China’s Accounting
Brief Introduction on Confusable Financial Concepts
1. Book value, book balance and net book value
Book value means the net amount of an accounting subject (usually an asset account) book balance after deducting the related allowance items.
Book balance means the actual balance of an accounting subject without deducting the allowance items.
Net book value means depreciated value of fixed assets, which is the amount of original value of fixed assets minus the accumulated depreciation but without deducting provision for impairment.
2. Physical inventory and perpetual inventory
Physical inventory means an inventory counting method in which increase or decrease changes in physical property must be on the basis of accounting vouchers, the book balances of inventory can be calculated at any time. In order to reflect the in and out of stock status and the balance of all kinds of physical property, it is required to set up an account with the detailed quantity and amount of the item according to the physical property. Its advantage is to strengthen the management of physical property, but the daily workload is large.
Perpetual inventory means an inventory counting method by which physical property decreases in the current period are determined by physical count at the end of the period with only recording the increase quantity of physical property. The advantage is the daily work can be simplified, the disadvantage is that it can not always reflect the in and out of stock status as well as the balance of inventory, nor is it conducive to strengthen the management of physical property.
3. Accounts receivable and other receivables
Account receivable is to record the credit sales related to main business income, other receivables is to record the transactions irrelevant to the main business.
4. Capital premium and equity premium
Capital premium means that the invested capital exceeds the amount of registered capital during the process of raising funds, it is the extra part that the contribution amount from limited liability company investors exceeds the investment amount calculated on the basis of the contract or agreement.
Equity premium means the amount actually received in excess of the total face value of stock issued by an incorporated company at a premium.
5. Retained earnings and surplus earnings
Retained earnings refer to the internal accumulation extracted or formed from the net profits of enterprises over the years. According to Company Law and Enterprise Accounting System, enterprises distribute after-tax profits in light of article of association, the surplus reserves withdrew remains as internal accumulation as a part of retained earnings, and the remainder after distributing profit or dividend will be kept as undistributed profit for future distribution. This is also a part of retained earnings.
Surplus earnings refer to the difference between accounting profit and capital cost in a certain period, which is above-market return generated by the business. From the perspective of economics, the surplus earnings measure the surplus of the profit generated by the invested capital over the cost of capital.
6. Bank acceptance bill and commercial acceptance bill
Bank acceptance bill means that the bank undertakes guarantees to pay the bill at a due date.
Commercial acceptance bill is a draft singed by the drawer who promises to pay the amount on maturity date.
7. Revenue expenditure and capital expenditure
Revenue expenditure refers to expenditure whose benefit period is less than one year or an operating cycle. This means the expenditure is only for the profit of current period, and it will be fully compensated by the sales revenue of current year.
Capital expenditure refers to expenditure whose benefit period exceeds one year or an operating cycle. This means the expenditure is not only for the profit of current period but also for future profit. Usually it is recorded as asset firstly, then it will be recorded as annual cost through amortization or depreciation.
8. Commercial discount and cash discount
Commercial discount means price deduction offered to the purchaser based on the original price on the commodity price list to promote sales. According to Tax Law, VAT can be paid on the basis of discount sales if sales amount and discount amount stated separately on the same invoice. However, enterprise need to pay full VAT if the discount amount shows separately on another invoice, no matter how the discount be recorded in the accounting books.
Cash discount means a preferential deduction offered by the seller to encourage the purchaser to make early payment when enterprises sell goods or services on credit. Usually cash discount occurs after sales, as a financing expense it shall not be deducted from the sales amount when the output VAT is calculated.
9. Registered capital and paid-up capital
Registered capital is capital raised by the company at the time of establishment, which is stated in the article of association and registered by the company registration authority, it is capital subscribed by the shareholders.
Paid-up capital is the total capital received from shareholders at the time of establishment, it is actually owned by the company. After subscribing to the shares, shareholders can pay the capital in full amount at one time or in instalments, so the paid capital may less than registered capital in a certain period. However, the registered capital and paid-up capital shall ultimately be the same.
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