What are financial costs? Definition of
According to the Central Statistical Office, finance costs are expenses related to handling a company’s finances. At a general level, this is a sufficient definition, but the details can be very important. So let’s explore a more specific definition of financial costs.
Financial costs are all expenses that your company incurs in connection with the implementation of financial operations and the use of external capital. An important feature of financial expenses is that they affect the company’s bottom line. The level of these expenses should be examined regularly, as it is one of the key factors in assessing the company’s stability and liquidity. This group will include, among others, interest on loans or leases, interest on late payments (to be paid) or losses incurred on the disposal of financial assets. These are just a few examples – we have included a full list later in the text.
Recognition of financial expenses and income
Wanting to prepare a profit and loss statement, it is necessary to prepare a complete list of financial income and financial expenses.
Financial income – list
Every time your company lends or sells financial assets (such as discount or interest) to others, it records financial income. Here’s a list of revenue categories:
- amounts due from dividends,
- updating the value of investments,
- Interest on purchased bonds,
- Interest on term deposits,
- interest on loans granted,
- Default interest (paid by creditors),
- Budgetary interest (refunds received),
- income from the sale of financial assets,
- Discounting (on raised bills of exchange and foreign checks),
- copies,
- exchange rate surpluses,
- profits from the sale of stocks, shares, securities (if it was issued by other entities).
Financial costs – list
When your company pays a fee to another entity in exchange for a loan or other service that results in a financial liability, there is a financial cost. Here is a list of cost categories:
- Interest – on loans, credits, leases, bonds,
- Interest on late payment of liabilities,
- Commissions – factoring, lending, credit,
- Bank fees – especially those resulting from debt service,
- Interest rates on loans and credits,
- negative exchange rate differences,
- costs of valuation of foreign currency liabilities,
- losses on financial assets held,
- Impairment losses on receivables from financial operations,
- Discounts (resulting from the sale of checks, bills of exchange and securities).
If you want to know more about commissions and other factoring costs, read our guide!
Remember that provisions secured for the settlement of financial liabilities can also be taken into account as financial expenses, as can losses incurred due to the liquidation of subsidiaries.
What is not a financial cost?
As important as it is to determine what is a financial expense, it is equally important to make sure that not every expense your company incurs, falls into this category. What will not be booked as a financial expense?
- Penalties – those resulting from failing to meet contractual terms, failing to comply with regulations or committing fiscal offenses – are not a financial cost to the company.
- Fines – if your company commits a misdemeanor or fiscal offense, or violates antitrust and consumer protection laws, a fine may be imposed on it. However, fines are not included in the records as financial expenses.
- Tax arrears – specifically, interest arising from them – are also not a financial expense.
To what account do you post financial expenses?
Financial expenses are a separate group from operating expenses and other operating expenses. They are accounted for in Compound 7 – Revenue, income and expenses, in account 751. It is worth noting here that account 750 belongs to financial income.
The face of account 751 is used to record all types of financial expenses, but it is worth remembering that accrued interest on loans and interest on late payment of liabilities should be separated within it.
With the end of the fiscal year, the recorded costs of financial operations should be transferred to the Wn side of account 860 (used to determine the financial result of the entity). This means that at the end of the year the account 751 should remain empty (show no balance).
Recording and accounting for financial expenses over time
Art. 39(1) of the Accounting Law states that entities make prepaid expenses if they relate to future reporting periods. Paragraph 4 of the same article is also particularly relevant in the context of this publication.
According to its content, if the value of the financial assets received is less than the liability to pay for them, including securities issued by the entity, the difference is a prepaid expense, which is written off as a financial expense in equal installments over the period for which the liability was incurred.
This accounts for, among other things, the cost of commissions on the debt incurred, which were deducted in advance, as well as the interest due on the amounts granted, which were collected in advance for the entire term of the loan.
Important!
The settlement of financial expenses over time should be recognized in account 651 – Other accruals, and then written off to account 75 – in installments, as mentioned in Article 39, paragraph 1 of the Accounting Law.
Example:
Mr. Richard’s company received a bank loan in the amount of PLN 95,000. Thus, the receipt of funds from the said loan into the company’s bank account was posted to the Wn. 130 account (Current account) and the Ma. 134 account (Bank loans).
The bank deducted the commission in advance, which means that the cost of this commission will be accrued over time and recognized in the Wn account 651 (Other accruals) and in the Ma account 134 (Bank loans).
The cost of commissions will be written off over time to the Wn account 751 (Financial expenses) and the Ma account 651 (Other accruals).
Summary
The issue of financial costs and revenues concerns any entrepreneur who conducts financial operations – especially when using financial products and foreign capital. In order to fulfill your obligations to account for financial expenses, be sure to recognize them in the appropriate accounts and refer to Articles 39 and 43 of the Accounting Law.
It’s also worth remembering that financial income and expenses generally have little effect on creating a company’s profit, and one does not follow from the other – depending on the situation, your company can record both high and low financial income and expenses. This does not necessarily mean financial trouble. Nevertheless, the level of costs should be monitored regularly.
