2.2 Define, Explain, and Provide Examples of Current and Noncurrent Assets, Current and Noncurrent Liabilities, Equity, Revenues, and Expenses

Assets (Actif)

Assets are resources owned by a business that have economic value and are expected to provide future benefits.

Key Characteristics:

• Owned or controlled by the business
• Have economic value
• Result from past transactions
• Expected to provide future benefits

Assets are classified as either current or noncurrent based on how quickly they can be converted to cash or used up.

Current Assets (Actif Circulant)

Current assets are assets expected to be converted to cash, sold, or used up within one year or the operating cycle (whichever is longer).

Examples:

• Cash (Liquidités): Money in bank accounts and on hand
• Accounts Receivable (Créances Clients): Money owed by customers
• Inventory (Stocks): Goods held for sale or materials for production
• Prepaid Expenses (Charges Constatées d'Avance): Expenses paid in advance (insurance, rent)

PCN Accounts: Class 3 (Inventory), Class 4 (Receivables), Class 5 (Cash)

Example: Marie's restaurant has:

• €5,000 in the bank (Current Asset - Cash)
• €500 owed by customers who dined on credit (Current Asset - Accounts Receivable)
• €2,000 in food inventory (Current Asset - Inventory)

Noncurrent Assets (Immobilisations)

Noncurrent assets (also called fixed assets) are long-term assets not expected to be converted to cash within one year.

Examples:

• Property, Plant, and Equipment (Immobilisations Corporelles): Buildings, machinery, vehicles, furniture
• Intangible Assets (Immobilisations Incorporelles): Patents, trademarks, goodwill, software
• Long-Term Investments (Immobilisations Financières): Investments in other companies, long-term loans to others

PCN Accounts: Class 2 (Fixed Assets)

Example: Marie's restaurant has:

• €15,000 in kitchen equipment (Noncurrent Asset - Equipment)
• €50,000 building (if owned) (Noncurrent Asset - Property)

Liabilities (Passif)

Liabilities are obligations owed by a business to creditors or other parties.

Key Characteristics:

• Result from past transactions
• Require future payment or service
• Cannot be avoided

Liabilities are classified as either current or noncurrent based on when they must be paid.

Current Liabilities (Passif Circulant)

Current liabilities are obligations due within one year or the operating cycle.

Examples:

• Accounts Payable (Dettes Fournisseurs): Money owed to suppliers
• Short-Term Loans (Emprunts à Court Terme): Loans due within one year
• Accrued Expenses (Charges à Payer): Expenses incurred but not yet paid (salaries, utilities)
• VAT Payable (TVA à Payer): VAT collected but not yet paid to tax authorities
• Social Charges Payable (Charges Sociales à Payer): Employee social security contributions due

PCN Accounts: Class 4 (Third-Party Accounts)

Example: Marie's restaurant has:

• €8,000 owed to food suppliers (Current Liability - Accounts Payable)
• €1,500 VAT payable to tax authorities (Current Liability - VAT Payable)

Noncurrent Liabilities (Passif Non Circulant)

Noncurrent liabilities are long-term obligations due after one year.

Examples:

• Long-Term Loans (Emprunts à Long Terme): Bank loans, mortgages due after one year
• Bonds Payable (Obligations): Long-term debt securities
• Deferred Tax Liabilities (Impôts Différés): Future tax obligations

PCN Accounts: Class 1 (Financial Debts)

Example: Marie's restaurant has:

• €20,000 bank loan for equipment, with €18,000 due after one year (Noncurrent Liability - Long-Term Loan)

Equity (Capitaux Propres)

Equity represents the owner's interest in the business. It's the residual interest after liabilities are subtracted from assets.

The Accounting Equation: Assets - Liabilities = Equity

Components of Equity:

• Share Capital (Capital Social): Initial investment by owners
• Retained Earnings (Bénéfices Reportés): Accumulated profits not distributed
• Current Year Profit/Loss (Résultat de l'Exercice): Profit or loss for the current period

PCN Accounts: Class 1 (Capital Accounts)

Example: Marie's restaurant equity:

• Initial investment: €10,000 (Share Capital)
• Accumulated profits: €2,500 (Retained Earnings)
• Total Equity: €12,500

Revenues (Produits)

Revenues are increases in equity resulting from business operations—money earned from selling goods or services.

Key Characteristics:

• Result from primary business activities
• Increase equity
• Earned, not necessarily received in cash (accrual basis)

Types of Revenue:

• Sales Revenue (Chiffre d'Affaires): Revenue from selling goods or services
• Service Revenue (Revenus de Services): Revenue from providing services
• Interest Income (Revenus Financiers): Interest earned on investments
• Rental Income (Revenus Locatifs): Income from renting property

PCN Accounts: Class 7 (Revenue Accounts)

Example: Marie's restaurant revenues:

• €15,000 from food and beverage sales (Sales Revenue)
• €500 from catering services (Service Revenue)
• Total Revenue: €15,500

Expenses (Charges)

Expenses are decreases in equity resulting from business operations—costs incurred to generate revenue.

Key Characteristics:

• Result from business operations
• Decrease equity
• Incurred, not necessarily paid in cash (accrual basis)

Types of Expenses:

• Cost of Goods Sold (Coût des Marchandises Vendues): Direct costs of products sold
• Operating Expenses (Charges d'Exploitation): Day-to-day operating costs
  • Salaries (Salaires)
  • Rent (Loyer)
  • Utilities (Services Publics)
  • Insurance (Assurance)
  • Depreciation (Amortissement)
• Financial Expenses (Charges Financières): Interest on loans, bank fees
• Tax Expenses (Charges Fiscales): Income tax, municipal business tax

PCN Accounts: Class 6 (Expense Accounts)

Example: Marie's restaurant expenses:

• €8,000 cost of food and beverages (Cost of Goods Sold)
• €3,000 salaries (Operating Expense)
• €800 rent (Operating Expense)
• €200 utilities (Operating Expense)
• Total Expenses: €12,000

Relationship: Revenues, Expenses, and Net Income

Net Income = Revenues - Expenses

If revenues exceed expenses: Net Income (profit)
If expenses exceed revenues: Net Loss (loss)

Example:

• Revenues: €15,500
• Expenses: €12,000
• Net Income: €3,500

Luxembourg PCN Classification

In Luxembourg, all accounts are classified into seven classes according to PCN:

• Class 1: Capital, Provisions, Financial Debts
• Class 2: Fixed Assets and Establishment Costs
• Class 3: Inventory Accounts
• Class 4: Third-Party Accounts (Payables, Receivables, VAT, Social Charges)
• Class 5: Financial Accounts (Cash, Banks)
• Class 6: Expense Accounts
• Class 7: Revenue Accounts

Think It Through

A Luxembourg retail store purchases €5,000 of inventory on credit. How does this affect assets, liabilities, and equity? Which PCN class accounts are involved?

Concepts in Practice

Luxembourg VAT on Assets and Expenses:

When a Luxembourg business purchases assets or incurs expenses:

• The cost (net of VAT) is recorded as an asset or expense
• The VAT paid is recorded as VAT Recoverable (431000) if the business can recover it
• VAT on sales is recorded as VAT Payable (430000)

Example: Purchase of €1,000 equipment with 17% VAT:

• Equipment (Asset): €1,000
• VAT Recoverable: €170
• Cash/Accounts Payable: €1,170

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