Long-term liabilities as an accounting objective

Khermovychuk Alla Sergiyvna
student of the 4th year of economics faculty
National University “Ostroh Academy”
Scientific supervisor : Kharchuk Yuliya Yurievna
associate professor of finance, accounting and audit department

Long-term liabilities as an accounting objective

Annotation : The article deals with theoretical and practical aspects of accounting of long-term obligations. The relationship and influence on the financial condition of the enterprise are analyzed. Dependence of the financial condition of the enterprise on long-term obligations is determined.

       Key words: long-term liabilities, financial condition, resources, borrowed capital.

       Problem statement: Modern economic conditions generate an objective need of taking loans by entrepreneurs in addition to their own capital. This in the end leads to the formation of obligations. However, the presence of the latter in the enterprise is considered as a normal state since that is the basis of the relationship between economic entities. Commitments have a significant impact on the financial stability and solvency of enterprises, and therefore  the actual state of payments and cash flow management needs to be effectively monitored. The clear methodology and organization of accounting and auditing of commitments give an opportunity for obtaining objective information for debt management in order to make managerial decisions about the activities of the enterprise and maintain their financial stability and solvency at a high level.

       Analysis of recent researches and publications: The main aspects of the organization of accounting of long-term obligations and facilities, namely the question of essence, recognition, evaluation and classification were reflected in scientific works: F.F. Butynets, S.F. Holova, IV Orlov, V.F. Paliy, Y.V. Sokolov and other scholars. However, the problems of accounting of long-term liabilities and provisions require further research.

       The purpose of the study is to identify ways to improve the accounting of long-term commitments and facilities at the enterprise on the basis of studying the theoretical and practical aspects of the problem.      

       Description of the main material: Functioning companies always have a lower or greater share of loan capital in their liabilities because their own is not enough to expand the scale of production. Involved in the turnover capital is called commitment. It is believed that the presence of obligations on the enterprise is a normal state and indicates the full employment of the enterprise.

The notion of commitment had a long and complex evolution. Up to date there is no consensus on the definition of “commitment”. In general, this concept is treated as a debt, as a borrowed capital, as a sum of costs, as an indebtedness.

The most successful theory of obligations was substantiated by Renee Savage. In his studies, the scientist deduces a general definition of accounting: “Accounting is mainly reflection of the dynamics of requirements and obligations.” Saying that the requirements are reflected in the asset, the liability – in the liability of the balance sheet, and the ratio of requirements and obligations is determined by the economic stability of the enterprise. The scientist also noted that the obligations arising from the contracts are not fully reflected [1].

Liabilities are recognized as debts to creditors in the following circumstances:

– the obligation is reflected in the present time and they are a consequence of past facts of economic life (received supplies, services, damages for which the company bears the responsibility);

– the enterprise recognizes the need for future payments to creditors to further maintain economic relations with them in accordance with the normal course of business activity;

– the obligation must be fulfilled indisputable, but future payments are in question because the company may have difficulties with payments;

– the terms of fulfillment of obligations can be determined, but the exact date is unknown;

– the entity against which the debt arose must be identified as a person or group of persons, although at the time of the obligation registration the entity could not be identified. In passive balance liabilities are divided into long-term and current ones. Long-term are defined as non-current, and current liabilities must be settled during the operating cycle or within twelve months from the balance date [6].

Objects of obligations – this is where rights and obligations of subjects are directed to. So the creditor is entitled to demand from the debtor certain actions. The debtor is obliged to make a certain action in favor of the creditor: to transfer the property, to perform work, to provide services. Any action of the debtor is due to one of the requirements of the creditor: give, provide or make [4].

According to NP (C) BO 1 “General requirements for financial reporting”, an obligation is the debt of an enterprise that arose as a result of past events and the future repayment of which is expected to lead to a decrease in the resources of an enterprise that embody economic benefits [3].

Long-term liabilities are a source of financing for long-term projects of an enterprise. Commitments of the company play an important role in its business activities.

Almost every major manufacturing enterprise has a commitment that is longer than one year.

There are accounts of the 5th form “Long-term liabilities” provided for accounting long-term liabilities. The accounts of this class summarize the information about the bank’s debt to banks for loans received from them, which is not a current liability (an indebtedness that cannot be repaid during the operating cycle of the enterprise or within twelve months from the balance sheet date); debt of the enterprise in relation to obligations with the attraction of borrowed funds (except for bank loans), which are accrued interest; the amount of income tax payable in future periods due to the temporary difference between the accounting and tax bases of evaluation; debt on issued long-term promissory notes and distributed bonds [6].

Correct reflection in accounting of long-term obligations of an enterprise allows to reliably estimate the financial condition of the enterprise, to determine its stability and independence. Automated accounting systems make it possible to carry out a quick and accurate accounting of the obligations of the enterprise, allows it to handle data processing easily and manage the migration of documents.

Automation of accounting affects the financial results of the enterprise. In particular, P. Pichugin highlights the following factors among the factors that would improve the quality of automation of the accounting process and, consequently, financial results:

  •        Arranging of accounting. Computer technology makes it possible to make certain arrangements in the system of accounting information, significantly accelerates its processing and improves the quality of input and output information [6, p. 25].

  •        Increase the amount of information received from the accounting. Automated processing of accounting information allows you to obtain detailed information about the status of assets and liabilities of the enterprise.

  •        Reducing the number of accounting errors. It is the computerized process of processing the accounting information to avoid most arithmetic errors, which manual method of data processing can have a subjective character and lead to negative consequences in the work of the enterprise. Thus, calculating the financial result for an automated form of accounting is purely a mechanical operation. An accountant does not form any postings or records [5, p. 436]. It only has the functions of the controller of the correctness of operations done by machine.

Accounting automation will make easier the work of the accountant, reduce the risk of error and lead to time and cost savings.

Enterprises are obliged to pay on time for their obligations. For untimely calculations they must pay fines and penalties. However, practice shows that the ability to avoid property liability for non-fulfillment of contractual obligations allows them to evade mutual settlements with their partners. Lack of payment causes financial complications from creditors, negatively affects their economic activity, and, ultimately, the economy of the country.

A compulsory financing strategy is a prerequisite for the effective management of funding sources. However, there are conditions that do not depend on an enterprise. For example, only the development of the financial market will help to obtain credit and the availability of financial information and a favorable investment climate to attract investors. There are always money and the ability to take loans for the long terms in any bank. But the problem is that we live in a rapidly changing, volatile world where for the economy three or four years is a very long period. Bankers are already experiencing a growing need for long-term financing in Ukraine. Over the last three years businesses increasingly invest in fixed assets as business is growing and “courageous.” If in the world practice “long” loans are considered for a term from 5 to 10-15 years and 30 years, however for us these are the loans that last longer than a year. Although five-year loans still occur, a loan for three years is already sufficiently “tense” for domestic bankers and their clients. However, the share of such money in the total loan portfolio of Ukrainian banks is 25% [5].

One of the problems of domestic enterprises is the insufficient amount of capital sources to finance the business entity and low level of individual indicators of financial condition. Currently for the overwhelming majority of enterprises the urgent matter is the optimization of the structure of capital the main criteria of which is to maximize the level of predicted profitability and minimize the cost of commitments [2].

Among some problems concerning the accounting of long-term liabilities the most common need is the need for detailed accounts, meaning the creation of additional accounts in more rational analytical accounting. In world practice there are examples of different variants of names and appointments of similar accounts.

Thus, in addition to long-term loans and commitments, also belong long-term lease and lease obligations which have a different name: Long-term liabilities (Estonia, Republic of Tajikistan, Slovak Republic); Settlements for long-term loans and loans (Russia, Belarus); Long-term loans, loans (Israel); Long-term accrued liabilities (Republic of Moldova); Long-term loans (Ukraine, Great Britain, Moldova, Azerbaijan Republic); Long-term loans received (Bulgaria); Long-term debt (Czech Republic); Long-term legal obligations (Azerbaijan Republic) [8].

In our opinion, the experience of France in developing the Accounting Plan is interesting because Class 1 of “Capital Accounts” are shown long-term and medium-term debt, in addition, this type of commitment is taken into account as medium-term. Also noteworthy is the experience of Estonia and the Republics of Azerbaijan and Kazakhstan, where long-term accounts are taken into account: long-term debts to suppliers (Estonia); long-term payables to suppliers and contractors (Azerbaijan, Kazakhstan). In addition to the long-term accounting accounts used in many countries, there are countries with non-repeatable long-term accounts, for example: Postpaid payments in the next period for long-term debt claims; Discount of non-converted long-term debt receipts; Long-term debts incurred in the acquisition of enterprises, and others [8]. Consequently, we suggest taking into account the foreign experience in improving the domestic accounting of long-term liabilities in terms of information on: long-term debt of related and unrelated parties; long-term future income; long-term debts to suppliers and contractors; convertible and non-converted liabilities; long-term debt of participants; long-term commitment to the company’s social goals. The financial status of the enterprise is largely influenced by the presence and structure of its obligations. Effective management of it is one of the important directions of activity of the enterprise. Thus, we can make the following conclusions:

– Borrowed resources are an important and complex subject of accounting. Disclosure of their essence in the accounting lies in the thorough study of business processes since information about loan resources is scattered and unsystematized in the financial statements.

– Improving the accounting of borrowed resources requires an expansion of the regulatory framework in the field of regulation of financial activity which creates an economic-legal field for attracting new types of financing of the enterprise. In particular, it concerns the issue of debt securities and the provision of financial services.

– solving problems of recognition and assessment of obligations will enable modeling the future financial state of the enterprise and reduce the negative impact of various financial risks on its development.

Conclusions: Correct reflection in the accounting of long-term obligations of an enterprise enables us to reliably assess the financial position of an enterprise, determine its stability and independence, anticipate adverse changes in reporting and financial security risks in a timely manner. The attraction of long-term obligations of the company as sources of financing for its development and improvement of its accounting will lead to positive consequences, as it will allow to increase the capital of the enterprise and its assets, the enterprise will be able to cover the stocks due to its own working capital and long-term sources

List sources

  1. Bogach AG, Melnyk VG Collection of tasks on the theory of accounting: Teaching. manual for the stud special “Accounting and Auditing”. – T .: Economic Thought, 2002. – 188 p.
  2. Garasim P.M. Financial, Managerial and Tax Accounting in Business Associations / Garasim P.M., Zhuravel GP, Khomin P.Ya.Ternopil: Economic Thought, 2003. – 480 pp.
  3. The Law of Ukraine “On Accounting and Financial Reporting in Ukraine”, adopted by the Verkhovna Rada of Ukraine on July 16, 1999 No. 196-14. URL: https://buhgalter.com.ua/zakonodavstvo/buhgalterskiy-oblik/zakon-ukrayini-pro-buhgalterskiy-oblik-ta-finansovu-zvitnist-v-ukrayini/
  4. Instruction on application of the Account of the accounts of assets, capital, liabilities and business operations of enterprises and organizations [Electronic resource]: approved by the order of the Ministry of Finance of Ukraine dated November 30, 1999 No. 291 (with amendments and additions) URL: http: //zakon4.rada.gov.ua/laws/show/z0893-99
  5. Orlov I.V. Accounting and control of obligations: theory and methodology: [monograph] / IV Orlov – Zhytomyr: ZHDTU, 2010. – 400 p.
  6. Pichugin P. 1C: Accounting: available to the accountant: Complete practical. a guide for a modern accountant. – Kharkiv: Factor, 2006. – 45
  7. Regulation (standard) of accounting 11-The obligation, approved by the order of the Ministry of Finance of Ukraine dated January 31, 2000 No. 20.
  8. Sadovskaya IB Accounting: [curriculum vitae] Manual.] / I. B. Sadovska, T. B. Bozhidarnik, K. Ye. Nagirska. – K.: Center for Educational Literature, 2013. – 688 p.

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