More and less bill
The more and less calculation (MWR) is a procedure to determine and present the effects on profit of changes to balance sheet items across periods. It is generally used to transfer a commercial balance sheet to a tax balance sheet and to evaluate the results in the context of a tax audit by the tax office .
There is the profit and loss method (income statement method) and the balance sheet item method .
While the P&L method examines the effects of a change in the balance sheet item on the income accounts, the balance sheet item method looks at the effects on the G / L accounts ( inventory accounts ). Due to the principle of double-entry bookkeeping, both methods always lead to the same result, so both methods can be used to test each other.
Profit and Loss Method
Booking incidents that influence the profit always address a profit account , which is concluded via the income statement account. Accordingly, this method examines which profit and loss accounts are affected by a change in the balance sheet. The advantage of this method is that there are no secondary effects to consider. In addition, many people find it easier to determine the impact of profit based on the affected profit accounts.
Example 1: In the trade balance, a provision for potential losses of 1 million is made in the first year . The provision is left unchanged in the second year. The dissolution takes place in the third year, since an impending loss is no longer to be expected. The creation of a real provision for potential losses is not permitted under tax law. Preliminary consideration: Posting in the trade balance in 01: effort on Provision 1 million Posting in the trade balance in 03: Provision on Yield 1 million Solution: - In the first year, the expense in the tax balance should have been zero instead of 1 million - Less effort equals more profit (1 million) - In the second year neither expenses nor income in the balance sheet (P&L accounts) - In the second year, no tax expense or income should have been posted - No change, no effect on profit in the income statement method (1 million) - In the third year, no income should have been posted in the tax balance sheet - Less income, less profit (1 million) Episode: For tax purposes, the profit must be increased by 1 million in the first year. In the second year there are no changes compared to to make the commercial balance sheet profit. For the third year, the commercial balance sheet profit is to be reduced by 1 million for tax purposes.
In general, the following procedure is recommended for the income statement method:
- Determine what has been booked? Which accounts were addressed?
- How should the booking have been correct? Which accounts should have been addressed?
- What is the profit impact?
It should be noted that (as already mentioned) in the P&L method only the profit accounts (i.e. expense and income accounts) are considered.
Example 2: A company is demanding 1 million from the taxpayer because of a patent infringement. The taxpayer has recognized the claim against him, but has not yet paid it on the balance sheet date (December 31). The accountant mistakenly assumed there was going to be a lawsuit and so posted a provision. However, since the taxpayer has remorsefully promised to pay, there is more certainty about the liability, so that the liability must be shown in the balance sheet instead of the provision. wrong posting record: Expenses from the creation of provisions on Provision for litigation risks 1 million correct booking rate: Extraordinary expenses on liabilities 1 million Solution: Overall, no success account is affected, and accordingly there is no effect on profit. Example 3: The taxpayer bought a patent for 1.5 million. He thinks that he can book everything he pays as an expense. Correctly, however, he should have activated the patent. wrong posting record: effort on Bank 1.5 million correct booking rate: patent on Bank 1.5 million Solution: Only one success account is affected, namely the expense account. 1.5 million have been booked on this. Correctly nothing should have been booked there. Less effort means more profit. The change leads to a profit increase of 1.5 million. The other accounts remain completely empty.
The following principles can finally be listed for the income statement method:
incident meaning Profit impact Income account is reduced less yield less profit Income account is increased more yield more profit Expense account is reduced less effort more profit Expense account is increased extra effort less profit No success account is affected Cost / income constant no profit impact
Balance sheet item method
Derivation
The balance sheet item method is based on the profit definition of Section 4 of the Income Tax Act. Thereafter, the profit is the difference between the business assets at the end and the beginning of a financial year. Business assets, in turn, are the difference between active balance sheet items and passive balance sheet items. The following formula can therefore be derived:
Profit in the first year = (assets 12/31/2001 - liabilities 12/31/2001) - (assets 12/31/2000 - 12/31/2000 liabilities)
Due to the context of the balance sheet, the balance sheet of 31.12. identical to the balance sheet on 1.1. of the following year. The following profit definition would result for 02
Second year profit = (assets 12/31/2002 - liabilities 12/31/2002) - (assets 12/31/2001 - 12/31/2001 liabilities)
In the event of changes, the respective balance sheet as of December 31 is always considered.
Example as for the income statement method
- The provision is 1 million too high in the first year
This can be inserted into the formulas as follows:
Profit in the first year = (assets 12/31/2001 - (liabilities 12/31/2001 - 1 million)) - (assets 12/31/2000 - liabilities 12/31/2000)
Since the balance sheet in the first year is the starting value for accounting in the second year and the provision may not appear in the commercial balance sheet but not in the tax balance sheet at the end of the second year, the following formula results for the second year:
Profit in the second year = (assets 12/31/2002 - liabilities 12/31/2002 - 1 million) - (assets 12/31/2001 - liabilities 12/31/2000 - 1 million)
At the end of the third year there is neither a provision in the trade balance nor should there be any in the tax balance sheet.
Third year profit = (assets 12/31/2003 - liabilities 12/31/2003) - (assets 12/31/2002 - liabilities 12/31/2002 - 1 million)
The following formulas result in simplified form:
First year: profit in the first year = (business assets 12/31/2001 + 1 million) - business assets 12/31/2000
Result: profit in the first year + 1 million
Second year: Profit in the second year = (business assets 12/31/2002 + 1 million) - (business assets 12/31/2001 + 1 million)
Result: profit in the second year no change
Third year: Profit in the third year = business assets 12/31/2003 - (business assets 12/31/2002 + 1 million)
Consequence: profit in the third year - 1 million
Based on these formulas, essential assumptions and basic statements for the balance sheet item method can be derived.
General Principles
As of the balance sheet date, a comparison must be made between the actual and target values. The changes then have the following effects on profits:
- Increasing an asset = more profit
- Increase in a liability item = less profit
- Reduction of an asset = less profit
- Reduction of a liability item = more profit
In addition, the following statement can be made:
Every change to a balance sheet item results in exactly the opposite change in the following year due to the balance sheet context. The sum of all changes in a year then gives the total change in profit.
