FA1 theory

Transactions

Entered as expenditure; revenue; financial transactions; related adjustments/transfers

Each transaction

Entered to an account corresponding with the nature of the transaction

Chart of accounts

Clear and sufficiently detailed chart of accounts for each financial year

General ledger

Entries used to derive the financial statements

Subledgers

Information entered into the general ledger as combination entries

Accrual basis

Exp. when product/service received; Rev. when product delivered/service rendered

Income + expense accounts

Transferred to Income Statement

Asset + Liability accounts

Transferred to Balance Sheet

Buyer

Records as purchase

Seller

Records as sales

VAT

VAT is a consumption tax added by seller to selling price

VAT registration

Business subject to VAT must register; no registration if turnover ≤ €20

VAT rates

25.5% general; 13.5% food/restaurant/catering; 10% books/medicines/exercise/cinema/cultural/entertainment/passenger transport etc.

VAT payable

Sales incl. VAT → VAT payable

VAT recoverable

Purchases incl. VAT → VAT recoverable

VAT liability

VAT payables > VAT recoverable

VAT claim

VAT payables < VAT recoverable

VAT reporting

Monthly; quarterly; annually

VAT accounting

Net or gross method

VAT example: €100 + 25.5%

Price before VAT €100; VAT €25.50; selling price €125.50; company pays €25.50 VAT to tax administration

Financial statements

Prepared within 4 months of accounting period end

VAT payment

VAT declared and paid no later than 12th day of 2nd month following each tax period

Net turnover

Sales income − sales discounts − VAT − other taxes directly linked to sales

Payment terms: 14 days -2%

2% cash discount if paid within 2 weeks

Payment terms: 30 days net

Full amount paid within 30 days

Late payment

Full amount + interest on overdue amount

Cash discounts

Adjustment items to sales revenue

Cash discount example: €10

000 sales

Cash discount example: invoice

Invoice €10

Cash discount example: dates

Invoice 1.9; customer pays 5.9

Credit note

Adjustment to seller's income; VAT payables decrease

Credit note example

€10

Collection problems

Debt collection; foreclosure; corporate restructuring; bankruptcy

Reminder fee

VAT-free; booked against Sales

Late payment interest

Booked to Other interest income

Reference rate

2.5%

Consumer late-payment rate

9.5%

Corporate late-payment rate

10.5%

Interest formula

(% × total × days) / 365

Credit loss example

Invoice €10

Going concern

A reporting entity is presumed to be carrying on its business as a going concern

Consistency

Principles and methods applied consistently from one financial year to the next

Substance over form

Accounting considers substance of transactions and not merely legal form

Prudence

Valuation made on a prudent basis

Opening balance

Based on closing balance sheet for preceding financial year

Accrual principle

Income and expenses relating to financial year regardless of receipt/payment date

Intra-Community trade

Sales and acquisitions of goods between taxable entities in EU countries

Intra-Community sale

Generally VAT-exempt if goods transported Finland → another EU country; buyer liable for VAT elsewhere in EU; valid VAT number

Intra-Community sale example

0%; accounts receivable; bank account; €12

Intra-Community acquisition

VAT generally payable on purchases from another EU country

Intra-Community acquisition + deduction

No tax to be accounted for if put into service and qualifies for deduction; VAT payable = VAT deductible

Exports

Exports to non-EU countries are VAT-free export sales

Exchange rate differences

Non-euro purchase price → exchange rate differences

Exchange rate differences on sales

Increase/decrease in sales proceeds

FX sales example

USD 12

FX balance sheet

Foreign-currency receivables/liabilities translated using exchange rate at balance sheet date

Gift vouchers

Sale recorded on balance sheet

Gift voucher — sale

Debit Cash; credit prepayments for goods/services

Gift voucher — used

Debit prepayments; credit Sales + VAT payable

Gift voucher — recognition

Recognized as income when used and service performed or when voucher expires

Subsidies

Other operating income

Income statement by nature

Turnover → change in stocks → manufacture for own use → other operating income → materials/services → personnel costs → depreciation/amortization → other operating expenses → operating profit/loss → financial income/expenses → profit/loss before distribution/taxes → appropriations → income tax → other direct taxes → profit/loss for financial year

Factoring

Receivables remain in seller's balance sheet until customer pays

Factoring accounts

Separate accounts recommended/often necessary for factored receivables and factoring credit

Factoring costs

Fees + factoring interest → Interest expenses and other financial costs

Factoring example: €100 invoice

80% received at point of sale; 20% less 3% interest later

Factoring example: figures

80% payment €77.60; 20% payment €19.40; interest €3.00

Purchased services

Closely linked to products/services sold

Purchased services examples

Subcontracting; temporary agency work

Purchased services can include

Administrative; expert; accounting; facility management

Other operating expenses

Costs concerning the accounting entity in its entirety

Personnel costs

Salaries paid to employees as compensation for work done

Cash wages

Recorded in payroll account

Non-cash benefits

Meals; accommodation; car; telephone

Non-cash benefit expenses

Recorded as expenses e.g. rent; fuel

Personnel deductions/contributions

Withholding tax; pension; unemployment insurance; membership fees; non-wage labor costs

Social security contribution

1.16%

Income Register

Travel/accommodation allowances based on receipts; employer cost items; benefits paid to employer; earnings used as basis for social security contributions

Payroll example

20% income tax; 7.15% pension; 0.79% unemployment; 1.16% social security

Payroll example — total

Total salary €7