From our PHC professions feedback, we frequently encounter a common inquiry where company management finds significant discrepancies between their financial statements and actual business performance. For instance, a trading company's annual income statement shows that operating costs exceed operating revenue, leaving management puzzled: Are they losing money on every transaction? Such problems are prevalent in businesses, and over time, management tends to treat financial reports provided by the accounting department as mere formalities, preferring to ask more direct questions like "How much money is in the company's bank account?" or "How many accounts receivable is outstanding?" So, what exactly causes these discrepancies, and how can they be resolved?

Case Study

Let's take a trading company as an example. Annual sales were 1 million yuan, and the actual cost was 800,000 yuan. However, the total amount of cost-related invoices received from suppliers that year was only 300,000 yuan, with the remaining 500,000 yuan in invoices yet to be received, even though the company had already paid the suppliers. Instead of following accounting standards, the accountant recorded transactions based on the actual invoices received and bank transfer records. As a result, the cost recorded was only 300,000 yuan, leading to a miscalculation of the annual operating profit as 1 million yuan minus 300,000 yuan, equaling 700,000 yuan, instead of the actual 200,000 yuan (1 million yuan minus 800,000 yuan).

Solution

From the above case, it's clear that the main reason for the discrepancy between financial statements and actual conditions is that accountants must comply with both China's enterprise accounting standards and tax regulations when recording transactions. However, in practice, accountants tend to prefer using tax reporting standards for bookkeeping and tax declarations, resulting in financial statements that reflect a tax-based financial position. To address this issue, even if the 500,000 yuan in invoices has not been received from suppliers, this amount should still be included in the cost. At the end of the year, active efforts should be made to collect invoices from suppliers. If invoices cannot be obtained, a tax adjustment should be made for the 500,000 yuan. The final taxable income would be 700,000 yuan, but the profit shown on the financial statement would be 200,000 yuan. Once the invoices are obtained in the future, the necessary tax adjustments can be made.

Summary

In practice, the situations we normally encounter are undoubtedly more complex. However, to ensure the accuracy and reference value of a company's financial statements while meeting tax requirements, company accountants must clearly distinguish between received and unreceived invoices when recording transactions. It is essential to avoid the temptation of simply following tax requirements forbookkeeping, as this may simplify the process but will lead to significant distortions in the financial statements, rendering them useless for providing valuable information to management.

At PHC Advisory, we can offer you full support on matters regarding doing business in Italy or Asia or any other issues your business may face. If you would like to know more about policies relevant to your business in Italy or Asia, please contact us at info@phcadvisory.com. 

PHC Advisory is a company of DP Group: an international professional services conglomerate of companies with approximately 100 experienced professionals worldwide. We offer comprehensive services in tax, accounting, and financial consulting, including financial supervision, financial audit, internal audit, internal control over financial reporting, and support for audited financial statements and annual audits, ensuring clients' financial transparency and compliance.

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The content of this article is provided for informational purposes only, financial advice must be tailored to the specific circumstances on a case-by-case basis, and the contents of this article do not legally bind PHC Advisory with the reader in any way.

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