In the previous part, we mentioned the links between the individual accounting reports, and in today’s continuation, we will go through the context within the individual areas of account keeping itself.

Selected links in the accounting (logical correlations in the ledger/trial balance

The most frequent links recorded in the accounting will be described below. Within the description, account numbers or account groups are used according to established practice and which are part of the applicable chart of accounts under Czech accounting regulations. 


A) Non-current tangible and intangible assets

When accounting for non-current assets, there are four logical links that need to be verified and any differences explained/documented. These are the following links:

1. Additions to assets

• The sum of the turnover of the credit side of the 04x accounts must equal the sum of the turnover of the debit side of the 01x, 02x and 03x accounts.

Description of the link - this link gives us the mutual relationships in the classification of assets. If we place asset in use, we debit it to the asset accounts and credit the acquisition accounts 04x (accumulated 'acquisition' costs related to the investment). Differences may arise, for example, if the company does not account for all additions to non-current assets using the 04x accounts or if, on further review, there is a derecognition from 04x to costs because it was in fact an acquisition of a minor asset or a repair/maintenance cost. Other reasons for differences may be: cancelled investments derecognized into costs from 04x, subsidies received for the acquisition of assets, internal transfer between the different analytical accounts of 04x on grounds of transfers between investment actions or the introduction of new analytical accounts 01x, 02x and 03x.  

2. Disposal of assets

• The sum of the turnover of the debit side of accounts 07x, 08x must equal the sum of the credit turnover of accounts 01x, 02x and 03x.

Description of the link - assets are disposed of at acquisition cost, i.e. credited to the asset account and debited to the related depreciation reserves account. If these totals do not match, it is an indicator of erroneous or incorrect accounting. The reason for the difference may, among other things, be reversed accounting with a minus sign (-), omission of the actual accounting entry of the asset disposal, or different accounting software settings for asset disposal cases (e.g. SAP).

3. Depreciations

• The sum of the turnovers of the debit side of the 551 accounts (or 541, 543, 549 depending on the nature of the asset disposal) must equal the sum of the credit turnovers in the 07x and 08x accounts.

Description of the link - depreciation is derecognized into costs in account 551 against the depreciation reserves accounts for the relevant components of non-current assets (groups 07 and 08). Therefore, the final balance of the depreciation account in the profit and loss account is equal to the sum of the turnover of the credit side of the 07x and 08x accounts in the balance sheet.

An exception may arise if we have disposed of assets that have not yet been fully depreciated and that have not been disposed of at the same time. The residual value of the asset is charged, same as depreciation, to the credit side of Group 07 or 08 against the relevant cost accounts, depending on the nature of the disposal (e.g. 541 sale, 549 shortfall and damage, 543 gift). These cases must therefore also be reflected when verifying the above link.

4. Allowances for non-current assets

• The closing balance of the income statement non-current asset allowance account (analytical account 55x) must equal the change in the non-current asset allowance accounts 09x reported on the balance sheet.

Description of the link - in accounting for the allowances for non-current assets, we record the change in the allowance on the balance sheet against the related analytical cost account 55x. This link indicates how the amount of the allowance has changed during the accounting period and therefore the closing balance in the income statement must be equal to the difference in the turnover of the balance sheet accounts 09x. If this is not the case, it is necessary to trace where the incorrect accounting occurred. The reason for the difference may be, for example, an entry in the wrong analytical account 55x, or posting on the opposite side with a negative sign.


B) Inventory

Another area of accounting, where we may encounter logical links in accounting and subsequent control, is inventory. More specifically, we will take a closer look at the links in accounting for inventory purchases, inventory allowances and links within inventories from own operations.

1. Inventory stocking

• The sum of the turnover of the credit side of the 111,131 accounts must equal the sum of the turnover of the debit side of the 112 and 132 accounts respectively.

Description of the link - this link gives us the relationship in the acquisition and stocking of inventory, specifically materials and goods. What has been received has also been stocked. Inaccuracies in this link may arise, for example, if the goods have been devalued prior to stocking and have been derecognized from account 111 (131) directly to costs, or by entering to debit account 112 (132) due to detected inventory differences (surpluses) or a change in warehouse location.  

2. Inventory allowances

• The closing balance of the inventory allowance account (analytical account 55x) needs to equal the change in the inventory allowance accounts 19x shown on the balance sheet.

Description of the link - in accounting for inventory allowances, we record the change in the balance sheet allowance against the related analytical costs account 55x. This link indicates how the amount of the provision has changed during the accounting period, and therefore the closing balance in the income statement must be equal to the difference in the turnover of the 19x balance sheet accounts. If this is not the case, it is necessary to trace where the incorrect accounting occurred. The reason for the difference may be, for example, an entry in the wrong analytical account 55x, or the already repeatedly mentioned posting to the wrong side with the opposite sign.

3. Inventories of own activities

• The closing balance of the profit and loss account Change in inventories from own operations (58x) must be equal to the difference between the turnover of the debit and credit accounts 12x (or the difference between the closing and opening balances of the 12x accounts)

Description of the link - during the accounting period, additions to inventories from own activities are debited to the accounts of account group 12 with a corresponding entry to the accounts of account group 58. When stocks of own production are removed, opposite entries are used. This logical link therefore clearly gives us equality in the turnover of the respective accounts. If the above equality does not hold, we have an error or incorrectness in the accounting. The reason for the difference may be, for example, inventory shortfalls above the standard (losses within the natural wastage standards are accounted for through the 12x and 58x accounts).

C) Allowances for receivables

When accounting for receivables, we find a control logical link, specifically when accounting for allowances for receivables. Again, similar rules apply as for allowances for non-current assets or inventories.

• The final balance of the result accounts for provisions for receivables (analytical accounts 55x) must be equal to the difference between the turnover of the debit and credit accounts 39x reported in the balance sheet.

Description of the link - when accounting for allowances for receivables, we record a new allowance (or an increase in the originally recorded allowance) on the credit side of the 39x accounts at the same time as the 55x costs account on the debit side (conversely, we record a decrease in the allowance for receivables in the reverse entry). This link indicates how the amount of the allowance has changed during the accounting period, and therefore the final balance of the costs accounts shown in the economic income statement must be equal to the difference in the turnover of the accounts in the balance sheet. If this is not the case, it is necessary to trace where the incorrect accounting occurred. The reason for the difference may be, for example, an entry in the wrong analytical account 55x or incorrect use of another cost account.

D) Reserves

There is also a logical link in the accounting for reserves, which we present below.

• The final balance of the analytical costs account Change in reserves 55x must be equal to the difference between the turnover of the debit and credit accounts 45x reported on the balance sheet.

Description of the link - when accounting for a new provision, or an increase in an already recorded provision, we credit the 45x accounts against the 55x costs account. Conversely, we account for a decrease in reserves by a reverse entry. This link indicates how the amount of the provision has changed during the financial year and therefore the change in the provision in the income statement must be equal to the differences in turnover reported in the balance sheet. If this is not the case, it is necessary to trace where the incorrect accounting occurred.

A few words in conclusion ...

Logical links not only serve to verify correlations in the context of bookkeeping, but can also be a useful aid in the preparation of corporate income tax returns, since, for example, turnover in debit 55x accounts relating to accounting provisions or reserves should be part of items increasing the tax base (these are non-tax costs) and, conversely, turnover in credit 55x accounts should be part of items reducing the tax base. Therefore, if the entity is accounting correctly, it has information directly from the trial balance about what items should be excluded from tax costs and vice versa.

The accuracy of recording the creation or reversal of provisions, reserves, depreciation, etc. therefore affects several areas. Each entity should, at a minimum, verify the above logical links (whether at the level of financial reporting or accounting itself) on an ongoing basis, because any differences may affect the compiled financial statements, and therefore one of the fundamental principles of accounting, i.e. the maintenance of a true and fair presentation of the subject matter of the accounts and the financial position of the entity, may not be observed.