FINANCIAL ACCOUNTING

p. 214

CHAPTER 14: LIABILITIES

In this chapter, we will discuss the accounting treatment of liabilities. We will

consider the accounting treatment of long-term liabilities (which gives rise to
additional classification issues (i.e., the long- vs. the short-term part of the
liability)), as well as short-term liabilities. We will also deal with liabilities in
foreign currency and the accounting treatment of company taxes (on profits).

14.1 Definition

IFRS define a liability as a “present obligation of the enterprise arising from past
events, the settlement of which is expected to result in an outflow from the enterprise
of resources embodying economic benefits”. Basically, a liability reflects an
obligation to pay or deliver (e.g. goods) in the future.

Two types of liability funds providers may be discerned:

 persons or organizations whose main activity is to do so
o banks;
o insurance companies;
o etc.
 the “business partners” of the company
o customers (e.g. advance payments);
o suppliers;
o tax authorities;
o employees;
o etc.

There are two alternative ways of financing a firm: liabilities versus equity (see
Chapter 12 for a discussion of equity). Both these sources of finance have their
own characteristics, which are contrasted in the following table:
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p. 215

Liabilities Equity
Repayment term Repayment of principal is required. No repayment required.
Flexibility Highly flexible (duration, amount, ease Not flexible and high transaction costs.
of obtaining additional funds, Decision is not reversible.
possibility to refinance, …).
Cost of funds Interest must be paid regardless of the No directly required remuneration.
economic outcome of the use of the Dividends paid only if there is enough
funds. Rates are market based. net income or accumulated previously
undistributed income. Part of the
remuneration may come from a market
appreciation of the shares.

Deductibility of the cost Interest expense is generally tax Dividends are generally not tax
of funds deductible. deductible.
Rights of the funds Debtholders generally have no Shareholders generally have influence
providers influence or control over the decisions and control over decisions and
or the management of the firm. New management. Additional shareholders
debtholders affect previous debt may cause a dilution of the power of
holders only because the interest current shareholders.
expense of the new liability may
overburden the earnings and increase
the likelihood of bankruptcy.

Use of funds Funds and projects may be linked Funds cannot be targeted to a specific
explicitely (for example, through project.
specific securing or guarantee
agreements such as mortgages).

Source: Stolowy & Lebas, 2002: 436.

The choice between both these sources of finance is inspired by the firm’s needs
and the aforementioned characteristics.

It might be interesting to add that Belgian companies tend to rely heavily on

liabilities for financing themselves (i.e., compared to companies from other
countries). It is rather common for Belgian companies to be financed with 40%
equity and 60% liabilities. This rather heavy reliance upon liabilities is inspired by
several causes. The main cause relates to the fact that only few Belgian companies
are listed on a stock market and it is therefore not easy for Belgian companies to
raise additional share capital (or equity) in most cases.

14.2 Belgian Chart of Accounts

Before we go any further, it is very important to acknowledge that a distinction is

made in both the chart of accounts and the balance sheet between short-term (or
current) and long-term (or non-current) liabilities. This distinction is based on the
liability’s maturity date:
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 short-term (or current) liabilities: the date of maturity falls within one year;
and
 long-term (or non-current) liabilities: the date of maturity exceeds one year.

The following categories of long-term liabilities are discerned in the Belgian chart
of accounts:

170 Subordinated loans

171 Unsubordinated debentures
172 Leasing and other similar obligations
173 Credit institutions
174 Other loans
175 Trade debts
176 Advances received on contracts in progress
178 Cash guarantees
179 Other amounts payable

The following categories of short-term liabilities are discerned in the Belgian chart
of accounts:

42 Current portion of amounts payable after more than one year

43 Financial debts
44 Trade debts
45 Taxes, remuneration and social security
46 Advances received on contracts in progress
47 Amounts payable resulting from appropriation of profit
48 Other amounts payable

The distinction between long- and short-term liabilities is therefore quite

important because it affects the specific account that needs to be used (i.e., to
obtain a correct classification of liabilities in the balance sheet). When faced with a
long-term (short-term) liability, a 17-account (4-account) should be used.

14.3 Belgian Balance Sheet

In the Belgian format of the balance sheet, we find the following information
related to liabilities:

VIII. Amounts payable after more than one year 17

A. Financial debts 170/4
1. Subordinated loans 170
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2. Unsubordinated debentures 171

3. Leasing and other similar obligations 172
4. Credit institutions 173
5. Other loans 174
B. Trade debts 175
1. Suppliers 1750
2. Bills of exchange payable 1751
C. Advances received on contracts in progress 176
D. Other amounts payable 178/9

IX. Amounts payable within one year 42/48

A. Current portion of amounts payable after more than one year
falling due within one year 42
B. Financial debts 43
1. Credit institutions 430/8
2. Other loans 439
C. Trade debts 44
1. Suppliers 440/4
2. Bills of exchange payable 441
D. Advances received on contracts in progress 46
E. Taxes, remuneration and social security 45
1. Taxes 450/3
2. Remuneration and social security 454/9
F. Other amounts payable 47/48

Some classes under heading ‘Amounts payable after more than one year’ also
appear under heading ‘Amounts payable within one year’ and we will therefore
focus our attention first to the classes for the latter heading (i.e., given the fact that
the only difference between the classes for the former and the latter heading
relates to the date of maturity, cf. the current/non-current discussion). The content
of account ‘42 Current portion of amounts payable after more than one year’ is
discussed in Section 14.4 of this chapter. ‘43 Financial debts’ relates to liabilities
towards fund providers whose main activity is to lend money (e.g., banks,
insurance companies, etc.), while ‘44 Trade debts’ relate to liabilities towards the
firm’s suppliers. Accounts ‘45 Taxes, remuneration and social security’ and ‘46
Advances received on contracts in progress’ are discussed in Sections 14.7 up to
14.9 of this chapter. We already discussed the content of account ‘47 Amounts
payable resulting from appropriation of profit’ in Chapter 12 of this textbook (i.e.,
the chapter related to Shareholders’ Equity). Finally, account ‘48 Other amounts
payable’ is used for all liabilities that do not belong to any of the other categories
mentioned in the chart of accounts.
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If we turn our attention to the ‘Amounts payable after more than one year’, we note
that accounts 170 up to 174 relate to so-called financial debt (i.e., loans from
persons or organizations whose main activity is to provide debt, cf. supra).
Accounts 175 up to 179 relate to debt obtained from the firm’s business partners
(cf. supra). If the company stops doing business, its creditors need to be repaid
before the shareholders are entitled to anything. That is, the proceeds from selling
the assets need to be used first to settle the firm’s liabilities. If anything is left after
repaying the liabilities, the remainder is divided among the shareholders (i.e.,
proportionally to the share they own in the firm). If the proceeds from selling the
assets are not sufficient to settle all liabilities, government comes first (i.e., the firm
has to settle liabilities with government (e.g., taxes) first). After settling liabilities
with government, other creditors will be repaid. A distinction is then made
between subordinated and unsubordinated loans. Unsubordinated loans will be
repaid before subordinated loans. This distinction depends on the terms of the
contract (i.e., the terms of the contract will include whether or not it is a
subordinated loan). Both accounts ‘170 Subordinated loans’ and ‘171
Unsubordinated debentures’ relate to bonds (i.e., debt issued with the general
public (e.g., through the stock market)), but the former account relates to
subordinated bonds while the latter account relates to unsubordinated bonds.
Financial leasing (i.e., account ‘172 Leasing and other similar obligations’) will be
discussed in Section 14.5 of this chapter. Account ‘173 Credit institutions’ relates to
debt obtained from financial institutions (e.g., banks). Account ‘174 Other loans’ is
used for all other long-term financial liabilities that do not belong to any other
category. Accounts ‘175 Trade debts’, ‘176 Advances received on contracts in
progress’ and ‘179 Other amounts payable’ are the long-term equivalents of
accounts ’44 Trade debts’, ‘46 Advances received on contracts in progress’ and ’48
Other amounts payable’, respectively. Account ‘178 Cash guarantees’ relates to
long-term cash guarantees received (e.g., a three month rent deposit received as a
guarantee for a rental contract). Cash guarantees are recorded as a liability
because they will have to be repaid once the contract ends and the good(s) is (are)
returned in proper shape.

14.4 Current Portion of Long-Term Liabilities

On the closing date of the accounting period, the portion of long-term liabilities
that falls due within the next accounting period has to be reclassified to the current
liabilities. This is required to obtain a right image in the balance sheet (cf. the long-
term vs. short-term distinction in the balance sheet). The current portion of long-
term liabilities will be recorded on account ‘42 Current portion of amounts payable
after more than one year’. This reclassification is an end-of-period entry. The use
of this particular account is illustrated based on the following example:
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01/05/20X0
Firm ABC borrows an amount of 100.000,00 EUR from its banker (C/A
extract no. X0/59). An annual interest rate of 5% applies to this loan
(interests are payable in arrear). Each year on the 30th of April one fifth
of the loan has to be repaid (i.e., the loan relates to a 5-year period) plus
interests. The closing date of the accounting year is December 31st.

The aforementioned loan is a 5-year loan and will therefore be recorded as a long-
term loan (i.e., a 17-account). Based on the current account extract we record:

No. Debit Credit Debit Credit

1 01/05/20X0
5500 Credit institutions - Current account 100.000,00
173 @ Am. pay. after more than 1 year - Credit institutions 100.000,00
C/A extract no. X0/59

In the T-accounts, we get:

5500 Credit institutions - Current 173 Am. pay. after more than 1 year -
D C D C
account Credit institutions
(1) 100.000,00 100.000,00 (1)

At year-end (i.e., 31/12/20X0), we have to make a reclassification for the part of the
loan that falls due within the next accounting period. As mentioned earlier, each year
one fifth of the original amount of the loan (i.e., 100.000,00 EUR / 5 = 20.000,00 EUR)
has to be repaid. On 31/12/20X0, we therefore record:

No. Debit Credit Debit Credit

2 31/12/20X0
173 Am. pay. after more than 1 year - Credit institutions 20.000,00
42 @ Current portion of am. pay. after more than 1 year 20.000,00
Reclassification short-term part loan

In the T-accounts, we get:

173 Am. pay. after more than 1 year - 42 Current portion of am. pay. after
D C D C
Credit institutions more than 1 year
(2) 20.000,00 100.000,00 (1) 20.000,00 (2)
 FINANCIAL ACCOUNTING
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Accordingly, at the end of accounting year 20X0 we find a long-term liability of

80.000,00 EUR and a short-term liability of 20.000,00 EUR in the balance sheet of
ABC, which is a correct reflection of reality.

Another important end-of-period entry is needed for the interest charge. That is,
interests related to the period 01/05/20X0 – 30/04/20X1 will only be paid in 20X1.
Nevertheless, part of the expense relates to the current accounting period and will
therefore have to be recorded as an accrued charge in 20X0. The part of the interest
charge that relates to 20X0 equals:

100.000,00 EUR * 5% * 8 months = 3.333,34 EUR

12 months

On 31/12/20X0, we therefore record:

No. Debit Credit Debit Credit

3 31/12/20X0
6500 Interests, commissions and debt charges 3.333,34
492 @ Accrued charges 3.333,34
Adjusting entry interests

In the T-accounts, we get:

6500 Interests, commissions and debt

D C D 492 Accrued charges C
charges
(3) 3.333,34 3.333,34 (3)

As discussed in ‘Chapter 6: End-of-Period Entries’, the aforementioned entry will be

reversed at the beginning of the next accounting period. On 01/01/20X1, we
therefore record:

No. Debit Credit Debit Credit

1 01/01/20X1
492 Accrued charges 3.333,34
6500 @ Interests, commissions and debt charges 3.333,34
Reversal adjusting entry interests

In the T-accounts, we get:

6500 Interests, commissions and debt

D C D 492 Accrued charges C
charges
3.333,34 (1) (1) 3.333,34 3.333,34 (OB)
 FINANCIAL ACCOUNTING
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30/04/20X1
ABC repays one fifth of the aforementioned loan plus interests (C/A
extract no. X1/23).

This gives rise to the following entry:

No. Debit Credit Debit Credit

2 30/04/20X1
42 Current portion of am. pay. after more than 1 year 20.000,00
6500 Interests, commissions and debt charges 5.000,00
5500 @ Credit institutions - Current account 25.000,00
C/A extract no. X1/23

In the T-accounts, we get:

42 Current portion of am. pay. after 5500 Credit institutions - Current

D C D C
more than 1 year account
(2) 20.000,00 20.000,00 (OB) 25.000,00 (2)

6500 Interests, commissions and debt

D C
charges
(2) 5.000,00 3.333,34 (1)

Analogous to the previous accounting period, we have to make a reclassification for

the part of the loan that falls due within the next accounting period at the end of the
accounting year (i.e., 31/12/20X1). On 31/12/20X1, we therefore record:

No. Debit Credit Debit Credit

3 31/12/20X1
173 Am. pay. after more than 1 year - Credit institutions 20.000,00
42 @ Current portion of am. pay. after more than 1 year 20.000,00
Reclassification short-term part loan

In the T-accounts, we get:

173 Am. pay. after more than 1 year - 42 Current portion of am. pay. after
D C D C
Credit institutions more than 1 year
(3) 20.000,00 80.000,00 (OB) (2) 20.000,00 20.000,00 (OB)
20.000,00 (3)
 FINANCIAL ACCOUNTING
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Accordingly, at the end of accounting year 20X1 we find a long-term liability of

60.000,00 EUR and a short-term liability of 20.000,00 EUR in the balance sheet of
ABC, which is a correct reflection of reality.

Also analogous to the previous accounting period, we need to record an end-of-period

entry for the interest charge. That is, interests related to the period 01/05/20X1 –
30/04/20X2 will only be paid in 20X2. Part of the expense relates to the current
accounting period and will therefore have to be recorded as an accrued charge in
20X1. The part of the interest charge that relates to 20X1 equals (note that the
interest expense is always determined based on the outstanding balance of the loan,
being the amount that still needs to be repaid):

80.000,00 EUR * 5% * 8 months = 2.666,67 EUR

12 months

On 31/12/20X1, we therefore record:

No. Debit Credit Debit Credit

4 31/12/20X1
6500 Interests, commissions and debt charges 2.666,67
492 @ Accrued charges 2.666,67
Adjusting entry interests

In the T-accounts, we get:

6500 Interests, commissions and debt

D C D 492 Accrued charges C
charges
(2) 5.000,00 3.333,34 (1) (1) 3.333,34 3.333,34 (OB)
(4) 2.666,67 2.666,67 (4)

The accounting treatment for the other years is analogous and we therefore end
the example here.

Let us now have a look at the same example using a different assumption (i.e.,
instead of having yearly repayments of the loan, the entire amount of the loan is
repayable after a period of five years).

01/05/20X0
Firm ABC borrows an amount of 100.000,00 EUR from its banker (C/A
extract no. X0/59). The entire loan is repayable after five years. An
annual interest rate of 5% applies to this loan (interests are payable in
arrear) and interests have to be settled each year on the 30 th of April. The
closing date of the accounting year is December 31st.
 FINANCIAL ACCOUNTING
p. 223

Based on the current account extract we record:

No. Debit Credit Debit Credit

1 01/05/20X0
5500 Credit institutions - Current account 100.000,00
173 @ Am. pay. after more than 1 year - Credit institutions 100.000,00
C/A extract no. X0/59

In the T-accounts, we get:

5500 Credit institutions - Current 173 Am. pay. after more than 1 year -
D C D C
account Credit institutions
(1) 100.000,00 100.000,00 (1)

Unlike the previous example, we do not have to make a reclassification of the loan at
year-end (i.e., 31/12/20X0) because the full amount of the loan remains a long-term
liability. Nevertheless, analogous to the previous example, an end-of-period entry is
required for the interest charge. On 31/12/20X0, we therefore record:

No. Debit Credit Debit Credit

2 31/12/20X0
6500 Interests, commissions and debt charges 3.333,34
492 @ Accrued charges 3.333,34
Adjusting entry interests

In the T-accounts, we get:

6500 Interests, commissions and debt

D C D 492 Accrued charges C
charges
(2) 3.333,34 3.333,34 (2)
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p. 224

This entry will be reversed at the beginning of the next accounting period. On
01/01/20X1, we therefore record:

No. Debit Credit Debit Credit

1 01/01/20X1
492 Accrued charges 3.333,34
6500 @ Interests, commissions and debt charges 3.333,34
Reversal adjusting entry interests

In the T-accounts, we get:

6500 Interests, commissions and debt

D C D 492 Accrued charges C
charges
3.333,34 (1) (1) 3.333,34 3.333,34 (OB)

30/04/20X1
ABC pays interests (C/A extract no. X1/23).

This gives rise to the following entry:

No. Debit Credit Debit Credit

2 30/04/20X1
6500 Interests, commissions and debt charges 5.000,00
5500 @ Credit institutions - Current account 5.000,00
C/A extract no. X1/23

In the T-accounts, we get:

6500 Interests, commissions 5500 Credit institutions -

D C D C
and debt charges Current account
(2) 5.000,00 3.333,34 (1) 5.000,00 (2)

Again, at the end of the accounting period (i.e., 31/12/20X1), an end-of-period entry
is required for the interest charge. Because the outstanding balance of the loan has
not changed yet, the amount of the adjustment is exactly the same as at the end of the
previous accounting period:

No. Debit Credit Debit Credit

3 31/12/20X1
6500 Interests, commissions and debt charges 3.333,34
492 @ Accrued charges 3.333,34
Adjusting entry interests
 FINANCIAL ACCOUNTING
p. 225

In the T-accounts, we get:

6500 Interests, commissions and debt

D C D 492 Accrued charges C
charges
(2) 5.000,00 3.333,34 (1) (1) 3.333,34 3.333,34 (OB)
(3) 3.333,34 3.333,34 (3)

The accounting treatment for the following years (i.e., 20X2 and 20X3) is
analogous and we therefore immediately turn our attention to accounting period
20X4:

On 01/01/20X4, we reverse the end-of-period entry recorded at the end of the

previous accounting period:

No. Debit Credit Debit Credit

1 01/01/20X4
492 Accrued charges 3.333,34
6500 @ Interests, commissions and debt charges 3.333,34
Reversal adjusting entry interests

In the T-accounts, we get:

6500 Interests, commissions and debt

D C D 492 Accrued charges C
charges
3.333,34 (1) (1) 3.333,34 3.333,34 (OB)

30/04/20X4
ABC pays interests (C/A extract no. X4/36).

This gives rise to the following entry:

No. Debit Credit Debit Credit

2 30/04/20X4
6500 Interests, commissions and debt charges 5.000,00
5500 @ Credit institutions - Current account 5.000,00
C/A extract no. X4/36

In the T-accounts, we get:

6500 Interests, commissions 5500 Credit institutions -

D C D C
and debt charges Current account
3.333,34 (1)
(2) 5.000,00 5.000,00 (2)
 FINANCIAL ACCOUNTING
p. 226

At the end of the accounting period (i.e., 31/12/20X4), an end-of-period entry is

required for the interest charge. Because the outstanding balance of the loan has not
changed yet, the amount of the adjustment is exactly the same as at the end of the
previous accounting period:

No. Debit Credit Debit Credit

3 31/12/20X4
6500 Interests, commissions and debt charges 3.333,34
492 @ Accrued charges 3.333,34
Adjusting entry interests

In the T-accounts, we get:

6500 Interests, commissions and debt

D C D 492 Accrued charges C
charges
(2) 5.000,00 3.333,34 (1) (1) 3.333,34 3.333,34 (OB)
(3) 3.333,34 3.333,34 (3)

At year-end (i.e., 31/12/20X4), we also have to make a reclassification for the part of
the loan that falls due within the next accounting period. Because the entire amount
of the loan falls due in the next accounting period, we record:

No. Debit Credit Debit Credit

4 31/12/20X4
173 Am. pay. after more than 1 year - Credit institutions 100.000,00
42 @ Current portion of am. pay. after more than 1 year 100.000,00
Reclassification short-term part loan

In the T-accounts, we get:

173 Am. pay. after more than 1 year - 42 Current portion of am. pay. after
D C D C
Credit institutions more than 1 year
(4) 100.000,00 100.000,00 (OB) 100.000,00 (4)

Accordingly, at the end of accounting year 20X4 we find a short-term liability of

100.000,00 EUR in the balance sheet of ABC (and the long-term liability
disappeared), which is a correct reflection of reality.
 FINANCIAL ACCOUNTING
p. 227

In 20X5, we get the following entries:

On 01/01/20X5, we reverse the end-of-period entry recorded at the end of the

previous accounting period:

No. Debit Credit Debit Credit

1 01/01/20X5
492 Accrued charges 3.333,34
6500 @ Interests, commissions and debt charges 3.333,34
Reversal adjusting entry interests

In the T-accounts, we get:

6500 Interests, commissions and debt

D C D 492 Accrued charges C
charges
3.333,34 (1) (1) 3.333,34 3.333,34 (OB)

30/04/20X5
ABC repays the loan and interests (C/A extract no. X5/27).

This gives rise to the following entry:

No. Debit Credit Debit Credit

2 30/04/20X5
42 Current portion of am. pay. after more than 1 year 100.000,00
6500 Interests, commissions and debt charges 5.000,00
5500 @ Credit institutions - Current account 105.000,00
C/A extract no. X5/27

In the T-accounts, we get:

42 Current portion of am. pay. after 5500 Credit institutions - Current

D C D C
more than 1 year account
(2) 100.000,00 100.000,00 (OB) 105.000,00 (2)

6500 Interests, commissions and debt

D C
charges
(2) 5.000,00 3.333,34 (1)
 FINANCIAL ACCOUNTING
p. 228

14.5 Financial Leasing

As discussed earlier (cf. Chapter 9 - Tangible Fixed Assets), a financial lease is

defined as a lease agreement for which the annuities (or the annual payments)
increased by the amount of the purchase option cover the entire amount invested
in the asset by the leasing firm plus interests and additional expenses. However,
the purchase option is only taken into account if it does not exceed 15% of the
initial investment made by the leasing firm. Assets under financial leasing are
recorded as an asset in the balance sheet on a sub-account of account ‘25 Fixed
assets held under leasing and other similar rights’. On the liabilities side of the
balance sheet, we record the liability towards the leasing firm. The long-term part
of the liability is recorded on a sub-account of ‘172 Leasing and other similar
obligations’, while the short-term part of the liability is recorded on account ‘42
Current portion of amounts payable after more than one year’. The following
example illustrates how to account for a fixed asset held under financial leasing:

01/04/20X1
Firm ABC decides to lease a car that has a value of 30.000,00 EUR. The
duration of the contract is from 01/04/20X1 up to 31/03/20X6. The
leasing firm charges an interest rate of 11% and requires an annuity of
8.117,11 EUR (lease payments have to be made on March 31st). The
following annuity table was included in the lease agreement:

Reduction
Principal Interest
Period Annuity of principal
amount (11%)
amount
01/04/20X1 - 31/03/20X2 30.000,00 8.117,11 3.300,00 4.817,11
01/04/20X2 - 31/03/20X3 25.182,89 8.117,11 2.770,12 5.346,99
01/04/20X3 - 31/03/20X4 19.835,90 8.117,11 2.181,95 5.935,16
01/04/20X4 - 31/03/20X5 13.900,74 8.117,11 1.529,08 6.588,03
01/04/20X5 - 31/03/20X6 7.312,71 8.117,11 804,40 7.312,71
30.000,00

The closing date of ABC’s accounting period is December 31st.

Let us first have a look at the meaning of the information provided in the annuity
table. The first column mentions the period to which the annual payments relate. In
the second column, we find the (outstanding balance of the) liability. At start, ABC
has a liability of 30.000,00 EUR towards the leasing firm and each year it will settle
part of this liability. The part of the liability that is settled each year can be found in
the last column of the annuity table (i.e., the column entitled ‘reduction of principal
amount’). For example, on 31/03/20X2 ABC will settle 4.817,11 EUR of the liability
(cf. last column in the annuity table). Accordingly, the principal amount (cf. second
column in the annuity table) goes from 30.000,00 EUR in the first period to 25.182,89
EUR (i.e., 30.000,00 EUR – 4.817,11 EUR) in the second period. In the third column,
 FINANCIAL ACCOUNTING
p. 229

we find the annual payment that ABC will have to make to the leasing firm (also
called the ‘annuity’). The annuity is composed of two things: interests (cf. fourth
column in the annuity table) and repayment of the liability (cf. last column of the
annuity table). Accordingly, if you add up the interests and the part of the liability
that is settled within a certain period, you get the amount of the annuity. For
example, for the first period you get 3.300,00 EUR (interests) + 4.817,11 EUR
(reduction of principal amount) = 8.117,11 EUR (annuity). The interest (i.e., fourth
column in the annuity table) is determined as 11% of the outstanding balance of the
liability. For example, the outstanding balance of the liability for the second period
equals 25.182,89 EUR and the interest for the second period is thus based on that
amount (i.e., 25.182,89 EUR x 11% = 2.770,12 EUR (i.e., the interest expense for the
second period, cf. fourth column in the annuity table)).

Based on this information, we record the following on 01/04/20X1:

No. Debit Credit Debit Credit

1 01/04/20X1
2520 Vehicles held under leasing - Cost of acq. 30.000,00
172 @ Leasing and other similar obligations 30.000,00
Leasing contract dated 01/04/20X1

In the T-accounts, we get:

2520 Vehicles held under 172 Leasing and other similar

D C D C
leasing - Cost of acq. obligations
(1) 30.000,00 30.000,00 (1)

At the end of the accounting period (i.e., December 31), we have to record several
things in the accounts of ABC. First, the part of the liability that falls due in the next
accounting period (being 4.817,11 EUR, cf. annuity table) should be reclassified to the
short-term liabilities. We record:

No. Debit Credit Debit Credit

2 31/12/20X1
172 Leasing and other similar obligations 4.817,11
42 @ Current portion of am. pay. after more than 1 year 4.817,11
Reclassification short-term of the liability
 FINANCIAL ACCOUNTING
p. 230

In the T-accounts, we get:

172 Leasing and other similar 42 Current portion of am. pay.

D C D C
obligations after more than 1 year
(2) 4.817,11 30.000,00 (1) 4.817,11 (2)

Second, we have to accrue interest expenses. That is, the first annuity (including
interest expenses for the first period) will be paid on 31/03/X02. Part of the interest
expense paid at that date relates to the current accounting period and therefore we
need to accrue interest expenses in the current accounting period. We record:

No. Debit Credit Debit Credit

3 31/12/20X1
6500 Interests, commissions and debt charges 2.475,00
492 @ Accrued charges 2.475,00
Adjusting entry interests

We need to accrue an interest expense for nine months and the adjustment is
therefore determined as follows: (3.300,00 EUR (cf. annuity table) / 12 months) x 9
months = 2.475,00 EUR. In the T-accounts, we get:

6500 Interests, commissions

D C D 492 Accrued charges C
and debt charges
(3) 2.475,00 2.475,00 (3)

Third, ABC has a tangible fixed asset in its accounts and will therefore have to record
depreciation. The useful life of the asset is quite logically based on the terms of the
contract (being five years). At the end of the useful life, there will be no residual
value because ABC will have to return the car to the leasing firm. If we assume that
ABC employs the straight-line method, we record:

No. Debit Credit Debit Credit

4 31/12/20X1
6302 Depreciation of tangible fixed assets 4,500.00
2529 @ Vehicles under leasing - Ac. depreciation 4,500.00
Annual depreciation car

Remember that we record depreciation for 9 months only (i.e., the contract starts on
April 1, so we used the asset for 9 months).
 FINANCIAL ACCOUNTING
p. 231

In the T-accounts, we get:

6302 Depreciation of tangible 2529 Vehicles under leasing -

D C D C
fixed assets Ac. Depreciation
(4) 4,500.00 4,500.00 (4)

In the next accounting period (i.e., 20X2), we record the following entries:

At the beginning of the accounting period, we record the reversal of the adjusting
entry related to the interest expense:

No. Debit Credit Debit Credit

1 01/01/20X2
492 Accrued charges 2.475,00
6500 @ Interests, commissions and debt charges 2.475,00
Reversal adjusting entry interests

In the T-accounts, we get:

6500 Interests, commissions

D 492 Accrued charges C D C
and debt charges
(1) 2.475,00 2.475,00 (OB) 2.475,00 (1)

On March 31, ABC settles the first annuity and we record:

No. Debit Credit Debit Credit

2 31/03/20X2
42 Current portion of am. pay. after more than 1 year 4.817,11
6500 Interests, commissions and debt charges 3.300,00
5500 @ Credit institutions - C/A 8.117,11
C/A extract no. …
 FINANCIAL ACCOUNTING
p. 232

In the T-accounts, we get:

42 Current portion of am. pay.

D C D 5500 Credit institutions - C/A C
after more than 1 year
(2) 4.817,11 4.817,11 (OB) 8.117,11 (2)

6500 Interests, commissions

D C
and debt charges
(2) 3.300,00 2.475,00 (1)

Analogous to the previous accounting period, three entries need to be recorded at

year-end: (1) reclassification of the short term part of the liability; (2) accrue interest
expenses (for the period March up to December 20X2); and (3) depreciation. For the
reclassification of the short-term part of the liability, we record:

No. Debit Credit Debit Credit

3 31/12/20X2
172 Leasing and other similar obligations 5.346,99
42 @ Current portion of am. pay. after more than 1 year 5.346,99
Reclassification short-term of the liability

In the T-accounts, we get:

172 Leasing and other similar 42 Current portion of am. pay.

D C D C
obligations after more than 1 year
(3) 5.346,99 25.182,89 (OB) 5.346,99 (3)

In order to accrue the interest expenses, we record:

No. Debit Credit Debit Credit

4 31/12/20X2
6500 Interests, commissions and debt charges 2.077,59
492 @ Accrued charges 2.077,59
Adjusting entry interests
 FINANCIAL ACCOUNTING
p. 233

In the T-accounts, we get:

6500 Interests, commissions

D C D 492 Accrued charges C
and debt charges
(2) 3.300,00 2.475,00 (1) (1) 2.475,00 2.475,00 (OB)
(4) 2.077,59 2.077,59 (4)

For the depreciation, we record:

No. Debit Credit Debit Credit

5 31/12/20X2
6302 Depreciation of tangible fixed assets 6.000,00
2529 @ Vehicles under leasing - Ac. depreciation 6.000,00
Annual depreciation car

In the T-accounts, we get:

6302 Depreciation of tangible 2529 Vehicles under leasing -

D C D C
fixed assets Ac. depreciation
(5) 6,000.00 4,500.00 (OB)
6,000.00 (5)

The journal entries for the following years (i.e., 20X3 up to 20X5) are very similar and
we will therefore not consider them here (to avoid too much repetition). This, we
immediately move to accounting period 20X6.

At the beginning of the accounting period, we record the reversal of the adjusting
entry related to the interest expense:

No. Debit Credit Debit Credit

1 01/01/20X6
492 Accrued charges 603,30
6500 @ Interests, commissions and debt charges 603,30
Reversal adjusting entry interests

In the T-accounts, we get:

6500 Interests, commissions

D 492 Accrued charges C D C
and debt charges
(1) 603,30 603,30 (OB) 603,30 (1)
 FINANCIAL ACCOUNTING
p. 234

On March 31, ABC settles the last annuity and we record:

No. Debit Credit Debit Credit

2 31/03/20X6
42 Current portion of am. pay. after more than 1 year 7.312,71
6500 Interests, commissions and debt charges 804,40
5500 @ Credit institutions - C/A 8.117,11
C/A extract no. …

In the T-accounts, we get:

42 Current portion of am. pay.

D C D 5500 Credit institutions - C/A C
after more than 1 year
(2) 7.312,71 7.312,71 (OB) 8.117,11 (2)

6500 Interests, commissions

D C
and debt charges
(2) 804,40 603,30 (1)

We still have to record depreciation for using the asset the last three months. We
therefore record:

No. Debit Credit Debit Credit

3 31/03/20X6
6302 Depreciation of tangible fixed assets 1,500.00
2529 @ Vehicles under leasing - Ac. depreciation 1,500.00
Depreciation car - last three months

In the T-accounts, we get:

6302 Depreciation of tangible 2529 Vehicles under leasing -

D C D C
fixed assets Ac. depreciation
(3) 1,500.00 28,500.00 (OB)
1,500.00 (3)
 FINANCIAL ACCOUNTING
p. 235

The contract ends and ABC therefore has to return the asset to the leasing firm. The
asset has to disappear from ABC’s accounts and we therefore record:

No. Debit Credit Debit Credit

4 31/03/20X6
2529 Vehicles under leasing - Ac. depreciation 30,000.00
2520 @ Vehicles under leasing - Cost of acq. 30,000.00
Return car to leasing firm

In the T-accounts, we get:

2520 Vehicles under leasing - 2529 Vehicles under leasing -

D C D C
Cost of acq. Ac. depreciation
(OB) 30,000.00 30,000.00 (4) (4) 30,000.00 28,500.00 (OB)
1,500.00 (3)

14.6 Amounts Payable in Foreign Currencies

The accounting treatment of amounts payable in foreign currencies is similar to

that of amounts receivable in foreign currencies (cf. Chapter 8). Because Belgian
companies prepare their financial statements in EUR, amounts payable in foreign
currencies have to be converted into EUR. Analogous to amounts receivable in
foreign currencies, there are three important dates to remember.

A first important date is the date on which the amount payable arises. To record
the transaction, all amounts are converted into EUR employing the exchange rate
applicable at invoice date.

25/12/20X1
ABC buys goods for resale from a UK supplier. An invoice is made for an
amount of 2.000,00 GBP (purchase invoice no. 158). The current
exchange rate: £ 1,00 = € 1,50. ABC is a Belgian company, which reports
in EUR.

To record this transaction in the accounts of ABC, a conversion into EUR is required.
Employing the current exchange rate, the amount of the transaction equals 3.000,00
EUR (2.000,00 GBP * 1,50) and we therefore record:
 FINANCIAL ACCOUNTING
p. 236

No. Debit Credit Debit Credit

1 25/12/20X1
604 Purchases of goods for resale 3.000,00
440 @ Suppliers 3.000,00
Purchase invoice no. 158

In the T-accounts, we get:

D 604 Purchases of goods for resale C D 440 Suppliers C

(1) 3.000,00 3.000,00 (1)

A second important date to remember is balance sheet date. All amounts payable
in foreign currencies that are not settled yet at balance sheet date have to be
valued at the exchange rate applicable at balance sheet date. This requirement is
inspired by the fact that the value of these amounts payable might have changed
due to changes in exchange rates. Results that arise from this conversion have to
be recorded on account ‘655 Results from the conversion of foreign currencies’ (i.e.,
in case of an increase in the value of the amount payable) or ‘755 Results from the
conversion of foreign currencies’ (i.e., in case of a decrease in the value of the
amount payable).

31/12/20X1
It is the closing date of ABC’s accounting year and the UK supplier has not
been paid yet (purchase invoice no. 158, cf. supra). The exchange rate on
December 31st: £ 1,00 = € 1,40.

At the closing date of the accounting year, the value of the amount payable equals
2.800,00 EUR (2.000,00 GBP * 1,40). Accordingly, the amount payable exhibits a
decrease in value of 200,00 EUR (the amount payable was originally recorded for
3.000,00 EUR) and we therefore record:

No. Debit Credit Debit Credit

2 31/12/20X1
440 Suppliers 200,00
755 @ Results from the conversion of foreign currencies 200,00
Conversion exchange rate dd. 31/12/20X1
 FINANCIAL ACCOUNTING
p. 237

In the T-accounts, we get:

755 Results from the conversion of

D 440 Suppliers C D C
foreign currencies
(2) 200,00 3.000,00 (1) 200,00 (2)

The third important date is the date on which the firm pays its supplier in foreign
currencies. Quite logically, this amount will be converted into EUR using the
current exchange rate (i.e., the exchange rate on payment date). Due to changes in
exchange rates, a difference may occur between the EUR equivalent of the amount
paid and the EUR equivalent of the amount payable in the accounts. These
differences have to be recorded on account ‘654 Exchange results’ (i.e., if the
amount paid is larger than the amount payable) or ‘754 Exchange results’ (i.e., if the
amount paid is smaller than the amount payable).

25/01/20X2
ABC makes a payment of 2.000,00 GBP to its UK supplier related to
purchase invoice no. 158 (current account extract X2/099). The
exchange rate on January 25th: £ 1,00 = € 1,55.

The amount of the payment equals 3.100,00 EUR (2.000,00 GBP * 1,55), while the
book value of the amount payable equals 2.800,00 EUR. ABC therefore realizes an
exchange loss of 300,00 EUR upon payment date. Payment is recorded as follows:

No. Debit Credit Debit Credit

1 25/01/20X2
440 Suppliers 2.800,00
654 Exchange results 300,00
5500 @ Credit institutions - C/A 3.100,00
C/A extract no. X2/099
 FINANCIAL ACCOUNTING
p. 238

In the T-accounts, we get:

5500 Credit institutions - Current

D C D 440 Suppliers C
account
3.100,00 (1) (1) 2.800,00 2.800,00 (OB)

D 654 Exchange results C

(1) 300,00

It might be interesting to add that different accounts are used to reflect the results
that arise from exchange rate differences upon balance sheet date and payment
date (accounts ‘655/755 Results from the conversion of foreign currencies’ versus
accounts ‘654/754 Exchange results’). Separate accounts are used to clearly make a
distinction between unrealized results (i.e., at balance sheet date) and realized
results (i.e., at payment date).

14.7 Company taxes

Companies are required to pay taxes on the profits they make. In Belgium, tax
authorities encourage firms to make advance tax payments. Because profits for an
accounting year (on which company taxes are based) are only known at the end of
the accounting period, the actual tax demand will only be received during the next
accounting period. Accordingly, a timing difference occurs between the realization
of profits and the actual payment of taxes. Tax authorities therefore encourage
advance tax payments in order to speed up the collection of company taxes. Actual
details on these fiscal encouragements are beyond the scope of this textbook. If
advance tax payments are made by the company, they will be recorded on account
‘6700 Taxes due or paid’ (i.e., taxes are an expense for the company). It might be
interesting to add that all income statement (or P&L) accounts related to company
taxes are in the 67- and 77-account groups. Let us have a look at the following
example:

15/11/20X1
ABC makes an advance tax payment of 20.000,00 EUR for Belgian taxes
on profits (C/A extract no. X1/115).
 FINANCIAL ACCOUNTING
p. 239

We therefore record:

No. Debit Credit Debit Credit

1 15/11/20X1
6700 Taxes due or paid 20.000,00
5500 @ Credit institutions - C/A 20.000,00
C/A extract no. X1/115

In the T-accounts, we get:

5500 Credit institutions - Current

D 6700 Taxes due or paid C D C
account
(1) 20.000,00 20.000,00 (1)

At the end of the accounting period, actual profits for the period are known and the
firm will have to make an estimate of company taxes. An estimate is required
because, as mentioned earlier, the actual tax demand will only be received in the
next accounting period. Nevertheless, the tax expense has to be included in the
income statement of the current accounting period (because of the matching
principle). Of course, advance tax payments will also be taken into consideration
when recording estimated company taxes. Basically, two possibilities may occur:
(1) a tax liability (i.e., the company will have to pay (additional) company taxes); or
(2) a tax receivable (i.e., the company will receive money from tax authorities (e.g.,
the firm made a too large amount of advance tax payments)). In the former case,
we debit account ‘6702 Estimated taxes’ and credit liability account ‘4500 Estimated
taxes - Belgian taxes on profit’. In the latter case, we debit receivable account ‘4120
Taxes to reclaim - Belgian taxes on profit’ and credit ‘6701 Capitalized surplus of
taxes paid (-)’. The following example provides an illustration:

31/12/20X1
Based on the profit for the accounting period, ABC’s accountant estimates
Belgian taxes on profits at 25.000,00 EUR. Because ABC already made an
advance tax payment of 20.000,00 EUR (cf. supra), the accountant thinks
that ABC will have to pay an additional 5.000,00 EUR to tax authorities.
 FINANCIAL ACCOUNTING
p. 240

ABC is facing an additional tax expense and we therefore increase the tax expenses by
debiting account ‘6702 Estimated taxes’. Because we did not settle the expense yet,
we also increase liabilities by crediting account ‘4500 Estimated taxes - Belgian taxes
on profits’:

No. Debit Credit Debit Credit

2 31/12/20X1
6702 Estimated taxes 5.000,00
4500 @ Estimated taxes - Belgian taxes on profits 5.000,00
Estimate company taxes 20X1

In the T-accounts, we get:

4500 Estimated taxes -

D 6702 Estimated taxes C D C
Belgian taxes on profits
(2) 5,000.00 5,000.00 (2)

During the next accounting period, the actual tax demand will be received. Quite
logically, the actual tax demand will also have to be recorded. In most cases, the
amount mentioned on this demand will not correspond to the firm’s estimate. Two
possibilities occur. Firstly, if the amount mentioned on the tax demand is larger
than the estimate, an additional tax expense will have to be recorded by debiting
account ‘6710 Additional taxes due or paid’ and the actual tax liability will have to
be credited on account ‘4520 Taxes due - Belgian taxes on profits’ (i.e., the amount
on account ‘4500 Estimated taxes - Belgian taxes on profits’ has to be booked off
against the latter account due to the fact that the amount no longer relates to
estimated taxes (i.e., the tax liability is now known for sure)). Conversely, if the
amount mentioned on the tax demand is smaller than the estimate, a decrease of
the tax expense will have to be recorded by crediting account ‘7711 Regularization
of estimated taxes’. Let us have a look at the following example:
 FINANCIAL ACCOUNTING
p. 241

30/06/20X2
ABC receives its tax demand, which mentions an amount payable of
2.000,00 EUR.

Accordingly, the amount mentioned on the tax demand is smaller than the estimate
(being 5.000,00 EUR, cf. supra) and account ‘7711 Regularization of estimated taxes’
will be credited for the difference (i.e., 3.000,00 EUR). The amount mentioned on the
tax demand will have to be recorded on account ‘4520 Taxes due - Belgian taxes on
profits’ and the liability on account ‘4500 Estimated taxes - Belgian taxes on profits’
will have to be booked off. In sum, we record the following:

No. Debit Credit Debit Credit

1 30/06/20X2
4500 Estimated taxes - Belgian taxes on profits 5.000,00
4520 @ Taxes due - Belgian taxes on profits 2.000,00
7711 Regularization of estimated taxes 3.000,00
Tax demand 20X1

In the T-accounts, we get:

4500 Estimated taxes - 4520 Taxes due - Belgian

D C D C
Belgian taxes on profits taxes on profits
(1) 5.000,00 5.000,00 (OB) 2.000,00 (1)

7711 Regularization of
D C
estimated taxes
3.000,00 (1)

Let us know have a look at another example (in which the firm will get back money
from tax authorities).

31/12/20X1
Based on the profit for the accounting period, ABC’s accountant estimates
Belgian taxes on profit at 18.000,00 EUR. Because ABC already made an
advance tax payment of 20.000,00 EUR (which already has been properly
recorded), the accountant thinks that ABC will get back 2.000,00 EUR
from tax authorities.

The tax expense recorded by ABC (being 20.000,00 EUR) appears too large and we
therefore decrease the tax expenses by crediting account ‘6701 Capitalized surplus of
 FINANCIAL ACCOUNTING
p. 242

taxes paid (-)’. So, we decrease the tax expense by crediting a tax expense having a (-)
in its name (thus, being a negative expense). The meaning of capitalize is to record as
an asset in the balance sheet and that is exactly what we will do. Because the advance
tax payment was too large, ABC will get money back from tax authorities and we
therefore debit a receivable account (i.e., asset), being account ‘4120 Taxes to reclaim
- Belgian taxes on profits’. In sum, we record:

No. Debit Credit Debit Credit

… 31/12/20X1
4120 Taxes to reclaim - Belgian taxes on profits 2.000,00
6701 @ Capitalized surplus of taxes paid (-) 2.000,00
Estimate company taxes 20X1

In the T-accounts, we get:

4120 Taxes to reclaim - 6701 Capitalized surplus of

D C D C
Belgian taxes on profits taxes paid (-)
(2) 2.000,00 2.000,00 (2)

30/06/20X2
ABC receives its tax demand, which mentions an amount receivable of
1.200,00 EUR.

Accordingly, the amount receivable mentioned on the tax demand is smaller than the
estimate (being 2.000,00 EUR, cf. supra) and account ‘6710 Additional taxes due or
paid’ will be credited for the difference (i.e., 800,00 EUR). We record the following:

No. Debit Credit Debit Credit

1 30/06/20X2
6710 Additional taxes due or paid 800,00
4120 @ Taxes to reclaim - Belgian taxes on profits 800,00
Tax demand 20X1

In the T-accounts, we get:

6710 Additional taxes due or 4120 Taxes to reclaim -

D C D C
paid Belgian taxes on profits
(1) 800,00 (OB) 2.000,00 800,00 (1)
 FINANCIAL ACCOUNTING
p. 243

Doing so, we end up with a receivable of 1.200,00 EUR on account ‘4120 Taxes to
reclaim – Belgian taxes on profits’, which corresponds to the amount mentioned on
the tax demand. Note that for a receivable, no distinction is made in the chart of
accounts between estimated taxes and the actual receivable.

Other scenarios are possible of course. An estimated tax receivable at year end
might appear to be a tax payable upon receipt of the tax demand (or vice versa).
Regardless of the specific scenario, the aforementioned accounts are the ones to be
used to record company taxes, but depending on the specific scenario alternative
combinations of the accounts are used. In what follows, a schematic overview of
accounting for company taxes and all possible scenarios (to preserve overview
only account numbers are mentioned):

1. Advance tax payment during the accounting period (year t)

6700
@ 5500
2. Estimate of (additional) company 2. Estimate of (additional) company
taxes at year-end (year t) is a taxes at year-end (year t) is a liability
receivable
6702 Estimated taxes
4120 4500 Estimated taxes –
@ 6701 Belgian (…)
3. Receipt of the tax demand (year 3. Receipt of the tax demand (year
t+1) t+1)

Scenario 1: receivable is larger than Scenario 1: liability is larger than

estimated estimated

4120 6710 (see *** below)

@ 7711 4500 (amount of estimate – close
(journal entry for the difference account)
between the estimate and the actual @ 4520 (amount of actual liability)
receivable) *** for difference between the estimate
and the actual liability
Scenario 2: receivable is smaller than
estimated Scenario 2: liability is smaller than
estimated
6710
@ 4120 4500 (amount of estimate – close
(journal entry for the difference account)
between the estimate and the actual @ 4520 (amount of actual liability)
receivable) 7711 (see *** below)
*** for difference between the estimate
and the actual liability
 FINANCIAL ACCOUNTING
p. 244

Scenario 3: tax liability instead of Scenario 3: tax receivable instead of

receivable liability

6710 (see *** below) 4120 (amount of actual receivable)

@ 4120 (amount of estimate – close 4500 (amount of estimate – close
account) account)
4520 (amount of actual liability) @ 7711 (see *** below)
*** for the sum of the estimated *** for the sum of the estimated liability
receivable and the actual liability, and the actual receivable, because you
because you go from a receivable to a go from a liability to a receivable
liability instead instead

Scenario 4: estimate equals actual Scenario 4: estimate equals actual

receivable liability

No entry required. 4500 (amount of estimate – close

account)
@ 4520 (amount of actual liability)

A final note relates to the fact that, as you might have noted during the illustrations
(and in the schematic overview), two separate liability accounts are being used for
company taxes. That is, the estimated liability at year end is recorded on account
‘4500 Estimated taxes – Belgian taxes on profits’, while the actual liability based on
the tax demand has to be recorded on account ‘4520 Taxes due - Belgian taxes on
profits’. So, as you noted in the illustration, a tax liability should be transferred
from account 4500 to account 4520 upon receipt of the tax demand. However, no
such distinction is being made in the chart of accounts for a tax receivable. For a
tax receivable, there is only one account to be used, being ‘4120 Taxes to reclaim -
Belgian taxes on profits’. The latter account thus applies to both the estimated
amount at year end as well as the actual amount based on the tax demand (as a
result, and as you noted in the illustration, no transfer is need (i.e., the receivable
stays on account 4120 upon receipt of the tax demand)).
 FINANCIAL ACCOUNTING
p. 245

14.8 Wages

Wages (for both workers and employees) have to be accurately recorded in the
accounts of the company. Before we discuss the accounting treatment of wages, it
is important to properly understand the composition of wages, which is depicted
schematically as follows:

Gross wage
- Contribution for social security
Taxable wage
- Taxes
Net wage

Basically, workers and employees receive a gross wage, from which the employer
withholds (1) a contribution for social security; and (2) taxes. A contribution for
social security is mandatory in Belgium. In return for these contributions, the
public service for social security offers a substitute wage in case of illness,
unemployment, retirement, etc. As mentioned before, both the contribution for
social security and taxes are withheld by the employer and he is responsible for
paying them to the appropriate institutes (i.e., public service for social security and
tax authorities respectively). It is important to note that the employer also has to
make a contribution to the public service for social security for each worker
and/or employee he employs. The total expense of a worker or employee for the
employer therefore equals the gross wage plus the employer’s contribution for
social security. The actual calculations of the contribution for social security and
taxes are beyond the scope of this textbook.

Based on this information, we are able to explain the accounting treatment of

wages. Gross wages and the employers’ contribution for social security are clearly
expenses (i.e., personnel expenses) for the firm and will therefore have to be
debited on one or more expense accounts. The Belgian chart of accounts mentions
the following accounts ‘620 Remuneration and social benefits’ and ‘621 Employer’s
contribution for social insurance’. The former account will be used to record the
entire gross wage and the latter will be used to record the employer’s contribution
for social security. Quite logically, a liability should also be reflected towards
personnel for the total amount of net wages (account ‘455 Remuneration’), towards
the public service for social security for both the employer’s and personnel’s
contribution to social security (account ‘454 Public service for social security’) and
towards tax authorities for the total amount of taxes withheld from the gross wage
(account ‘453 Deducted advance payments’). All of these accounts will be credited.
 FINANCIAL ACCOUNTING
p. 246

The following example illustrates the accounting treatment of wages:

31/12/20X1
ABC receives wage calculations for the month of December from its social
secretariat. The overview provides the following information:

Gross wages: 100.000,00 EUR

Contributions for social security:
Employees: 12.000,00 EUR
Employer: 25.000,00 EUR
Taxes: 24.000,00 EUR

Before we go on, let us first determine the amount of net wages:

Gross wages 100.000,00 EUR

- Contributions for social security (employees) 12.000,00 EUR
Taxable wages 88.000,00 EUR
- Taxes 24.000,00 EUR
Net wages 64.000,00 EUR

Now we have all the data we need to record wages for the month of December in the
accounts of ABC:

No. Debit Credit Debit Credit

1 31/12/20X1
620 Remuneration and social benefits 100.000,00
621 Employer's contribution for social insurance 25.000,00
453 @ Deducted advance tax payments 24.000,00
454 Public service for social security 37.000,00
455 Remuneration 64.000,00
Wage calculations December 20X1
 FINANCIAL ACCOUNTING
p. 247

In the T-accounts, we get:

D 620 Remuneration and social benefits C D 453 Deducted advance tax payments C
(1) 100.000,00 24.000,00 (1)

621 Employer's contribution for social

D C D 454 Public service for social security C
insurance
(1) 25.000,00 37.000,00 (1)

D 455 Remuneration C
64.000,00 (1)

02/01/20X2
Net wages are paid to the employees (C/A extract no. X2/001).

We record:

No. Debit Credit Debit Credit

1 02/01/20X2
455 Remuneration 64.000,00
5500 @ Credit institutions - C/A 64.000,00
C/A extract no. X2/001

In the T-accounts, we get:

5500 Credit institutions - Current

D 455 Remuneration C D C
account
(1) 64.000,00 64.000,00 (OB) 64.000,00 (1)

14.9 Advance Payments Received

Advancement payments received from clients have to be recorded as a liability in

the balance sheet. More specifically, account ‘46 Advances received on contracts in
progress’ has to be used for these purposes. Advance payments received classify as
a liability because they reflect an obligation to deliver in the future. Moreover, if
 FINANCIAL ACCOUNTING
p. 248

no delivery is made in the future, the company will have to repay the advance
payment. It should therefore be clear that advance payments received represent a
liability for the company. The following example shows how to account for
advance payments received:

25/06/20X1
A client places an order, but ABC is unable to deliver immediately. To
formally place the order, ABC requires an advance payment from its
client. An invoice (for the advance payment) is made for 2.000,00 EUR
(excluding 21% VAT) (Sales invoice X1/053). The client makes the
advance payment by means of a bank transfer (C/A extract no. X1/96)

As discussed earlier, the advance payment has to be recorded on liability account ‘46
Advances received on contracts in progress’. So, instead of crediting a revenue
account (which we typically do when recording a sales invoice), we now credit a
liability account:

No. Debit Credit Debit Credit

1 25/06/20X1
400 Trade debtors 2.420,00
46 @ Advances received on contracts in … 2.000,00
451 VAT due 420,00
Sales invoice X1/053
2 25/06/20X1
5500 Credit institutions - C/A 2.420,00
400 @ Trade debtors 2.420,00
C/A extract X1/96

In the T-accounts, we get:

D 400 Trade debtors C D 451 VAT due C

(1) 2.420,00 2.420,00 (2) 420,00 (1)

D 46 Advances received on … C D 5500 Credit institutions - C/A C

(1) 2.000,00 (2) 2.420,00

30/07/20X1
ABC delivers goods with a total value of 5.000,00 EUR (excl. 21% VAT) to
the client from which it already received an advance payment of 2.000,00
EUR (excluding 21% VAT) (cf. 25/06/20X1) (Sales invoice no. X1/79).
 FINANCIAL ACCOUNTING
p. 249

Basically, the sale will be recorded in the same way as any other sale. The only
difference relates to the fact that we will have to consider the advance payment when
recording the transaction. Because we now deliver the goods, the liability should
disappear from ABC’s accounts and we therefore debit account 46. We therefore
record:

No. Debit Credit Debit Credit

3 15/07/20X1
400 Trade debtors 3.630,00
46 Advances received on contracts in … 2.000,00
704 @ Sales of goods for resale 5.000,00
451 VAT due 630,00
Sales invoice X1/79

In the T-accounts, we get:

D 400 Trade debtors C D 451 VAT due C

(1) 2.420,00 2.420,00 (2) 420,00 (1)
(3) 3.630,00 630,00 (3)

D 46 Advances received on … C D 704 Sales of goods for resale C

(1) 2.000,00 2.000,00 (3) 5.000,00 (3)

As reflected on account ‘400 Trade debtors’, the client still has to pay goods worth of
3.000,00 EUR plus the related amount of VAT (being 21% of 3.000,00 EUR = 630,00
EUR).

14.10 Completing the Financial Statements

As discussed earlier, the ultimate goal of financial accounting is (preparing) the

financial statements. In what follows, we will briefly discuss how to get
information from the T-accounts into the financial statements. Because the current
chapter deals with liabilities, we will discuss how to get liabilities into the financial
statements. Nevertheless, our focus on liabilities merely serves as an illustration.
Quite logically, liabilities appear on the equity and liabilities’ side of the balance
sheet (page C 3.2). Before you are able to fill in the financial statements, you need
to be aware of the following things:
 The codes in the balance sheet refer to account numbers. Under the
heading ‘AMOUNTS PAYABLE (codes 17/49)’, we find, amongst others,
‘Amounts payable after more than one year (code 17)’. The codes refer to
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account groups and the ‘/’ between the codes means ‘up to’. In other words,
next to code 17/49, you will find the sum of the balances of account groups
17 up to 49.
 In the balance sheet, you always find two columns: period (i.e., figures for
the current accounting period); and previous period (i.e., figures for the
previous accounting period). When preparing financial statements, both
columns have to be filled in. That is, firms have to provide comparative
figures (i.e., the figures of the previous accounting period) in order to
enable financial statement users to assess the evolution.

Let us, once again, have a look at the example related to the current portion of
long-term liabilities (cf. Section 14.4):

01/05/20X0
Firm ABC borrows an amount of 100.000,00 EUR from its banker (C/A
extract no. X0/59). An annual interest rate of 5% applies to this loan
(interests are payable in arrear). Each year on the 30th of April one fifth
of the loan has to be repaid (i.e., the loan relates to a 5-year period) plus
interests. The closing date of the accounting year is December 31st.

As discussed earlier, this gives rise to the following entries for accounting year 20X0:

01/05/20X0

5500 Credit institutions - Current 173 Am. pay. after more than 1 year -
D C D C
account Credit institutions
(1) 100.000,00 100.000,00 (1)

31/12/20X0

173 Am. pay. after more than 1 year - 42 Current portion of am. pay. after
D C D C
Credit institutions more than 1 year
(2) 20.000,00 100.000,00 (1) 20.000,00 (2)

6500 Interests, commissions and debt

D C D 492 Accrued charges C
charges
(3) 3.333,34 3.333,34 (3)
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p. 251

Let us assume that we now prepare the balance sheet at the end of 20X0. As
mentioned earlier, we need to record the loan in the balance sheet (page C 3.2) and
we get:

Notes Codes Period Previous period

AMOUNTS PAYABLE ............................................. 17/49 ................................. .................................

Amounts payable after more than one year .............................. 6.9 17 80.000,00 .................................
Financial debts ........................................................................ 170/4 80.000,00 .................................
Subordinated loans ........................................................... 170 ................................. ..................................
Unsubordinated debentures .............................................. 171 ................................. ..................................
Leasing and similar obligations ........................................ 172 ................................. ..................................
Credit institutions ............................................................. 173 80.000,00 ..................................
Other loans ....................................................................... 174 ................................. ..................................
Trade debts ............................................................................. 175 ................................. .................................
Suppliers ........................................................................... 1750 ................................. ..................................
Bills of exchange payable ................................................. 1751 ................................. ..................................
Advances received on contracts in progress ........................... 176 ................................. .................................
Other amounts payable ........................................................... 178/9 ................................. .................................

Amounts payable within one year ............................................. 6.9 42/48 20.000,00 .................................
Current portion of amounts payable after more than one year
falling due within one year 42 20.000,00 .................................
Financial debts ........................................................................ 43 ................................. .................................
Credit institutions ............................................................. 430/8 ................................. ..................................
Other loans ....................................................................... 439 ................................. ..................................
Trade debts ............................................................................. 44 ................................. .................................
Suppliers ........................................................................... 440/4 ................................. ..................................
Bills of exchange payable ................................................. 441 ................................. ..................................
Advances received on contracts in progress ........................... 46 ................................. .................................

Taxes, remuneration and social security .................................

6.9 45 ................................. .................................
Taxes ................................................................................ 450/3 ................................. ..................................
Remuneration and social security ..................................... 454/9 ................................. ..................................
Other amounts payable ........................................................... 47/48 ................................. .................................

Accrued charges and deferred income ...................................... 6.9 492/3 ................................. .................................

TOTAL LIABILITIES .................................................. 10/49

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Because the loan was only contracted in 20X0, the column for the previous period
is blank. The 80.000,00 EUR next to code 173 in the column ‘period’ is the closing
balance of account ‘173 Amounts payable after more than one year – Credit
institutions’ for 20X0. Quite similarly, the 20.000,00 EUR next to code 42 in the
column ‘period’ is the closing balance of account ‘42 Current portion of amounts
payable after more than one year’ for 20X0. The figures next to codes 17 and 42/48
are subtotals (and thus include the aforementioned balances).

As can be seen from the balance sheet, reference is made to note 6.9. If we turn to
note 6.9 of the financial statements (page C 6.9), we see that the note consists of
three different sections:
A. Analysis by current portions of amounts initially payable after more
than one year
B. Amounts payable guaranteed
C. Amounts payable for taxes, remuneration and social security
In what follows, we will merely focus on section A. In that section, firms have to
further split up their long-term liabilities based on (1) term; and (2) type. For
example, while code 42 in the balance sheet presents the lump sum of the current
portion of amounts payable after more than one year, in this section we should
provide more detail regarding to the types of liabilities (e.g., financial debts, trade
debts, etc.) that make up this figure. Basically, there are three parts:
 1. not more than one year: part of the long-term liability that falls due
within one year (i.e., situation at the end of the accounting period)
 2. between one and five years: part of the long-term liability that falls due
between one and five years (i.e., situation at the end of the accounting
period)
 3. over five years: part of the long-term liability that falls due after more
than five years (i.e., situation at the end of the accounting period)
Based on our example, we would get the following information in this note:
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Codes Period

ANALYSIS BY CURRENT PORTIONS OF AMOUNTS INITIALLY PAYABLE AFTER MORE

THAN ONE YEAR
Amounts payable after more than one year, not more than one year
Financial debts ........................................................................................................................................ 8801 20.000,00
Subordinated loans ............................................................................................................................ 8811 .................................
Unsubordinated debentures ............................................................................................................... 8821 .................................
Leasing and other similar obligations ............................................................................................... 8831 .................................
Credit institutions .............................................................................................................................. 8841 20.000,00
Other loans ........................................................................................................................................ 8851 .................................
Trade debts .............................................................................................................................................. 8861 ..................................
Suppliers ........................................................................................................................................... 8871 .................................
Bills of exchange payable ................................................................................................................. 8881 .................................
Advance payments received on contracts in progress ............................................................................. 8891 ..................................
Other amounts payable ............................................................................................................................ 8901 ..................................

Total amounts payable after more than one year, not more than one year ..................................................... (42) 20.000,00

Amounts payable after more than one year, between one and five years
Financial debts ........................................................................................................................................ 8802 80.000,00
Subordinated loans ............................................................................................................................ 8812 .................................
Unsubordinated debentures ............................................................................................................... 8822 .................................
Leasing and other similar obligations ............................................................................................... 8832 .................................
Credit institutions .............................................................................................................................. 8842 80.000,00
Other loans ........................................................................................................................................ 8852 .................................
Trade debts .............................................................................................................................................. 8862 ..................................
Suppliers ........................................................................................................................................... 8872 .................................
Bills of exchange payable ................................................................................................................. 8882 .................................
Advance payments received on contracts in progress ............................................................................. 8892 ..................................
Other amounts payable ............................................................................................................................ 8902 ..................................

Total amounts payable after more than one year, between one and five years ..............................................
8912 80.000,00

Amounts payable after more than one year, over five years
Financial debts ........................................................................................................................................ 8803 ..................................
Subordinated loans ............................................................................................................................ 8813 .................................
Unsubordinated debentures ............................................................................................................... 8823 .................................
Leasing and similar obligations ........................................................................................................ 8833 .................................
Credit institutions .............................................................................................................................. 8843 .................................
Other loans ........................................................................................................................................ 8853 .................................
Trade debts .............................................................................................................................................. 8863 ..................................
Suppliers ........................................................................................................................................... 8873 .................................
Bills of exchange payable ................................................................................................................. 8883 .................................
Advance payments received on contracts in progress ............................................................................. 8893 ..................................
Other amounts payable ............................................................................................................................ 8903 ..................................

Total amounts payable after more than one year, over five years.................................................................. 8913 ..................................
 FINANCIAL ACCOUNTING
p. 254

In the first part, we find detail regarding the part of the long-term liabilities that
fall due within one year. Basically, the column represents detail regarding the
closing balance of account ’42 Current portion of amounts payable after more than
one year’. In our example, the closing balance of account ’42 Current portion of
amounts payable after more than one year’ (being 20.000,00 EUR) relates to a
bank loan. Accordingly, the full balance of the account is mentioned next to code
8841 (Financial debts – Credit institutions). Clearly, the total of this section (i.e.,
code (42)) should correspond to the closing balance of account ’42 Current portion
of amounts payable after more than one year’.

In the second part, we find detail regarding the part of the long-term liabilities that
falls due between one and five years. Because the entire loan is repayable within 5
years, the remainder of the balance of the loan is to be found in this column. The
closing balance of account ‘173 Amounts payable after more than one year – Credit
institutions’ (i.e., 80.000,00 EUR) is mentioned next to code 8842 (Financial debts
– Credit institutions). The third part (i.e., the part of the long term liabilities that
falls due after five years) remains blank in this example, given that the full loan is
repayable within five years. Again, it is important that the information in the notes
corresponds to the information in the balance sheet. Therefore, the sum of the
figures next to codes 8912 and 8913 should correspond to the figure appearing
next to code 17 in the balance sheet.

14.11 Summary and Learning Objectives

In this chapter, we dealt with the accounting treatment of both long- and short-
term liabilities. In addition, we discussed the transfer of accounting information
related to (long-term) liabilities into the actual financial statements (i.e., we went
from the T-accounts to the financial statements).

By now, using the Belgian chart of accounts, you should be able to account for:
- long-term liabilities including its proper classification in terms of maturity
(i.e., long- vs. short-term part – 17- vs. 42-account) and related interest
expenses.
- financial leasing (which is a combination of tangible fixed asset and a long-
term liability);
- short-term liabilities (e.g., wages, advance payments received)
- liabilities in foreign currencies
- company taxes (on profits)
Moreover, using the Belgian chart of accounts and the Belgian format of the
financial statements, you should be able to properly transfer information related to
(long-term) liabilities into the financial statements (i.e., balance sheet and related
notes to the financial statements). This learning outcome also applies to financial
 FINANCIAL ACCOUNTING
p. 255

leasing (and you should then be able to properly transfer information related to
the tangible fixed asset as well as the long-term liability into the financial
statements).

14.12 Exercises

Exercise 14.1

01/09/20X0
ABC borrows an amount of 18.000,00 EUR from its banker (C/A extract no. X0/52).
The contract stipulates an annual interest rate of 6% on the outstanding balance of
the loan. Interest charges have to be paid in advance on 28/02 and 31/08 each
year. The loan relates to a 3-year period and each year 6.000,00 EUR has to be
repaid (i.e. 3.000,00 EUR on 28/02 and 3.000,00 EUR 31/08 respectively). The
first repayment of the principal amount has to be settled on 28/02/20X1.

Required
(a) Record all journal entries that result from the aforementioned data.
The closing date of the accounting year is December 31st.
(b) What balances related to the loan are to be found in the financial
statements of 20X1 (i.e., balance sheet and notes to the financial
statements)?

Exercise 14.2

On July 1st 20X0, enterprise ABC decides to lease a machine. The following annuity
table is included in the leasing contract:

Reduction
Principal Interest
Period Annuity of principal
amount (10%)
amount
01/07/20X0 - 30/06/20X1 50.000,00 13.190,00 5.000,00 8.190,00
01/07/20X1 - 30/06/20X2 41.810,00 13.190,00 4.181,00 9.009,00
01/07/20X2 - 30/06/20X3 32.801,00 13.190,00 3.280,10 9.909,90
01/07/20X3 - 30/06/20X4 22.891,10 13.190,00 2.289,11 10.900,89
01/07/02X4 - 30/06/20X5 11.990,21 13.190,00 1.199,02 11.990,98

All payments have to be made on June 30th. The machine is depreciated using the
straight-line method over the duration of the leasing contract.
 FINANCIAL ACCOUNTING
p. 256

Required
(1) Record all journal entries that result from the aforementioned leasing
contract in the accounts of ABC during the accounting years 20X0 and 20X1.
The closing date of the accounting year is December 31st.
(2) What balances related to this machine are to be found in the financial
statements 20X3 of ABC? (i.e., balance sheet and notes to the financial
statements)

Exercise 14.3

10/12/20X0
DEF buys goods for resale from a US supplier. The invoice (purchase invoice no.
X0/911) mentions an amount of 3.500,00 USD. The exchange rate at the 10th of
December equals $ 1,00 = € 0,89.

18/12/20X0
DEF makes an advance tax payment for an amount 10.000,00 EUR (C/A extract no.
X0/95).

27/12/20X0
DEF receives an advance payment of 2.000,00 EUR from its customer ‘FAST’,
regarding an order that will be delivered during the next month (C/A extract no.
X0/96).

31/12/20X0
Purchase invoice no. 911 in USD has not been paid yet. The exchange rate at the
31st of December equals $ 1,00 = € 0,97.

The accountant estimated company taxes for the current accounting year. Based
on this estimate, DEF will have to pay an additional 3.600,00 EUR (i.e. after
deduction of the advance tax payments).

Wages for the month of December are as follows:

Gross wages: 35.000,00 EUR
Contributions for social security:
Employees: 5.000,00 EUR
Employer: 2.400,00 EUR
Advance tax payments: 9.400,00 EUR

02/01/20X1
Wages for the month of December 20X0 are paid now (C/A extract no. X1/01).
 FINANCIAL ACCOUNTING
p. 257

10/01/20X1
DEF pays its US supplier (i.e. purchase invoice no. X0/911) (C/A extract no.
X1/02). The exchange rate now equals $ 1,00 = € 0,94.

18/01/20X1
DEF delivers goods to FAST, for which it already received an advance payment (see
27/12/20X0). Goods were delivered for a total amount of 5.000,00 EUR (excl. 21%
VAT) (sales invoice no. X1/005).

15/05/20X1
DEF receives its tax demand, which mentions an amount payable of 4.500,00 EUR.

Required
Record all journal entries that result from the aforementioned data. The closing
date of the accounting year is December 31st.