that the profit so far is 12,000 Euros.

Christina says that the business is subject to a 30% corporate tax.

In the case of the campus book store, this profit,

before taxes that we have here of 12,000 Euros, is the same as the taxable profit.

In other words, there is no need for further tax adjustments.

So we can apply the 30% directly to this 12,000 and so

the tax expense we are going have for this year is 3,600 Euros.

Now Christina's not paying to the tax authorities this amount yet.

However she knows that by the mere fact that she had this profit this year of

12,000 Euros, in the future, she will have to pay the 3,600 Euros.

So we need to recognize this now even though we are not paying for

the taxes yet.

How would you recognize this?

Well first of all we need to recognize the tax expense.

So we are poorer because of these taxes.

And the PNL account is going to decrease by 3,600 Euros.

On the other hand,

obviously we are not paying anything therefore cash remains the same.

But we need to recognize a liability.

An obligation to pay his amount in the future to the tax authorities.

We're going to call this tax payable.

This is the last transaction of the year.

So, this is great.

We are already done with accounting of all the transaction.

And so now we have the ending balance for the return of the accounts.

And what we're going to do next?

Is to prepare the balance sheet.

So basically just to put this document here in a nicer way, and

after that I'm going to introduce a new financial statement.

In our next video, we are going to prepare the balance sheet at the end of year X1.

[MUSIC]

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