LIABILITIES AND SHAREHOLDERS’ EQUITY

1.   Short-term Liabilities

       We finished studying assets. Assets are on the left hand side of the balance sheet. From now on we start studying the right hand side of the balance sheet. Right hand side of the balance sheet contains liabilities and shareholders’ equity. As you remember from previous chapters liabilities are cash, goods or services that business owes to other businesses, individuals or government. Liabilities are group into two categories, which are short-term liabilities and long-term liabilities. Liabilities that are due with a year (within 12 months) are called short-term liabilities; liabilities that are due more than a year (more than 12 months) are long-term liabilities. In this section we will study short-term liabilities.

 

      Short-term liabilities are listed below. Don’t forget, the business must fulfill these liabilities within a year by paying cash, or by delivering the goods, or providing a service.

 

      a.   Bank loans (ST)

      b.   Trade payables

      c.   Other payables

      d.   Taxes and other duties payable

      e.      Provision for corporate tax

      f.      Advance payments received

      g.      Unearned revenue

 

      We have already studied some of these short liabilities. Trade payables arise from the operating activities of the business (purchasing goods or services related to the operating activities) and consist of accounts payable and notes payable. Other payables are payables that do not arise from the operating activities. Taxes and other duties payable are cash payables to the government and consist of taxes payable and social security premiums payable. Taxes payable do not include corporate tax that is collected on the period income. Taxes payable includes value added tax, excise tax, and tax withholdings that must be paid to the government. Provision for corporate tax is the amount of corporate tax on the period income that must be paid to the government. So far we have studied trade payables, other payables, taxes and other duties payable, and provision for corporate tax. Now, we will start studying the rest of the short-term liabilities.

 

2.   Advance payments received and unearned revenue

 

      Both advance payments received and unearned revenue are prepayments received by the business. Advance payments received is the payment received before delivering the goods, unearned revenue is the payment received before providing a service that will be provided portion by portion.

Example-1


The firm is a machinery manufacturer. The firm received an order to manufacture and deliver a machine. Price of the machine (including transportation and installation) is 800,000 TL + 18 % VAT. The firm received 160,000 TL in advance. When the firm delivered the machine it received another 350,000 TL + total VAT and a forward-dated check for the remaining amount. Make the accounting records at each step.

 At the first step the firm received the advance payment. Accounting record:

 

 

Debit

Credit

Bank accounts

160,000

 

  Advance payments received

 

160,000

 

Don’t forget, increases in liabilities are credited, decreases in liabilities are debited.

 

At the second step the firm delivered the machine, received the payment (350,000 TL + total VAT) and the forward-dated check for the remaining amount.

 

      Total VAT = 800,000 * 0.18 = 144,000 TL

 

      Payment = 350,000 + 144,000 = 494,000 TL

 

      Remaining amount = (800,000 + 144,000) – 494,000 – 160,000 = 290,000 TL

 

      Total amount that must be received is 800,000 + 144,000 = 944,000 (price + VAT)

 

      The firm received 160,000 TL in advance, received another 350,000 TL + total VAT (494,000 TL) when it delivered the machine. We find the remaining amount by subtracting 160,000 TL + 494,000 TL from the total amount that must be received. This is equal to 290,000 TL. Accounting record:

 

 

Debit

Credit

Bank accounts

494,000

 

Notes receivable

290,000

 

Advance payments received

160,000

 

   Domestic sales

 

800,00

   VAT payable

 

144,000

 

When the firm delivers the machine, revenue (domestic sales) and VAT payable must be recorded, and advance payments received must be closed with a debit entry.

 

 Example-2

 A university receives 8,500 + 8 % VAT from a student for one-semester (for 4 months) tuitions in advance.

 

      a.   Make the accounting record when the university receives the payment.

      b.   Make the accounting record at the end of the first month.

 

a.   VAT = 8,500 * 0.08 = 680 TL

 

      Total payment received = 8,500 + 680 = 9,180 TL

 

      Accounting record when the payment is received:

 

 

Debit

Credit

Bank accounts

9,180

 

  Unearned revenue

 

9,180

 

      The university received 8,500 TL + 680 TL (VAT) = 9,180 TL from the student before providing the education service. So, this amount (9,180 TL) is unearned revenue and credited to unearned revenue account.

 

b.   At the end of the first month the student received (and the university provided) one- month education service. So, the university earned one-month revenue and must record one-month revenue (domestic sales) with VAT payable.

 

      One month revenue = 8,500 / 4 = 2,125 TL

      One month VAT = 680 / 4 = 170 TL

 

Accounting record:

 

 

Debit

Credit

Unearned revenue

2,295

 

   Domestic sales

 

2,125

   VAT payable

 

170

 

2,295 TL (one month revenue + one month VAT) is deducted from unearned revenue with a debit record.

 

Example-3

 A firm signed a contract with another firm to provide a service for six months and received 36,000 TL + 18 % VAT for six-month service in advance.

 

      a.   Make the accounting record when the firm receives the payment.

      b.   Make the accounting record at the end of the first month.

 

      a.   VAT = 36,000 * 0.18 = 6,480 TL

 

            Total payment received = 36,000 + 6,480 = 42,480 TL

             Accounting record when the payment is received:

 

 

Debit

Credit

Bank accounts

42,480

 

  Unearned revenue

 

42,480

 

      b.   One month revenue = 36,000 / 6 = 6,000 TL

            One month VAT = 6,480 / 6 = 1,080 TL

 

Accounting record:

 

 

Debit

Credit

Unearned revenue

7,080

 

   Domestic sales

 

6,000

   VAT payable

 

1,080

 

3.   Short-term bank loans

 

      Businesses obtain funds from the banks when they need money. These funds are obtained as credit or loan. There is a slight difference between a credit and a loan. Credit is a limit (maximum amount of money) that a business can withdraw when it needs money. If the business does not need any money, it does not withdraw anything from the credit. Loan is a lumpsome money received from the bank that will be paid at once or in installments.

       Most common credit is revolving line of credit. Here, the bank extends a line (sets a limit) for the firm. The firm withdraws money from its revolving line of credit up to this limit and pays the amount that it seems appropriate. At the end of every three-month the firm must pay interest on the average balance of money withdrawn from the revolving line of credit during the three-month period. Sometimes the banks may want the businesses to pay a certain amount of money withdrawn at the end of every three-month. Whenever a firm withdraws money from its revolving line of credit the amount is credited to bank loans; whenever a firm repays money to its revolving line of credit the amount is debited. Following examples are about revolving line of credit.

 

      Example-1 


      A firm withdraws 20,000 TL from its revolving line of credit to pay an open account. The accounting record:

 

 

Debit

Credit

Accounts payable

20,000

 

  Bank loans

 

20,000

 

      Example-2


      A firm withdraws 12,000 TL from its revolving line of credit to pay taxes payable. The accounting record:

 

 

Debit

Credit

Taxes payable

12,000

 

  Bank loans

 

12,000


      Example-3

       The firm repays 8,000 TL to its revolving line of credit from the bank accounts. The accounting record:

 

 

Debit

Credit

Bank loans

8,000

 

  Bank accounts

 

8,000

 

      Example-4

       The firm paid 7,000 TL interest for its revolving line of credit from the bank account. The accounting record:

 

 

Detail

Debit

Credit

780 Finance expenses

 

7,000

 

  - Interest expenses 7,000    

  Bank accounts

 

 

7,000

       Another type of bank loan is spot loan. Spot loans have stated maturities.  In a spot loan, the firm obtains lumpsome money from the bank and pays the principal with the interest at once at maturity. We will explain spot loan by taking the following examples.

 

      Example-5

       A firm takes out a spot loan amounting 120,000 TL on 14 May 2012. The money is transferred to the firm’s bank account. Maturity is 91 days, interest is 14 %.

       a.   Make the accounting record on 14 May 2012.

      b.   Make the accounting record when the loan is paid off.

       a.   On 14 May 2012, the firm’s bank account increased by 120,000 TL. because the amount of the loan is transferred to the firm’s bank account. This amount must be debited to bank accounts. The firm owes this amount of money to the bank. So, this amount must be credited to bank loans. The accounting record:

 

 

Debit

Credit

Accounts payable

120,000

 

  Bank loans

 

120,000

     
      b.   Interest for 91 days = 120,000 * 0.14 * 91/360 = 4,247 TL.

       Since the maturity of the loan ends in 2012, all the interest belongs to 2012. The accounting record:

 
          

 

Detail

Debit

Credit

780 Finance expenses

 

4,247

 

  - Interest expenses 4,247    

Bank loans

 

120,000

 

   Bank accounts

 

 

124,247

       Amount of interest (4,247 TL) is debited to finance expenses. Since the firm paid the principal (120,000 TL) it does not owe any money to the bank. In other words the firm fulfilled its obligation to return the principal to the bank. So, the bank loans must be closed with a debit record. The firm paid the principal and interest (120,000 + 4,247 = 124,247 TL) to the bank from its bank accounts. Its bank account decreased by 124,247 TL. So, this amount is credited to the bank accounts.

       Example-6

       A firm takes out a spot loan amounting 80,000 TL on 20 September 2012. The money is transferred to the firm’s bank account. Maturity is 182 days, interest is 16 %.

       a.   Make the accounting record on 20 September 2012.

      b.   Make the adjusting entry on 31 December 2012 (101 days passed until 31 December)

      b.   Make the accounting record when the loan is paid off.

 a.       The accounting record on 20 September 2012:

 

     

Debit

Credit

Bank accounts

80,000

 

  Bank loans

 

80,000

       b.   In this example the maturity of the loan extends to the other year. In other words, the firm takes out the loan in 2012, but it will pay off the loan in 2013. For this reason, the interest belongs to two accounting periods. 101 days of interest (interest between 20 September 2012 and 31 December 2012) belongs to 2012, the rest (01 January 2013 until maturity) belongs to 2013. On 31 December 2012, interest between 20 September 2012 and 31 December 2012 (101 days of interest) must be accrued.

       101 days of interest = 80,000 * 0.16 * 101/360 = 3,591 TL.

      On 31 December 2012 this interest (interest belonging to 2012) must be recorded as interest expense. The accounting record:

 

     

Detail

Debit

Credit

780 Finance expenses

 

3,591

 

  - Interest expenses 3,591    

  Accrued expenses

   

3,591

       The firm does not make any payment on 31 December. The interest belonging to 2012 (3,591 TL) will be paid on maturity in total interest. The firm owes 3,591 TL interest to the bank from 2012. This amount is credited to accrued expenses and represents 3,591 TL interest liability to the bank. Remember, accrued expenses are expenses occurred in the year but will be paid in the next year. This interest occurred (accrued) in 2012 but will be paid in 2013.

       c.   On maturity the firm pays the principal and total interest.

             Total interest for 182 days = 80,000 * 0.16 * 182/360 = 6,471 TL.

            Interest belonging to 2013 = 6,471 – 3,591 = 2,880 TL

            Total payment = 80,000 (principal) + 6,471 (total interest) = 86,471 TL

Accounting record:

 

 

Detail

Debit

Credit

780 Finance expenses

 

2,880

 

   - Interest expenses 2,880    

Accrued expenses

 

3,591

 

Bank loans

 

80,000

 

   Bank accounts

 

 

86,471

       On maturity only the interest belonging to 2013 (interest between 01 January 2013 and maturity) is recorded as finance expenses (2,880 TL). Interest belonging to 2012 was recorded as finance expenses on 31 December 2012. Since it was not paid, the credit record was accrued expenses and this was a liability. The firm also paid the interest belonging to 2012 (3,591 TL), so the accrued expenses must be closed with a debit record. The firm paid the principal (80,000 TL), so the bank loans is also closed with a debit record. The firm paid a total of 86,471 TL (principal + total interest). This amount comes from the bank accounts, so it is credited to the bank accounts.

       Businesses may take out loans denominated in foreign currency. The following two examples deal with this situation.

 Example-7

 A firm takes out a spot loan amounting 90,000 Euro on 14 May 2012. The money is transferred to the firm’s bank account. Maturity is 91 days, interest is 7 %.

       a.   Make the accounting record on 14 May 2012 (1 Euro = 2.32 TL)

      b.   Make the accounting record when the loan is paid off (1 Euro = 2.35 TL)

      c.   Make the accounting record when the loan is paid off (1 Euro = 2.30 TL)

       a.      Although the firm takes out 90,000 Euro loan, we must convert this amount into TL by using the exchange rate on 14 May 2012 (the day when the firm takes out the loan) and make the accounting record in terms of TL.

       90,000 * 2.32 = 208,800 TL. Accounting record:

     

     

Debit

Credit

Bank accounts

208,800

 

  Bank loans

 

208,800

       b.   Since the maturity of the loan ends in 2012, all the interest belongs to 2012. We first calculate the interest in terms of Euro.

             Interest (in Euros) = 90,000 * 0.07 * 91/360 = 1,593 Euro

             Now we will convert this interest into TL by using the exchange rate on the day when the loan is paid off.

             1,593 * 2.35 = 3,744 TL.

             We must also find the TL equivalent of the principal (90,000 Euro) by using the exchange rate on the day when the loan is paid off.

             90,000 * 2.35 = 211,500 TL.

             Total payment (in TL) = 3,744 TL (interest) + 211,500 TL (principal) = 215,244 TL.

             Accounting record:

           

 

Detail

Debit

Credit

780 Finance expenses

 

3,744

 

  - Interest expenses 3,744    

Bank loans

 

208,000

 

Foreign exchange loss

 

3,500

 

   Bank accounts

 

 

215,244

     

TL equivalent of the interest (3,744 TL) is debited as finance expenses. When the firm took out the loan 208,000 TL was debited as bank loans. Now, the firm pays off the loan, so the recorded amount of the bank loans (208,000 TL) is closed with a debit record. TL equivalent of the principal was 208,000 TL when the firm took out the loan; TL equivalent of the principal is 211,500 TL when the firm pays off the loan. Although the firm paid 90,000 Euro, TL equivalent of 90,000 Euro increased when the firm paid off the loan because the exchange rate increased. The difference (211,500 – 208,000 = 3,500 TL) is foreign exchange loss (because the TL equivalent of the principal increased) and debited as foreign exchange loss. Total amount paid in terms of TL (215,244) is credited to bank accounts.

       c.   Here we will do the same calculations with a different exchange rate. Suppose the exchange rate on the day when the firm pays off the loan is 2.30 TL.

            Interest (in Euros) = 90,000 * 0.07 * 91/360 = 1,593 Euro

             Now we will convert this interest into TL by using the exchange rate on the day when the loan is paid off.

             1,593 * 2.30 = 3,664 TL.

             We must also find the TL equivalent of the principal (90,000 Euro) by using the exchange rate on the day when the loan is paid off.

             90,000 * 2.30 = 207,000 TL.

            Total payment (in TL) = 3,664 TL (interest) + 207,000 TL (principal) = 210,664 TL

             Accounting record:

        

 

Detail

Debit

Credit

780 Finance expenses

 

3,664

 

   - Interest expenses 3,664    

Bank loans

 

208,000

 

   Foreign exchange gain

 

 

1,000

   Bank accounts

 

 

210,664

 

            TL equivalent of the interest (3,664 TL) is debited as finance expenses. When the firm took out the loan 208,000 TL was debited as bank loans. Now, the firm pays off the loan, so the recorded amount of the bank loans (208,000 TL) is closed with a debit record. TL equivalent of the principal was 208,000 TL when the firm took out the loan; TL equivalent of the principal is 207,000 TL when the firm pays of the loan. Although the firm paid 90,000 Euro, TL equivalent of 90,000 Euro decreased when the firm paid off the loan because the exchange rate decreased. The difference (208,000 – 207,000 = 1,000 TL) is foreign exchange gain (because the TL equivalent of the principal decreased) and credited as foreign exchange gain. Total amount paid in terms of TL (210,664) is credited to bank accounts.

 Example-8

 A firm takes out a spot loan amounting 140,000 USD on 10 September 2012. The money is transferred to the firm’s bank account. Maturity is 182 days, interest is 8 %.

       a.   Make the accounting record on 10 September 2012 (1 USD = 1.77 TL)

      b.   Make the adjusting entry on 31 December 2012 (112 days passed until 31 December, 1 USD = 1.82 TL)

      c.   Make the adjusting entry on 31 December 2012 (112 days passed until 31 December, 1 USD = 1.75 TL)

       a.      140,000 * 1.77 = 247,800 TL. Accounting record:

       

     

Debit

Credit

Bank accounts

247,800

 

  Bank loans

 

247,800

       b.   In this example the maturity of the loan extends to the other year. In other words, the firm takes out the loan in 2012, but it will pay off the loan in 2013. For this reason, the interest belongs to two accounting periods. 112 days of interest (interest between 10 September 2012 and 31 December 2012) belongs to 2012, the rest (01 January 2013 until maturity) belongs to 2013. On 31 December 2012, interest between 10 September 2012 and 31 December 2012 (112 days of interest) must be accrued.

       112 days of interest = 140,000 * 0.08 * 112/360 = 3,484 USD.

       Now we will convert this interest into TL by using the exchange rate on 31 December 2012.

             3,484 * 1.82 = 6,341 TL.

             We must also find the TL equivalent of the principal (140,000 USD) by using the exchange rate on 31 December 2012.

             140,000 * 1.82 = 254,800 TL.

       On 31 December 2012 we will make two accounting records. The first record will record the accrued interest (6,341 TL), the second one will record the increase or decrease in TL equivalent of the principal. The principal must be reported at its TL equivalent (254,800 TL) on 31 December 2012. When the loan was taken out the principal was converted into TL by using the exchange rate on that day. The recorded amount was 247,800 TL. On 31 December, TL equivalent of the principal calculated by using the exchange rate on 31 December 2012 is 254,800 TL. The difference (254,800 – 247,800 = 7,000 TL) must be added to the TL equivalent of the principal. Since TL equivalent of the principal increased, this amount (7,000 TL) must be credited to bank loans. Because TL equivalent increased as a result of increase in foreign exchange rate, the debit entry must be foreign exchange loss. Accounting record:

 

     

Detail

Debit

Credit

780 Finance expenses

 

6,341

 

   - Interest expenses 6,341    

  Accrued expenses

 

 

6,341

Foreign exchange loss

 

7,000

 

     Bank loans

 

 

7,000

       Since the interest isn’t paid on 31 December 2012, it is recorded as accrued expenses (the credit record).

       c.   Here we will do the same calculations with a different exchange rate.

             Remember, the interest belonging to 2012 is 3,484 USD. TL equivalent of this interest:

             3,484 * 1.75 = 6,097 TL.

             TL equivalent of the principal:

             140,000 * 1.75 = 245,000 TL.

             TL equivalent of the principal was 247,800 when the loan was taken out and recorded at that amount. TL equivalent of the principal decreased on 31 December 2012 because the exchange rate decreased. TL equivalent of the principal must be reduced by (247,800 – 245,000 = 2,800 TL). This amount must be debited to bank loans. Since TL equivalent of the loan decreased as a result of a decrease in foreign exchange rate the credit record must be foreign exchange gain. The accounting record:

             

  Detail

Debit

Credit

780 Finance expenses

 

6,097

 

   - Interest expenses 6,097    

  Accrued expenses

 

 

6,097

Bank loans

 

2,800

 

     Foreign exchange gain

 

 

2,800

 

4.   Long-term bank loans

       Businesses also take out long-term bank loans (bank loans whose maturities are more than 12 months). These loans are generally paid off in installments. Installment payments may be made in every month, every three-month or ever six-month depending on the type of the loan. We will explain long-term bank loans by taking the following examples.

 Example-1

      A firm takes out a loan amounting 80,000 TL on 01 April 2012. Maturity is 36 months, monthly interest is 1.2 %. Money is transferred to the bank account. The loan will be paid in monthly installments. Amount of the monthly payments is 2,750 TL.

       For this type of loans (installment loans) a repayment table is prepared. The repayment table for this loan is presented below. Explanations about the table are made below the table.

 Repayment table

No

Beginning balance

Payment

Interest

Principal

Ending balance

1

80,000

2,750

960

1,790

78,210

2

78,210

2,750

939

1,811

76,399

3

76,399

2,750

917

1,833

74,565

4

74,565

2,750

895

1,855

72,710

5

72,710

2,750

873

1,877

70,833

6

70,833

2,750

850

1,900

68,933

7

68,933

2,750

827

1,923

67,010

8

67,010

2,750

804

1,946

65,064

9

65,064

2,750

781

1,969

63,095

10

63,095

2,750

757

1,993

61,102

11

61,102

2,750

733

2,017

59,085

12

59,085

2,750

709

2,041

57,044

13

57,044

2,750

685

2,065

54,979

14

54,979

2,750

660

2,090

52,888

15

52,888

2,750

635

2,115

50,773

16

50,773

2,750

609

2,141

48,632

17

48,632

2,750

584

2,166

46,466

18

46,466

2,750

558

2,192

44,273

19

44,273

2,750

531

2,219

42,055

20

42,055

2,750

505

2,245

39,809

21

39,809

2,750

478

2,272

37,537

22

37,537

2,750

450

2,300

35,238

23

35,238

2,750

423

2,327

32,910

24

32,910

2,750

395

2,355

30,555

25

30,555

2,750

367

2,383

28,172

26

28,172

2,750

338

2,412

25,760

27

25,760

2,750

309

2,441

23,319

28

23,319

2,750

280

2,470

20,849

29

20,849

2,750

250

2,500

18,349

30

18,349

2,750

220

2,530

15,819

31

15,819

2,750

190

2,560

13,259

32

13,259

2,750

159

2,591

10,668

33

10,668

2,750

128

2,622

8,046

34

8,046

2,750

97

2,653

5,393

35

5,393

2,750

65

2,685

2,708

36

2,708

2,750

32

2,718

-10

                       - 10 balance is because of rounding the decimals.

 Monthly payments (2,750 TL) contain two things. Interest and principal payment. In every payment interest and principal must be separated. As you see there are 36 payments. Calculations for the first payment are as follows:

Interest = Beginning balance * monthly interest rate

Interest = 80,000 * 0.012 = 960 TL.

Principal = Monthly payment – interest

Principal = 2,750 – 960 = 1,790 TL.

Ending balance = Beginning balance – principal

Ending balance = 80,000 – 1,790 = 78,210 TL.

Calculations for the second payment

 Beginning balance is the ending balance after the first payment that is 78,210 TL.

Interest = 78,210 * 0.012 = 939 TL.

Principal = 2,750 – 939 = 1,811 TL.

Ending balance = 78,210 – 1,811 = 76,399 TL.

 76,399 TL is the beginning balance of the third payment. Calculations continue in this sense.

       a.   Make the accounting record on 01 April 2012.

            When we make the accounting record on 01 April 2012, the first 12 principal payments (22,956 TL) will be made within the 12 months. So they are short-term and must be recorded as short-term portion of long-term debt. Short-term portion of long-term debt is the first 12 principal payments of a long-term bank loan. Be careful, it is the first 12 principal payments, not the first 12 payments. As you remember, amount of the payments include both interest and principal. Other principal payments will be made after 12 months. So they are long-term and must be recorded as bank loans (LT). Accounting record:

 

     

Debit

Credit

Bank accounts

80,000

 

  Short-term portion of long-term debt

 

22,956

  Bank loans (LT)

 

57,044

 

      b.   Make the accounting record when the first payment is made.

 

                 

Detail

Debit

Credit

780 Finance expenses

 

960

 

   - Interest expenses 960    

Short-term portion of long-term debt

 

1,790

 

  Bank Accounts

 

 

2,750

 

      960 TL of interest is debited as finance expenses. Principal payment (1,790 TL) is deducted from short-term portion of long-term debt with a debit record. The firm paid 2,750 TL (interest + principal). This amount is deducted from the bank accounts with a credit record.

       c.   Make the accounting record on 31 December 2012.

             31 December is also a payment date. 781 TL interest and 1,769 TL principal paid on 31 December. On 31 December 2012, short-term becomes the period 31 December 2012-31 December 2013. Principal payments in this period are short-term. Principal payments that will be made in this period that are not included in short-term portion of long-term debt must be transferred from bank loans (LT) to short-term portion of long-term debt. 19,507 TL must be transferred to short-term portion of long-term debt. Accounting record:

 

                 

Detail

Debit

Credit

7870 Finance expenses

 

781

 

   - Interest expenses 781    

Short-term portion of long-term debt

 

1,769

 

   Bank Accounts

 

 

2,750

Bank loans (LT)

 

19,507

 

  Short-term portion of long-term debt

 

 

19,507

             As you see from the accounting record, 19,507 TL is deducted from bank loans (LT) with a debit record and added to short-term portion of long-term debt with a credit record.

 Example-2

      A firm takes out a loan amounting 7,000,000 TL on 20 April 2012. The money is transferred to the firm’s bank account. Maturity is five years, interest is 16 %. The loan will be paid in six-month installments. Amount of six-month payment is 1,043,206 TL.

       First we will prepare a repayment table like the one in the previous example. Since payments are made ever six-month and the maturity is five years, there are 10 payments.

 Repayment table

No

Beginning balance

Payment

Interest

Principal

Ending balance

1

7,000,000

1,043,206

560,000

483,206

6,516,794

2

6,516,794

1,043,206

521,344

521,862

5,994,932

3

5,994,932

1,043,206

479,595

563,611

5,431,320

4

5,431,320

1,043,206

434,506

608,700

4,822,620

5

4,822,620

1,043,206

385,810

657,396

4,165,223

6

4,165,223

1,043,206

333,218

709,988

3,455,235

7

3,455,235

1,043,206

276,419

766,787

2,688,448

8

2,688,448

1,043,206

215,076

828,130

1,860,318

9

1,860,318

1,043,206

148,825

894,381

965,937

10

965,937

1,043,206

77,275

965,931

6

                       6 balance is because of rounding the decimals.

            The logic of preparing the table is the same as in the previous example. Calculations for the first payment:

       Interest = 7,000,000 * 0.08 = 560 TL. (since the payments are made every six-moth, the interest must be six-month interest that is half of the annual interest; 0.16/2 = 0.08)

      Principal = 1,043,206 – 560,000 = 483,206 TL.

      Ending balance = 7,000,000 – 483,206 = 6,516,794 TL.

 6,516,794 TL is the beginning balance of the second payment. Calculations continue in this sense.

       a.   Make the accounting record on 20 April 2012.

             The first two principal payments are made in 12 months because the payments are made every six-month. Amount of the first two principal payments (483,206 + 521,862) 1,005,068 TL are recorded as short-term portion of long-term debt, the remaining amount (7,000,000 - 1,005,068 = 5,994,932 TL) is recorded as bank loans (LT). Accounting record:

 

     

Debit

Credit

Bank accounts

7,000,000

 

  Short-term portion of long-term debt

 

1,005,068

  Bank loans (LT)

 

5,994,932

 

b.   Make the accounting record when the first payment is made.

       The first payment is made on 20 October 2012. The interest belongs to the period 20 April 2012-20 October 2012. All the interest belongs to 2012. Accounting record:

 

                 

Detail

Debit

Credit

780 Finance expenses

 

560,000

 

   - Interest expenses 560,000    

Short-term portion of long-term debt

 

483,206

 

  Bank Accounts

 

 

1,043,206

 

c.   Make the adjusting entry on 31 December 2012 (71 days passed until 31 December)

       31 December 2012 is not a payment date. The second payment will be made on 20 April 2013. But on 31 December 2012, 2012 accounting period ends. The interest belonging to 2012 accounting period (interest belonging to 20 October-31 December 2012) must be accrued. Also the principal payments that will be made until 31 December 2013 must be transferred to short-term portion of long-term debt. There is only one principal payment that becomes short-term (563,611 TL).

       Interest = 6,516,794 * 0.08 * 71/182 = 203,381 TL (six-month is 182 days. Notice that we used the beginning balance for the second payment) accounting record:

 

                 

Detail

Debit

Credit

780 Finance expenses

 

203,381

 

   - Finance expenses 203,381    

   Accrued expenses

 

 

203,381

Bank loans (LT)

 

563,611

 

  Short-term portion of long-term debt

 

 

563,611

 

      d.   Make the accounting record when the second payment is made.

             The interest belonging to 20 October 2012-20 April 2013 is 521,344 TL. The portion (203,381) belonging to 2012 was recorded on 31 December 2012. The portion belonging to 2013 is 521,344-203,381 = 318,481 TL. Accounting record:

 

                 

Detail

Debit

Credit

780 Finance expenses

 

318,481

 

   - Interest expenses 318,481    

Accrued expenses

 

203,381

 

Short-term portion of long-term debt

 

521,861

 

  Bank Accounts

 

 

1,043,206

 

5.      Shareholders’ Equity

 

      Shareholders’ equity is the last subject we will study. First component of shareholders’ equity is capital. As you remember capital is the amount that the owners invested as cash or in-kind.

      There are two types of corporations, which are publicly held corporations and privately held corporations. Publicly held corporations are the corporations whose shares are offered to public. In other words, a publicly held corporation is a corporation whose shares are traded in an organized exchange. If a corporation’s shares are not traded in an organized exchange it is called privately held corporation.

       There are three types of value for a share of a publicly held corporation. These are:

      Nominal value: Value used to record the capital (1 Kr or 1 TL)

      Issue price: The price that the shares are offered to public

      Market value: The trading value in the exchange

 

Example-1

       A publicly held corporation increased its capital by 20,000,000 TL and offered the shares representing the increased capital to public. Nominal value is 1 TL, issue price is 3 TL. Make the accounting record.

       Since the nominal value is 1 TL, the corporation issued 20,000,000 shares. Accounting record:

 

                 

Debit

Credit

Bank accounts

60,000,000

 

   Capital

 

20,000,000

   Additional paid-in capital

 

40,000,000

       The firm received (20,000,000 * 3) 60,000,000 TL. Nominal value of the shares is recorded as capital. The difference is recorded as additional paid-in capital.

       The second important subject for all businesses is what to do with the net period income. A portion of the net period income is transferred to the reserves. The portion that is not transferred to the reserves is distributed as dividend.

       There are three types of reserves. They are:

       Legal reserves: Reserves that must be appropriated according to the Turkish Commerce Code.

       Statutory reserves: Reserves that must be appropriated according to the corporate charter.

       Retained earnings: Earnings (a portion of the net period income) that is not distributed according to the decision of the general assembly of the shareholders.

Example-2

       Net period income is 250,000 TL. After first legal reserves and first dividend (capital is 1,000,000 TL), the general assembly of the shareholders decided to distribute 60 % of the remaining income and retain the rest. Make the accounting record. 

      First of all, first legal reserves must be appropriated. First legal reserves are 5 % of the net period income.

      First legal reserves: 250,000 * 0.05 = 12,500 TL.

       Then first dividend must be calculated. First dividend is 5 % of the capital.

       First dividend: 1,000,000 * 0.05 = 50,000 TL.

       First legal reserves and first dividend are compulsory according to the Turkish Commerce Code.

       Remaining income = 250,000 – 12,500 – 50,000 = 187,500 TL.

       Second dividend (general assembly of the shareholders decides) = 187,500 * 0.6 = 112,500 TL.

       If a company distributes second dividend then it must appropriate 10 % of the second dividend as second legal reserves.

       Second legal reserves = 112,500 * 0.1 = 11,250 TL.

       Retained earnings = 187,500 – 112,500 – 11,250 = 63,750 TL.

       Accounting record:

     

                 

Debit

Credit

Net period income

250,000

 

   Legal reserves

     - 1st legal reserves: 12,500

      - 2nd legal reserves: 11,250

 

23,750

   Retained earnings

 

63,750

   Payable to shareholders

 

162,500

 Payable to shareholders is the sum of first and the second dividends (50,000 + 112,500). This amount will be paid to the shareholders.

Glossary

Due: Vadesi gelmek

Owe: Borçlu olmak

Fulfill a liability: Bir yükümlülüü yerine getirmek

Tax witholdings: Vergi kesintileri (örnein çal覺anlar覺n ücretlerinden yap覺lan gelir vergisi kesintisi).

Corporate tax: Kurumlar vergisi (dönem kar覺 üzerinden ödenen vergi)

That will be provided portion by portion: K覺s覺m k覺s覺m sunulacak

Tuitions: Öretim ücreti

Bank loans: Banka kredileri

Lumpsome: Toplu olarak

Pay at once: bir defada ödemek

Pay in installments: Taksitlerle ödemek

Revolving line of credit: Borçlu cari hesap (BCH)

Maturity: Vade

Principal: Ana para

Accrued expenses: Gider tahakkuklar覺

Denominated in foreign currency: Yabanc覺 para cinsinden

Repayment table: Geri ödeme tablosu

Short-term portion of long-term debt: Uzun vadeli kredinin k覺sa vadeli k覺sm覺 (ilk 12 ay içinde ödenecek toplam ana para tutar覺)

Deduct: Eksiltmek

In-kind: Ayni (mal olarak)

Publicly held corporation: Halka aç覺k anonim irket

Privately held corporation: Halka aç覺k olmayan anonim irket

Shares: Hisseler

Organized exchange: Organize borsa (襤MKB gibi)

Nominal value: Nominal deer

Issue price: 襤hraç fiyat覺

Market value: Piyasa deeri

Additional paid-in capital: Ek ödenmi sermaye.

Reserves: Yedekler

Dividend: Kar pay覺 (temettü)

Legal reserves: Yasal yedekler

Appropriate: Ay覺rmak

Turkish Commerce Code: Türk Ticaret Kanunu

Statutory reserves: Statü yedekler

Corporate charter: irket ana sözlemesi

Retained earnings: Da覺t覺lmam覺 karlar

General assembly of the shareholders: Ortaklar genel kurulu

First legal reserves: 1 nci tertip yasal yedekler

Second legal reserves: 2 nci tertip yasal yedekler

First dividend: 1 nci temettü

Second dividend: 2 nci temettü

Compulsory: Zorunlu

Payable to shareholders: Ortaklara borçlar