Connecting the accounting profits and the conditioned profits
Recognition of the profits is becoming more complicated than in previous years with the coming of new business models. In many cases, it is no longer true that the billing date copies the VAT output on at the same time.
The list of business contracts with the client as well as procedures that we apply by recording the profits in the accounting is a necessity. Many situations can change the usual procedure of sorting a completely invoiced profit to the current accounting period. Understanding the legal relationship with a customer is important. It is necessary to define and identify if it follows the independent delivery of goods and services or a gradual fulfilment or another condition when future obligations develop. See some examples below:
• Reduction of the profits of the current period from a bonus provided to a customer that is usually connected to reaching the turnover requires a thorough going over of the obligation´s inventory to the date when accounting for the bonus. We account for the estimated item to the date of the balance and reduce our profit at the same time.
• A future conditional obligation of a price reduction by reaching the turnover with a customer reduces the profit in the current period. Concurrently, the time of awarding the abatement does not have to be connected with the end of the accounting period. If it is known before the financial statement in what volume the customers fulfilled the condition in the following period then we account the estimated item and reduce the profits. Where there is no confidence of the future obligation fulfilment in the future, we will form a part of it by setting a reserve.
• The legal guarantees provided have no impact on the accounting of profit in the current period. They show in the estimate of the amount of reserves on the side of expenses. Vice versa, the additional post-paid contractual guarantees to the customers, most often the so-called extended warranties, are set as accrued profits in the subsequent periods. They appear in the profits when the guarantee is applied, as the guarantee cannot be applied any longer. Subsequent costs of warranty repairs are posted during repairs and are matched with this deferred income.
• The right to return the goods, which is in the contractually determined, or publicly announced-term provided to the end customers makes part of the profit uncertain in the current period. It depends on the length of the term when the goods can be returned. With a short refund term for returning the goods in weeks, it is possible to calculate the supposed sum of the reduction of the profit for the current period quite accurately in the financial statement and together with the sum of reduction of the expenses for the goods sold. With a refund term for returning the goods in months that exceeds the day of preparing the financial statement, most often with other business partners in a store chain type, it is necessary to appraise the supposed risk of reducing the profit and the future obligation to address the reserve.
• The obligation to repurchase or exchange the goods for new ones after reaching the contracted term has a clear impact on the valuation of time connection of the profit. If additional profit is obtained on the sale above the usual profit for the goods, the profit will most often be identified as accrued profit. The cost for the repurchase is the same as the cost for a newly delivered product during the exchange is connected with deferred income. This contractual relationship should not be confused with the obligation and profit from the rental of the item that will be replaced by a new one again in the rental regime after the contractual term.
• Identification of the real legal relationship is necessary in the case of placing goods on an electronic marketplace such Amazon. It is necessary to identify if the organiser of an e-shop really buys the goods when it is delivered and whether the profit belongs into the current period. Alternatively, if the e-shop just makes the offer possible, ensures the storage, transportation and collection of the payment from an end customer. In such a case, the profit is registered only when the goods are sold to the customer and the commission from its sale usually belongs to the organiser.
• When accounting for revenue on a contract basis before its completion, it is necessary to differentiate the situations when to accrue the deferred profits of the subsequent periods or vice versa to include the profits into the current period to create an estimate or reserve for expenses spent in the subsequent period. It is connected with the correct appraisal of the uncompleted production.
In all of the cases, it is appropriate to describe the internal profit recognition system and also prepare arguments through the adopted accounting procedures for defending the income tax base. In order to set up the Czech accounting correctly, the international accounting standard IFRS 15, which is valid from the 1st of January 2018 is the inspiration.
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