INDUSTRIAL COST ACCOUNTING PRACTICES IN CHINA

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP80-00809A000700200087-2
• Release Decision: RIPPUB
• Original Classification: U
• Document Page Count: 35
• Document Creation Date: December 22, 2016
• Document Release Date: August 31, 2011
• Sequence Number: 87
• Publication Date: October 8, 1954
• Content Type: REPORT

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INDUSTRIAL COST ACCOUNTING PRACTICES IN CHINA
Chi-hua Ch en -uen Hui-chi Chino-ch'enz
Textbook on Planned Cost Accounting
Shanghai, Jul 1952
[Summary: This report contains information on ndustrial cost
accounting practices in China up to August 1951. Among the subjects
discussed are the following: cost and price components; definition
of cost items; itemization of accounts; cost and financial plans;
fixed and working capital; construction and major repair expenditures;
and depreciation and amortization. A sample profit and loss statement,
balance sheet, and working papers are appended.]
A. Meaning of Economic Accounting System
The economic accounting system is a unified system of calculation, combining
the calculation of production costs, of commodity sales, of factory financial
management, and of accumulations for expanded production. The system enables
one to determine not only whether a product shows a profit or loss but also the
reasons for its profit or loss. Thus the economic accounting system is an im-
portant tool for ascertaining working efficiency. Its principal objective is
to expand production and increase social wealth by economizing on raw materials,
reducing waste, lowering costs, raising product quality and production efficiency,
speeding up the process of commodity sales, and increasing enterprise profits.
B. The Role of Cost Accounting
Cost accounting is the scientific and systematic calculation of costs and
the recording of financial operations. It provides an accurate check on the
implementation of cost and financial plans and facilitates increased production,
lowered costs and the accumulation of capital.
Cost accounting differs from general accounting in five respects.
1. Cost accounting employs the perpetual inventory system; that is, when
showing such asset accounts as materials, goods in process, and finished goods,
calculations are made on the basis of book inventory., In general accounting it
is necessary to take physical inventories at the time the books are closed.
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3. From cost records, it is possible to ascertain better production meth-
ods, and thereby lower cost standards.
4. Cost accounting reveals the required amounts of materials and other
cost items, which are then incorporated in the national economic plan.
5. On the basis of cost calculations, wholesale prices can be determined
so as to insure the fulfillment of accumulation (profit) quotas.
C? Plan Cost
For cost accounting to be effective, it must make clear the achievements
and deficiencies of the various shops
fore, the enterprise must and departments in an enterprise. There-
lay down production goals for its shops and depart-
ments, calculate expenditures on a monthly basis, and compare these expenditures
with the results of production. Determining production goals in this way pro-
duces the cost plan, which is then compared with the actual cost. The cost
plan becomes an index for production.
In a New Democratic society, administrative and sales costs, as well as
enterprise production costs, are planned and included in the cost of products.
This then becomes an important source of information for the state in deter-
mining price policies.
2. Detailed recording of costs facilitates the discovery of causes of
waste.
II. COST AND PRICE CCA4'CNEI,"I,
one of the main objectives of the economic accounting system is to en-
courgage enterprises to increase their profits. These profits represent the
surplus product created by the workers in enterprises and consist of the
differential between the planned selling price of the product and the cost of
the product.
A? Cost-Finding Formulas
The formula for calculating the cost components of price are as follows:
1. Shops costs plus factory manaCement expenses equals factory cost
2. Factory cost plus allotted expenses of administrative organs above
the enterprise level equals industry cost
3. Industry cost plus sales expenses equals commercial cost
4. Commercial cost plus profits equals wholesale price
B. Breakdown of Price Cost Com onents
The above f8rmuda- shows how th,A
A further breakdown of these tnts.is'g Biceiven in cost ti. chart w chart ware calculated.
oompSne~.ishich follows.
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A. Types of Organization
Organizational units which figure in the production process may be classi-
fied as follows:
1. Production shops -- shops that engage directly in production. Examples
in the machine industry would be casting shops, metalworking shops, machine shops,
etc.
2. Supplementary shops and departments -- units that team up with produc-
tion shops in the production process. Generally, they are electric power shops,
repair shops, supply departments, finished product departments, financial de-
partments, accounting departments, planning departments, and factory management
departments.
3. Administrative departments -- administrative organs above the enter-
prise level, such as bureaus, companies, etc.
4. Sales departments -- departments that undertake the selling of the
finished product.
In addition, basic construction departments may be established, with the
exclusive responsibility of currying on basic construction work.
B. Typical Factory Organization.
Although a more advanced organizational structure was introduced in the
Northeast Administrative Area in 1951, the most common type of factory organi-
zation is shown on the following chart:
Factory, Manager
Deputy Factory Manager
Chief Engineer
Basic Supp}y.'" Finished-.Power !Repair..,Account- Finance Plan Factory
Constiuc- Depart- -Goods .._P1an1r T-ghop ing De- Depart- De- Manuge-
tion De ment De
P8r
. ~?''~'-'-'' partment :.ment part- meet De-
partment ment__,:_: menu partment
B
Production Production Production
Shop Shop Shop
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Shops and departments listed above-that do not directly engage in produc-
tion
have the following
functions:
1.
Power plant -- responsible for supplying and regulating flow of elec-
tric power
2. Repair shop -- responsible for normal factory repair work
3. Supply department -- responsible for procurement, purchasing, transpor-
tation, custody, and storage of materials
4. Planning department -- responsible for technical and research plans,
estimates, and inspection
5. Finance department -- responsible for keeping capital transfer, receipts,
and disbursements accounts
6. Accounting department -- responsible for cost estimates, accounting
records and reports, and statistical work
7. Finished goods department -- responsible for the storage and shipment
of finished goods
8. Factory management department -- responsible for drawing up and adminis-
tering plans pertaining to labor management and labor welfare.
A. Official List of Cost Items
The 13 cost items listed below have been selected from the unified account-
ing systems of the Ministry of Heavy Industry, Central People's Government, and
the Department of Industry, Northeast People's Government.
Basic materials
2. Indirect materials
3. Fuel
4. Basic wages
5. Electric power
6. Steam
7. Water
8. Forced air
9. Contract work
10. Shop expenditures
11. Factory management ' expense'
12. Administrative expense of orgdns above the enterprise level
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B. Cost Item Definitions
1. Basic materials -- materials used 'directly in the production process
and going to make up the main body of the product. They include raw materials,
processed.materials, and semifinished goods (either purchased or manufactured
on the premises).
2. Indirect materials -- materials used directly in the production pro-
cess, but not in the main body of the product.
3. Fuel -- fuel used directly in the production process,. including both
gas and liquid fuel.
4. Basic wages -- wages paid for labor directly engaged in the production
process, including bonuses, wages for extra shifts, and subsistance payments.
5. Electric power -- power used directly in the production process.
6. Steam --.steam used directly in the production process.
7. Water -- water used directly in the production process.
8. Forced air -- forced air used directly in the production procelia.'
9. Contract work.-- occurs when equipment needed to manufacture a given
item is lacking and another factory is commissioned to do the work.
10. Shop expenditures -- in'addition to the nine cost items listed above,
shop costs include shop expenditures which can be broken down as follows:
a. Indirect wages -- wages paid to workers not directly engaged in
production work, such as technical personnel, record keepers, etc. Includes
regular wages, bonuses, and subsistence payments.
b. Nonproductive wages -- regular wages paid to workers absent from
production work for officially approved reasons. Examples are workers injured
on the job, attending conferences, on sick leave, receiving pay when production
closes down for 5 days or less, attending marriages or funerals, etc.
c. Consumables -- includes materials and fuel consumed, but not used
directly in the production process. Also includes sums set aside on a monthly
basis for wear and tear and deferred expenditures on tools and instruments not
classified as fixed assets.
d. Repairs -- includes expense for miscellaneous repairs necessary
to maintain production
e. Inspection -- all expenses incurred in shop inspection work
f. Labor safety
g. Water and electricity -- cost of water and electricity not directly
used in the production process
h. Transportation -- all transportation expense within the factory in-
curred during the production process
i. Office expense -- includes expense for paper, ink, notebooks, etc.
J. Heat -- shop heating expense
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M. Taxes -- includes taxes levied according to quantity of production
and various taxes to be borne by the shop.
n. Depreciation and amortization -- includes deductions for deprecia-
tion of fixed assets, major repairs, expense of initiating production, and de-
ferred expenses.
k. Insurance -- includes expense for short-term insurance of fixed
ags ets against flood, fire, and other disasters and periodic payments into
the insurance fund for future insurance expense.
1. Rent -- expense for lease of property by the shop.
0. Other expenses
11. Factory management expenses -- expenses which may be listed under two
main headings.
a. Administrative expenses
(1) Indirect wages -- includes all types of wages paid to person-
nel engaged in the management of production
(2) Repairs -- expenses for miscellaneous repairs carried out in
the management department
(3) Wear and tear -- monthly expenditures for wear and tear on
tools and instruments of the management department which are not classified as
fixed assets
(4) Post and telegraph -- expense for such items as telegrams,
telephone calls, postage, etc.
(5) Communications
(6) Travel expenses
(7) Water and electricity -- expense for electricity and water
used by the management department
(8) Transportation -- includes charges on articles shipped by
management department
(9) Office expenses -- cost of paper, notebooks, etc. used by
(10) Heat
(11) Insurance
(12) Rent
(13) Taxes -- includes taxes paid by managemenL, such as building
public welfare contributions, etc.
(14) Depreciation and amortization -- includes deducti
n
f
o
s
or de-
preciation of fixed assets, major repairs, and expense of initiating production
(15) Other expenses
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b. General management expenses
STAT
(1) Inspection -- expense incurred in inspection of products
(2) Custody of materials
(3) Plans and blueprints
(4) Research and experimentation
(5) Security
(6) Accidents -- funds for losses due to accidents must be
in each cost calculating period
provided
lished b (7) Education -- expenses of schools and training courses estab-
y the factory
welfare (8) Welfare -- all expenses incurred in providing for employee
(9) Other expenses
12. Administrative expenses of organs above the enterprise -- the
expenses of such superior administrative organs as bureaus, companies , etc. are
''prorated among their subordinate enterprises. They are ke
expenses of the management of individual enterprises. Pt separate from the
13. Sales expenses. These also may be listed under two main headings.
are entered iInternal factory expense -- in each cost calculation period,'these goods in process or finished goods
department (1) Selling expense -- all normal expenses incurred by the sales
(2) Packing expenses
(3) Taxes -- includes taxes levied during the sales process
b
E
.
xternal expenses -- expenses which are entered into inventory
stored outside the factory in each cost calculation period.
located outsideMtheSefactorylling -- includes expenses of sales departments
(2) Packing expenses
(3) Taxes
(4) Transportation -- expenses of shipping goods from point of
origin to destination
V. GENERAL LEDGER ACCOUNTS
A. Itemization of Accounts
The cost items enumberated above are the objects of cost calculation and
do not reveal the entire process connected with production costs. For example,
since they do not reveal the origin and use of operating capital, cost items
are merely a part of the accounting process.
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The following Of accounting items used ainothei "Unified process
Ac Accounting seen
System the
the Ministry of Heavy Industry of the Central People's Government."
11. Fixed assets
1101 Land
1102 Buildings and installations
1102.1 Depreciation reserve -- buildings and installations
1103 Machinery and equipment
1103.1 Depreciation reserve machinery and equipment
1104 Power equipment
1104.1 Depreciation reserve -- power equipment
1105 Transportation equipment
1105.1 Depreciation reserve -- transportation equipment
1106 ?..us
:l seellaneousequipment
1106.1 Depreciation reserve -- miscellaneous. equipment
1107 Basic construction awaiting settlement
1108 Unfinished basic construction
1109 Miscellaneous capital expenditures awaiting settlement
1110 Major repair expenditures awaiting settlement
1111 Major repair expenditures
1112 Expense of initiating production
12. Current assets
1201 (~ggh iai'-.treasury
1202 Bank deposit$
1203 Imprest fund
1204 Notes receivable
1205 to receivable
1206 h,:.,tacome receivable
1207 Current account with basic construction fund
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1208
Materials
1209
Materials in transit
1210
Unapplied transportation expenses
1211
Goods in process
1212
Semifinished goods
1213
Finished goods
1214
Reprocessed goods
1215
Secondary products
1216
Finished goods cost
adjustment
1217
Other current assets
13? Other assets
1301 Deferred expenses
1302 Prepaid expenses
1303 Inventory of supplies
1304 Temporary payments
1305 Payments out of guaranty fund
2. Liabilities
21. Net worth
2101 Fixed capital
2101.1 Allowance for fixed capital
2102 Working capital
2103 Production profit and loss
2104 Operating profit and loss
2105 Other-profit and loss
2106 Current surplus and. deficit
.2107. Accumulated surplus . and.deficit,_
2108 Abnormal losses
2109 Plan fulfillment -+ ...,, .
22. Fixed liabilities
2201. Payments into basic construction fund
2202 Payments into miscellaneous capital expense fund
2203 Payments into major repair fund
2204 Long-term loans
STAT
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23. Current liabilities
2301 Bank overdraft
2302 Notes payable
2303 Accounts payable
2304 Expenses payable
2305 Funds payable to government
2306 Funds received as an agent for others
2307 Estimated cost of materials payable
24. Other liabilities
2401 Advance income
2402. Temporary receipts
2403 Payments into guaranty fund
3.
Losses
31. Operating expenses
3101
Cost of goods sold -- finished goods
3102
Cost of goods sold -- semifinished goods
3103
Cost of goods sold -- secondary products
3104
Repair cost
3105
Adjusted cost of goods sold
3106
Production expenses
3106.1
Basic materials
3106.2
Secondary materials
3106.3
Fuel
3106.4
Basic wages
3106.5
Electric power
3106.6 Steam
3106.7 Water
3106.8 Forced air
3106.9 Contract work
3106.10 Shop expenditures
3106.11 Factory management expense
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3106.12 Administrative expenses of organs above the enterprise level
3106.13 Sales expenses
3107 Production shop costs (by production shop units)
3108 Supplementary shop and department costs (by production and
department units)
3109 Administrative department costs
3110 Sales department costs
32. Nonoperating expenses
3201 Financial expenses
3202 Errors in price estimates
3203 Price differential
3204 Inventory loss
3205 Asset sales loss
3206 Allocations shortage
3207 Other nonoperating expenses
4. Income
41. Operating income
4101 Sales ncome -- finished,6o6ds
4102 Sales income -- semifinished goods
4103 Sales income -- secondary products
4104 Income for repairs
4105 Other operating income
42. Nonoperating income
4201 Financial income
4202 Errors in price estimates
4203 Inventory gain
4204 Asset sales profit
4205 Allocations overage
4206 Other nonoperating income
B. Classification of Accounts
The accounting items listed above may be classified accoriing to their
economic content. This may be presented in chart form as follows.
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3106.12 Administrative expenses of organs above the enterprise level
3106.13 Sales expenses
3107
3108
3109
3110
Production shop costs (by production shop units)
Supplementary shop and department costs (by production and
department units)
Administrative department costs
Sales department costs
32? Nonoperating expenses
3201 Financial expenses
3202
3203
3204
3205
3206
3207
Income
Errors in price estimates
Price differential
Inventory loss
Asset sales loss
Allocations shortage
Other nonoperating expenses
4101 Sales income -- finished goods
4102 Sales income -- semifinished goods
4103 Sales income -- secondary products
4104 Income for repairs
4105 Other operating income
42. Nonoperating income
4201 Financial income
4202 Errors in price estimates
4203 Inventory gain
4204 Asset sales profit
4205 Allocations overage
4206 Other nonoperating income
B. Classification of Accounts
The accounting items listed above may be classified according to their
economic content. This may be presented in chart form as follows.
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Account Classification by Economic Content
Production
capital
accounts
erating
capital
accounts
Distribu-
tion capi-
tal ac-
counts
(Cash in treasury
Currency capi--{Bank deposits
tal accounts LImprest fund
General
ledger
ac-
counts
I
Sources of
operating
cap i Lai
accounts
"Operating
process
accounts
(Fixed capital
Enterprise-provided J Fixed
capital
capital accounts Accumulated capital
((Bank overdrafts
Labsorbed capital iAccounts payable
accounts LOthers
process accounts Basic wages
Indirect wages
Others
1Fixed asset account
Means of labor -IDepreciation reserve
accounts Others
I, Materi
1-
jects of
Others
labor accounts
Finished goods
Semifinished goods
Secondary products
Labor product Reprocessed goods
f accounts Others
Liquidating
accounts
Accounts receivable
Notes receivable
Income receivable
Prepaid expenses
Temporary payments
Unapplied transportation expenses
Deferred expenses
Inventory of supplies
Product cost adjustment
Shop and department costs
Plan fulfillment
Basic materials
Shop expenditures
Factory management expenses
Supply [Materials in transit
accounts Others
Distribu-
tion proc-
ess ac-
counts
Sales
accounts
Sales income
Repair income
Financial income
Sales cost
Financial expenditures
Others
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VI. COST AND FINANCIAL PLANS
A. Product Cost Plan
To meet the requirements of the national economic plan, cost plan norms
fall into two major categories: quantity and value. In norm for
quantity of production, the criterion is setting the
what the labor force, with normal
exertion, can be expected to attain.. The norm for value or goat usually falls
between the previous plan periods average cost and minimum cost.
B. Product Cost Reduction Plan i
with Cost reduction quotas are established by comparing this period's costs the ceding ost'. The would be 1950, whicheisoalsoccalled the baspreceeding period err a 1a51 cost plan
. Ho
comparison, cost item prices of the base year must e'djlsr to so ca as s t o a nflrm
to the plan prices of the plan year. r et b base year ea wages ea
justed in terms of the value
drawn up. Of the wage nit at the time the plan must t b be ad-
d-
plan is being
An illustration of cost reduction in a factory cost plan follows.
Quantity Unit Cost Total Cost
Average unit cost of Items (Yuan) (Yuan
basic materials in 1950
19 10
10 160
Difference [cost reduction]
The plan 30
price of cost items in the cost plan is also called the fixed or
constant price. Before'-an enterprise draws up a product cost plan, the lap
is determined on a higher level and is forwarded to the enterprise. The -cost
this p bbd-.
reduction quota is also determined on a higher level. Assuming
be 10 percent, comparing plan year costs with base quota to
year cost, then the enter-
prise must draw up a cost reduction plan showing in detail
will be made. how the reductions
C. Plan Price Cost and Actual Price Cost
The procedures for calculating plan price costs and actual price costs are
as follows.
1? Plan price costs are calculated on the basis of base year [often usually
the Preceding year) plan prices, and become the constant or fixed cost for this
year. In this way, progress in fulfilling the plan can be measured with no need
to allow for changes in the prices of materials.
Average unit cost of
basic, materials in 1951 6
a. Prices of basic materials, indirect materials, fuel; electric power,
steam, and forced air are all calculated on the basis of plan prices.
b. Prices of products manufactured by the factory and used in produc-
tion are, upon approval of higher organs, calculated on the basis of plan prices.
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c. Depreciation and amortization are calculated according to the plan
figure. Deferred ex they penses are are incurred. calculated on the basis of the plan price cost of
the month in which
d. Wages and other expenses that cannot be treated as price items are
to be calculated on the basis of the value of wage units in the area in question.
2. Actual price costs are calculated on the basis of actual disbursements.
Once the actual costs of a factory are known, it is possible to determined the
commodity's selling price.
a. Expenses for basic materials, indirect materials, fuel, wages, elec-
tric power, steam, water, forced air, and other items are all calculated on the
basis of actual disbursements.
tory and b. finished
hedaeifinished goods manufactured by the fac-
torbads of the production are, n uposof approval of higher organs, calculated on
calculated on the basis of actual cost. approval is not forthcoming, they are
D. Income and Expenditure Plan
For the purpose of effecting control of currency income and expenditure,
enterprise units must prepare receipts and disbursements plans on a quarterly
basis. After approval by superior administrative organs, the plans will be
sent to the People's Bank to serve as a basis for receipts and disbursements.
Items used in income and expenditure plans have been standardized by the
People's Bank as follows.
1. Income items
a. Previous periods's treasury cash -- any cash in treasury left over
from previous period; enter as cash
b. Previous period's bank balance -- enter as transfer
c. 1ppropriations from superior organs -- enter as transfer
d. Increase in capital -- any increase in capital allocated by the
government or superior organs
e. Business income -- any income from sale of goods, etc.
f. Other income --,miacellaneous, such as interest
2. Expenditure items
a. Wage payments -
b. Expenditure for purchase of agricultural products
c. Expenditure for purchase of nonagricultural products
d. Basic construction expenditures
e.? Expenditure for repairs -- any expense for major repairs
f. Administrative expense -- all administrative expenses except those
for wages
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transfer h. Funds paid in -- any profits, depreciation, etc., paid in; enter as
i. Pensions, welfare expenditure -- all employee pension, welfare, in-
surance, etc., payments
J. Repayment of bank loans -- enter as transfer
k. Other expenses -- miscellaneous expenses
1. This period's treasury cash -- enter as cash
m. This period's bank balance -- enter as transfer
g. Business expenses
VII. FIXED AND WORKING CAPITAL
A. Separation of Fixed Ca ital From Working Capital
Just as basic construction capital must be kept distinct from operating
capital, so, in the operating capital sector, fixed capital must be kept sepa-
rate from working capital. p
Fixed capital appears as means of labor production, and also as fixed assets.
Working capital appears in three forms: in the form of raw materials, fuel, and
other materials purchased and stored in the production preparation stage; in the
form of unfinished goods (goods in process and semifinished goods) in the produc-
tion stage; and in the form of finished goods, commercial products, cash, trans-
fers, and bank drafts in the circulation stage.
whether the of If working capital and fixed capital are mixed, there is no way to determine
rally,, workingocapital~isksupplied tnotconly rby thepenterpriseritself,, but alsotu-
theeenterrpriseemust beouacrces. But first of
determined. 1~Andaifptheisources eofu capital bac-
counts of a state-operated enterprise are mixed, it is necessary, as a cost ac-
counting preliminary, to make a division between fixed and working capital.
B. Revised Balance Sheet Used in New Accounting System
The first of the two balance sheets which follow was drawn up by the Hung-
hsing Fhetory, 31 December 1950, using the old accounting system. The second is
is a balance sheet of the new type, drawn up so as to indicate the division be-
tween fixed and working capital.
os -
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working capital. The firstusteplinlseparatin;;tthectwocisbtocrevaluefthedfixed
assets, and enter the resulting figure in the new account "fixed capi:ul." All
remaining capital comprises working capital. The Journal entry is made as fol-
lows.
Debit: Government capital
Credit: Fixed capital
Working capital
When the government newly transfers an existing factory to the management of
an enterprise, the entries ::re made as follows.
Debit: Fixed assets
Credit: Fixed capital
Debit: Current assets
Credit; Working capital
After the work of separating sheet fixed and working capital has been completed,
the asset and liability :accounts are entered as shown on the revised balance
.
VIII. CONSTRUCTION AND MAJOR REPAIR EXPENDITURES
A. Construction Expenditures
An enterprise must distintuish between its expenditures for construction
and expenditures for production. Only then can costs be correctly calculated.
In general, construction expenditures fall into the following categories:
1. Production preparatory expenses -- this includes expenses for initiating
production, major repairs, and others.
2. Expenses for construction and inst.l1?tion of fixed assets.
3? Expenses for appreciation of fixed assets. This includes all expenses
for the expansion, improvement, or repl:.cement of fixed assets.
Other expenditure, if related to production during the period at hand, are
regarded as production expenditures. If expenses are incurred which are connected
with production in subsequent periods or are to be borne in subsequent periods,
they are regarded as deferred expenses.
B. Major Repair Expenditures
When fixed assets are in need of repair and the aim is merely to maintain
original productivity, these expenses are paid out of the major repair fund
and not out of the construction funds.
After an enterprise has drawn up it major repair plan and its request for
funds has been honored by a superior organ, the accounting procedure is as
follows.
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STAT
1. At time major repair fund is received:
Debit: Bank deposit
Credit: Payment into major repair fund
2. At time major repairs are in pro,ress:
Debit: Major repair expenditures awaiting settlement
Credit: Bank deposit
3. At time repairs are completed:
Debit: Major repair expense
Credit: Major repair expenditures awaiting settlement
Debit: Payment into major repair fund
Credit: Fixed capital
A? Depreciation
Depreciation is figured on fixed assets, such as buildings and installations,
machinery and equipment, power equipment and transportation equipment. The "straight
line average method" is used to calculate depreciation on a monthly basis, as shorn
in the following formulas.
fixed assets at the be-
ginning of Amoun thetmontheplusitheototalyval(ueeofone1 construction and replacements
minus the total value of assets destroyed or surrendered) multiplied by the monthly
depreciation rate.
2. Monthly depreciation rate equals the plan year depreciation rate multi-
plied by 1/12.
Employing this method, a factory mi;;ht calculate its monthly depreciation
in the following manner:
1. Total value of fixed assets at the be.-inning of month = 20,000,000 Yuan.
2. Total value of new construction this month - 5,000,000 yuan.
3. Total value of assets surrendered - 1,000,000 yuan.
4. Monthly depreciation rate = 1 percent (plan year rate as 12 percent).
5. Amount of depreciation = (20,000,000-f 5,000,000 - 1,000,000) x 1/l00
240,000 yuan.
B. Amortization
Major repair expenses and expenses to initiate production are listed under
fixed assets, but they differ from such assets as buildings and equipment in
that they must be amortized within a relatively abort period. In calculating
amortization, a limit of years is ?letermined, generally three or at most five,
and periodical deductions are made accordingly.
IX. DEPRECI:iTIOIP AND AMORTIZATION
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C. The Paying in of De reciation and Amortization Funds
State-operated enterprises carrying out the economic accounting system re-
ceive basic construction capital needed for new construction, for expanded con-
struction, and for reconstruction in the form of allocations from the state
treasury. With regard to that part of depreciation which enters into the cost
of a product, the enterprise pays an equivalent amount periodically into the
state treasury. This serves not only to increase the ordinary income of the
state treasury, but also forms a reserve for capital needed to replace fixed
assets when they come obsolete. Actually, the paying in of depreciation is
equivalent to the repayment by installments of fixed capital invested in the
enterprise by the state treasury.
If depreciation is paid into the state treasury at the end of each month
according to plan, the entry is made as follows:
Debit: Payment into state treasury basic construction depreciation
fund.
Credit: Bank deposit
The amount of depreciation paid in results in a corresponding reduction in
fixed capital. Therefore, it is necessary to transfer and enter this amount
into the "allowance for fixed capital account" as follows:
Debit: Allowance for fixed capital
Credit: Payment into state treasury basic construction depre-
ciation fund
If the depreciation fund system is not employed and payments are made not
at the end of each month but after closing the books, then the following entries
are made:
Debit: Allowance for fixed capital
Credit: Funds payable to the Government
At the time of paying in, the entry changes as follows:
Debit: Funds payable to the government
Credit: Bank deposit
On the other h^nd, payments into the major repair fund do not affect the
amount of fixed capital, and deductions for major repair expenses are entered
as follows:
Debit: Production expenditures
Credit: Major repair expenses
At the time of forwarding the deductions for major repair expenses, entry
is made as follows: the e
Debit: Payment into major repair fund
Credit: Bank deposit
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STAT
When majoWr repair funds are allocated from above, a temporary account is
established. hen the major repair work has been completed, it is then trans-
ferred to fixed capital. Then deductions for major repairs in succeeding must be listed on the credit side of the account for a
amounts for amortization are combined with the amounts for andonarthee
id in aliy
the
thL sideoofcthe account forstate
allowance treasury.
for At
fixed scapital, with entry
a corresponding reduction in the fixed asset account.
The amounts for depreciation and amortization are shown on the balance
sheet as follows:
Fixed capital
Minus: Allowance for fixed capital xxxxx
x
The total allorance for fixed capital must equal the total depreciation and
amortization payments.
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