Chart Of Accounts: Understanding Its Components

Financial Statements in the Chart of Accounts

The accounts that appear in a chart of accounts are frequently dictated by the company’s kind. You must normally use a designated method to display accounts in the chart of accounts to make it simpler to recognize them. When transactions are numbered, they’re also simpler to monitor. Small businesses frequently use three-digit numbers, whereas larger businesses usually use four-digit numbers to permit future growth (Corporate Finance Institute, 2022).

There are two primary financial statements in the chart account. 1) The income statement or profit and loss account and 2) the Balance sheet.

The assets and liabilities sides of the balance sheet are divided into two sections. All current and non-current assets are included in the assets side group. The liabilities side group, on the other hand, covers the company’s current obligations, non-current liabilities, and equity.

The asset side group covers all of the numerous types of assets that may be included in the account, such as intangible assets (patents, trademarks, and software), as well as current assets such as cash on hand, accounts receivable, inventories, and other short-term assets. The non-current assets include all fixed assets of the company such as plants and machinery, building, furniture, and other fixed assets. Each asset account can be assigned a number which helps to identify the assets easily (Corporate Finance Institute, 2022).

Accounts payable, wages payable, invoices payable, interest payable, and so on are all included in the liabilities side group. These are some instances of liability accounts whose names include the term payable.

Current liability and non-current liability are both included in the liability side group. Current liabilities include trade payable, suppliers, and short-term debt, and non-current liabilities account includes long-term debt, debenture, deferred tax liabilities, pension benefit obligation, and long-term loan (Corporate Finance Institute, 2022).

The value remaining in the company after all liabilities have been removed from the assets is referred to as equity. The equity of a firm is used to determine its worth to its shareholders. The owner’s equity accounts include preferred stock, retained earnings, and common stock, among other things.

The income statement shows the revenue and expenditure account.

The income earned by the company from the sale of its products and services is captured and recorded in revenue accounts. This only covers revenues that are relevant to the business’s core tasks and eliminates earnings that are irrelevant to the business’s principal operations (Corporate Finance Institute, 2022).

Sales discounts account, interest income account, sales returns account, and other sub-categories might well be listed within the revenue account.

The costs account is made up of all expense accounts that are used to track the costs incurred in producing revenue for the company. Creating an account for each item mentioned on IRS Tax Form Schedule C and integrating additional accounts that are relevant to the nature of the business is a straightforward approach to arranging the expense accounts.

	Equity and liabilities	Amount €
A	Code	Equity
	10	Capital
	100	Share capital
	101	Assigned capital
	102	Capital	3000000
	11	Reserve and another equity instrument
	112	Legal reserve	348180
	12	Profit/loss
	129	profit and loss for the year	158810
B		Non-current liability
	17	Non-current loan debenture and other
	170	Long-term debt to institutions	710000
C		Current liability
	40	Suppliers
	400	Suppliers	200000
	401	Creditors	3560
	52	Current payable for loan and others
	520	Short-term debts to institutions	38000

	Code	Assets	Amount €
A		Non-current assets
	20	Intangible assets
	203	industrial Propriety	40500
	21	Property, Plant, and Equipment
	211	Constructions	390000
	214	Equipment	9000
	216	Furniture	70000
	218	Motor vehicle	35000
	28	Accumulated amortization and depreciation
	280	Cumulative depreciation II	-5000
	281	Cumulative depreciation IM	-122000
B		Current liability
	35	Finished goods	62000
	39	Impairment loses	-1150
	43	Trade receivable
	403	Receivable	236200
	54	Other current investment
	540	Short-term investments (shares)	9000
	57	Cash and cash equivalent
	572	Bank	225000

International Accounting Standard 16 is used for fixed assets such as plants and equipment. IAS 16 specifies criteria for classifying property such as plants, and equipment as fixed assets, calculating respective carrying values, and calculating the depreciation as well as amortization that must be recorded. The depreciation is calculated or allocated based on the useful life of the assets (Iasplus.com, 2022).

Assets and Liabilities in the Chart of Accounts

The goal of IAS 16 is to specify how assets, equipment, and machinery should be accounted for. The identification of assets, the assessment of the respective value of assets, and the depreciation and impairments losses that must be recognized regarding these are the main problems (Iasplus.com, 2022).

IAS 16 is not applied to fixed assets if a different accounting approach is required or permitted by another standard, such as:

• According to IFRS 5, Non-current Assets Held for Sale and Discontinued, assets are classed as held for sale.
• IAS 41 Agriculture is used to account for assets utilized in agricultural activities.
• Exploration and evaluation assets are recorded in line with International Financial Reporting Standards (IFRS 6).

(Ifrs.org, 2022)

The standard IAS 16 covers the property, plant, and equipment required to develop or maintain the last three types of assets.

Recognition of fixed assets according to IAS 16:

Assets, plants, and equipment must be classified as assets if it’s likely:

Future financial benefits associated with the asset are anticipated to benefit the company, and

The asset’s cost could be accurately calculated.

When costs are incurred, this approach has been applied to all assets, plants, and equipment. Such costs include the price of acquiring or building an asset, plant, or equipment, and also the costs of expanding, replacing parts, or servicing it.

IAS 16 is used when certain elements of property, plant, and equipment are required to be replaced at regular times. If the recognized requirements are fulfilled, the carrying amount of that particular asset should contain the expenses of replacing a part of that asset when that cost is realized (pkf.com, 2022).

Initial cost measurement of fixed assets as per IAS 16

For concerns of security or environmental issue, some assets, plants, and equipment may be required to be acquired. These assets should be reported at cost first. All costs connected with getting the item into working order for its intended purpose are factored into the price. As a result, these assets comprise site preparation, shipping cost, installation cost, and the expected cost of changing the location and installing the machines, as well as the asset’s initial purchase price (Ifrs.org, 2022).

If the item is acquired in replacement of an old asset, the cost would be calculated based on its fair market value.   If the item is not appraised at fair market value, the cost is computed using the asset’s carrying value.

Measurement Following the first acknowledgment,

IAS 16 allows for the computation of initial asset recognition using two accounting models. These are:

Cost model: The asset’s value is calculated using the cost model technique by subtracting depreciation and impairment from its current cost. For each kind of PPE and also investment asset, management must declare the measuring methodology utilized to determine the gross carrying amount (PWC, 2022).

Therefore, a full discussion of how the ‘component method’ is used and how the pieces were identified is not required.

Revaluation Model: A revalued asset must be carried by an organization. The revalued amount is determined by deducting cumulative depreciation and impairment losses from the fair value of assets at the time of the revaluation.

When choosing the revaluation model, an organization must consider this:

(a) The revaluation baseline is the asset’s fair value at the revaluation date.

(b) The procedure of revaluing an asset must be conducted frequently such that the asset’s carrying value would not considerably diverge from its fair current value of revaluation.

The Asset Side Group

(pushdigits.ae, 2022)

Evaluations must be conducted on a frequent basis under the revaluation model. As a result, an asset’s carrying amount may not deviate significantly out of its fair value at the closing year. When an object is repriced, the whole asset class with which it corresponds must be revalued as well.

If the value of assets increases as a result of the revaluation, the increase must be attributed to other comprehensive income and thereafter recorded as a revaluation surplus in the balance sheet with accumulated equity.

If the value of the assets decreases as a result of revaluation, it should be recorded as an expense. As a result, these expenditures should be attributed to the same asset’s revaluation surplus.

Any revaluation excess created by the asset disposition may be moved straight to retained profits or reported as a revaluation surplus under equity in the balance sheet. Profits and losses cannot be used to move to retained earnings.

Keep the focus on these three points when managing depreciation:

Amount depreciable: The cost of an asset or other quantity exchanged for valuing less its residual worth is referred to as a depreciable amount.

Depreciation period: It refers to the time period during which assets are depreciated, also known as the asset’s useful life.

Any compensation obtained from third parties against the assets, plant, and equipment must be recorded in profit or loss, according to IAS 16.

Consider the following illustration: A profit or loss is reported when an insurance company pays out a claim for loss to the covered property.

Details	Amount $
Price of printer	25000.00
Cost of installation and assembly	3000.00
Cost of transportation and delivery	1150.00
Total Acquisition cost before Taxes	29150.00
VAT applicable @ 21%	6121.50
The total initial cost of acquisition of a printer	35271.50

Estimated dismantling and restoration of the location costs at the end of the fixed asset’s life will be included in the total cost of amortization.

So, Total cost of Amortization = 40271.50 euros (35271.50 + 5000)

The useful Life expectancy of a printer = is 10 Years

Amortization cost per Year = 4027.15 euros (40,271.50 / 10 Years)

???????Monthly Maintenance cost = 250 Euros

Weekly Maintenance cost = 62.5 Euros (250 / 4)

Daily Maintenance Cost = 8.93 Euros (62.5 / 7)

The International Accounting Standard 36, first determines the recoverable value of the asset if there is a risk that the asset is going to be harmed. The asset especially the goodwill arises out of the acquisition of a company and intangible assets having indefinite useful life shall be required to check for the recoverable amount annually (Deloitte, 2022).

The recoverable amount of an asset shall be higher of

(a) Fair value less cost to sell and

(b) Value in use

Where fair value less cost to sell is the arm`s length price or market price of such asset as reduced by the disposal costs and the value in use is derived by adding the discounted future expected cash flows applying the appropriate discounting factor. Whenever it is not practical to obtain the market price the value in use becomes the only option to determine the recoverable amount of the asset.

Value in use is required to consider the estimated cash flow from the asset from continuing use of the asset and out of its disposal after applying an appropriate discounting rate to these expected future cash flows (Ifrs.org, 2022).

The Liabilities Side Group

The entity is required to determine in each reporting period if there is some predefined indication of impairment, and if the answer is affirmative the entity needs to measure the recoverable value. For such assessment following information can be used as a guideline to identify the indication-

If there is an indication the asset`s current value is declined more than the expected decline due to use or efflux of time,

If there are significant changes took place in the technology that has an adverse impact on the use of such asset in the long term,

The carrying value of net assets of the entity is greater than the market value of the entity,

If there is significant damage to the value or the efficiency of the asset.

If there is a distribution of dividends from the subsidiary or joint venture or associate  

here the cash flows considered are only the cash flow generated from the current use of the asset not from a reconstruction of an entity that is expected to take place in the future. Restructuring in the operation is expected to improve the expected cash flows currently generated but shall be considered only if the company is committed or spend some investment in this direction. Where such cash flows do not include the cash inflows from financing activities or tax receipts and payments (Ifrs.org, 2022).   

For the computation of impairment loss, the recoverable amount is compared with the carrying amount of the cash-generating unit. The cash-generating unit is the asset that can generate cash flows that are independent of the cash flows from other assets when its output is marketed even if it is used internally within the firm.

The discounting factor in the discounting of cash flows shall be the pre-tax rate to equate the future cash flows and make them comparable with the current cash flows, for example, the weightage average cost of capital can be used or risk-free security rate of return.

When the recoverable amount is less as compared to the cash-generating unit’s carrying amount, the gap is known as an impairment loss and such impairment loss shall be allocated to the cash-generating unit which is subject to amortization or depreciation. However, if the carrying amount is lower then there is no need to charge impairment loss. The impairment loss shall be allocated to the CGU based on an appropriate ratio based on some reasonable criteria of use (grantthornton, 2022).  

The impairment loss charged may be reversed in the subsequent phase in the case of improvement in the cash flow generation or capability of the said asset to generate the expected cash flows, however, the reversal is not allowed in case of the goodwill in consolidated financial statements.

Allocation of impairment further requires checking first whether the goodwill is allocable or not, if it is allocable then the goodwill associated shall be divided among the other CGUs which are further used for evaluation of impairment loss and if there is an impairment loss then first such loss shall be adjusted against the goodwill and then the appropriate CGU (Accaglobal.com, 2022).

Equity in the Chart of Accounts

When the impairment testing of a CGU is done and if there is improvement in the cash flows then there may be an indication of reversal of impairment losses except that was recognized in respect of goodwill. As per paragraph 104 of IAS 36, an entity shall deduct by way of an impairment loss in the carrying amount to the extent of the recoverable amount. However, it may also happen that it is not feasible to evaluate the recoverable amount of individual assets then this standard would allocate the impairment loss between the components of that CGU as they all form a part of the cash-generating unit (Accaglobal.com, 2022).

An entity is required to make disclosures of all the substantial assumptions behind the valuation of the assets subject to revaluation and the basis of how such fair value or value in use is determined as per IFRS 13. 

Assets	Acquisition Value (Refer Note)	Recoverable Value	Impairment
Camera 1:	1,750.00	575.00	1,175.00
Camera 2:	3500.00	1,500.00	2,000.00
Camera 3:	1,950.00	750.00	1,200.00
Accessories	4,550.00	2,200.00	2,350.00
Total	11,750.00	5,025.00	6,725.00

According to the description of IAS 36 above, an asset impairment occurs whenever the fair value of an asset falls under its reported cost. Whenever the fair value of an asset falls less than its reported cost, it is called an asset impairment.

In this case, cameras were acquired in 2018, and impairment was assessed in 2020. The camera will be liable to depreciation, but we haven’t been given any information on useful lifetimes or depreciation methods, therefore the under-response assumes that the acquisition amount is equal to the asset’s carrying value in 2020.

The purpose of this Standard is to provide a method of accounting regarding intangible assets which are not covered by some other standards. These Standard mandates that a company recognizes an intangible asset exclusively if and only if certain requirements are satisfied. The Standard describes how to calculate the actual cost of intangible assets and mandates specifically related disclosures. That Standard applies to branding, marketing, start-up, or research & development expenses. The advancement of knowledge is the goal of research and development (Deloitte, 2022).

As a consequence, whereas these actions may produce a tangible product (such as a design), the intellectual portion of the property, i.e. the knowledge embedded in it, takes precedence.

The coverage of all this Standard includes rights owned by a lessee via licensing terms for things such as movie production films, video footage, dramas, writings, trademarks, and copyrights, which are not covered by IFRS 16.

cost for recognition of asset is the sum compensated in cash and cash equivalents or the market price of those others considering to obtain a resource at the date of purchase or construction, or, if relevant, the amount about that investment when it was first recognized in line with the appropriate prerequisites of those other IFRS standards, such as IFRS 2 Share-based Payment (Deloitte, 2022).

The acquisition cost, or another quantity replaced for cost, as reduced by its residual value is the depreciable sum. During commercial operations or usage, research results or other expertise are used to a set of concepts for the manufacture of new or considerably enhanced materials, gadgets, goods, procedures, methods, or activities.

The Income Statement

Assets, like highly technical information, creation and adoption of new systems and applications, licensing, proprietary information, domain expertise, and brands, are routinely acquired, developed, maintained, or enhanced by companies. Software programs, patents, trademarks, movie production films, client lists, loan servicing privileges, permits, import tariffs, franchising, customer or supply chain, consumer loyalty, market dominance, and distribution rights are all examples of products covered by these broad areas (Deloitte, 2022).

To differentiate an intangible asset from goodwill, the concept of an intangible asset necessitates that it be recognizable. In a merger or acquisition, goodwill is indeed an item that represents the potential economic advantages coming from those other property acquired in the transaction that is just not independently identifiable and recognized. Long-term economic gains may arise through synergies between both the identifiable assets bought or from resources that do not qualify for the company’s financial recognition on their own.

The intangible asset can be recognized if it:

(a) is distinguishable from the organization and can be marketed, transferred, licensed, rented, or swapped separately or in combination with associated agreements, identifiable assets, or obligations, irrespective of whether the organization aims to do so;

or

(b) emerges from contracting or other basic rights, irrespective of if these rights are tradable or differentiable from the organization or other duties and responsibilities (pkf.com, 2022).

Across many circumstances, there have been no increases to intangible assets or replaces of parts of them due to their nature. As a result, most extra costs are expected to sustain the predicted future financial opportunities shown in an established intangible, rather than satisfying the idea of an intangible asset and the identification standards under this Standard.

Furthermore, tracing later expenditures to a single intangible asset rather than the firm itself might be challenging. As a consequence, expenses paid after the first identification of a purchased intangible asset, or even after the execution of an internally produced intangible asset, are rarely recognized in an entity’s net assets.

In most cases, the price a company spends to purchase an intangible asset independently reflects assumptions about the likelihood that the asset’s predicted future economic benefits would stream to the company. For the sake of simplicity, the entity anticipates an influx of economic advantages, even though the timing and magnitude of the inflow are undetermined. As a result, for independently purchased intangible assets, the possible recognition requirement in paragraph 21(a) is always assumed to be met.

Until an intangible asset has fulfilled the requirements specified for it to operate in the way planned by management, expenses are no longer recognized in the carrying amount. As a result, expenditures associated with utilizing or reassigning an intangible asset are still not reflected in the asset class carrying value. For instance, expenditures spent while an asset able to operate in the way envisaged by the administration has yet to be placed to some use, and initial operational losses, like those sustained while the market for the asset’s output grows up, are not recognized in the books of the company as an identifiable asset (Ifrs.org, 2022).

Fixed Assets and IAS 16

When an intangible asset purchased in a corporate merger is separable or comes through commercial or other legal rights, there is enough information to properly calculate the investment’s fair value. Since there is a variety of potential possibilities with differing probabilities for the estimations used to calculate an intangible asset’s market price, uncertainties factor into the calculation of the asset’s fair value.  An intangible asset obtained in a business acquisition may be separated from a linked contract, identifiable asset, or obligation, except with the help of a related contract, identifiable asset, or liability. When this happens, the purchaser accounts for the intangible asset independently from goodwill, but with the corresponding item (Deloitte, 2022).

Implementing the prerequisites in paragraphs 54–62, successive spending on an in-process developed in the previous research work acquired separately or as part of the business conjunction and identified as an intangible asset is: (a) identified as a possible cost when imposed if it is research expenditure; (b) identified as an expenditure because once incurred if it is advancement spending that does not meet criteria for recognizing as an intangible in paragraph 57; and (c) acknowledged as an expense when imposed if it is advancement expenditure that fulfils the criteria.

A non-monetary asset or assets, or a mixture of financial and non-assets, may be obtained in return for one or even more intangible assets. The explanation that follows only pertains to the swap with one non-monetary item for another, although it also relates to all of the trades outlined in the preceding phrase. Unless (a) the express contract lacks economic substance or (b) the fair market value of neither the asset acquired nor the asset decided to give up is verifiable, the expense of an intangible asset is evaluated at fair value. Despite the fact that an entity cannot instantaneously recognize the asset that has been given up, the bought item is assessed in this manner (CPDbox, 2022).

Because of challenges in (a) recognizing if and when it has a recognizable asset that would yield projected future economic benefits; and (b) calculating the asset’s cost accurately, assessing whether an independently created intangible asset qualified for recognition can be challenging.

As a result, an organization applies the rules and guidelines in paragraphs 52–67 to all domestically created intangible assets in addition to dealing with the basic criteria for the identification and first measurement of intangibles. 

1-03-16	Patent Account	7,500.00
	Cash or Bank Account		7,500.00
	(Acquisition of patent)
31-12-16	Patent Account	1,500.00
	Revaluation Surplus Account		1,500.00
	(Record revaluation of the patent)
31-12-17	Revaluation Surplus Account	1,000.00
	Patent Account		1,000.00
	(Record revaluation of the patent)

References

(2022). IAS 38 Intangible Assets [Ebook]. Retrieved 31 March 2022, from https://www.pkf.com/media/8d891e8463108ff/ias-38-intangible-assets.pdf.

Accaglobal.com. (2022). IAS 36 impairment of assets | ACCA Global. Accaglobal.com. Retrieved 31 March 2022, from https://www.accaglobal.com/my/en/member/discover/cpd-articles/corporate-reporting/ias36-impairment.html.

CPDbox. (2022). How to Account for Intangible Assets under IAS 38 – CPDbox – Making IFRS Easy. CPDbox – Making IFRS Easy. Retrieved 31 March 2022, from https://www.cpdbox.com/ias-38-intangible-assets/.

Deloitte. (2022). IAS 36 — Impairment of Assets. Iasplus.com. Retrieved 31 March 2022, from https://www.iasplus.com/en/standards/ias/ias36.

Deloitte. (2022). IAS 38 — Intangible Assets. Iasplus.com. Retrieved 31 March 2022, from https://www.iasplus.com/en/standards/ias/ias38.

grantthornton. (2022). IFRS – IAS 36 – If and when to undertake an impairment review. Grant Thornton International Ltd. Home. Retrieved 31 March 2022, from https://www.grantthornton.global/en/insights/articles/IFRS-ias-36/ifrs-ias-36-If-and-when-to-undertake-an-impairment-review/.

Iasplus.com. (2022). IAS 16 — Property, Plant, and Equipment. Iasplus.com. Retrieved 31 March 2022, from https://www.iasplus.com/en/standards/ias/ias16.

Ifrs.org. (2022). IFRS – IAS 16 Property, Plant, and Equipment. Ifrs.org. Retrieved 31 March 2022, from https://www.ifrs.org/issued-standards/list-of-standards/ias-16-property-plant-and-equipment/.

Ifrs.org. (2022). IFRS – IAS 36 Impairment of Assets. Ifrs.org. Retrieved 31 March 2022, from https://www.ifrs.org/issued-standards/list-of-standards/ias-36-impairment-of-assets/#:~:text=The%20core%20principle%20in%20IAS,asset%20is%20described%20as%20impaired.

Ifrs.org. (2022). IFRS – IAS 38 Intangible Assets. Ifrs.org. Retrieved 31 March 2022, from https://www.ifrs.org/issued-standards/list-of-standards/ias-38-intangible-assets/.pkf.com.

pkf.com. (2022). IAS 16 Property, plant, and equipment [Ebook]. Retrieved 31 March 2022, from https://www.pkf.com/media/8d891e80cf3d2b2/ias-16-property-plant-and-equipment.pdf.

pushdigits. ae. (2022). IAS 16 – Property, Plant, and Equipment. https://www.pushdigits.ae/. Retrieved 31 March 2022, from https://www.pushdigits.ae/standards/ias/ias16-property-plant-and-equipment/.

PWC. (2022). A practical guide to accounting for property under the cost model. https://www.pwc.com/. Retrieved 31 March 2022, from https://www.pwc.com/jp/en/assurance/research-insights-report/assets/pdf/imre_22en.pdf.