Have you ever heard of correspondence accounting?
If you’re not an accountant, or financial systems consultant, stop here. And if you’re an accountant and you’ve never had to debit or credit your accounts in Russia or the Russian-influenced world then you won’t need to know about this either.
Correspondence accounting is the Russian way of accounting, and it’s the bane of ‘Western’ financial accounting systems and of companies like mine, since we struggle to make the systems we sell work in Russia. My company, LLP Group, works with SunSystems, a British-born financial system that works more easily than most systems almost anywhere in the world Indeed, we’ve implemented SunSystems for international companies in the USA, South America, Asia, Africa and Europe, ensuring a consistent view of finance even if local rules differ markedly.
But Russia is more difficult (any surprise?), and I write this in the hope that someone can tell me WHY!
Most accounting systems have a chart of accounts that lets you debit and credit to any series of accounts as long as you end up with a balance of zero. So you might do this for a sales invoice:
DEBTOR 1,000 D
SALES 800 C
TAX 200 C
You can have any accounts in your journal, and any number of them (two credits and one debit in this case) as long as the final journal balance is zero.
But in Russian correspondence accounting each debit must be matched by a credit, and the two accounts involved must ‘correspond’. Indeed, the state issues a list of accounts that are permitted to ‘oppose’ each other. A Russian journal would look like this:
DEBTOR 1000 D SALES 1000 C
VAT ON SALES 200 D VAT 200 C
Each line, debiting a single account and crediting a single account must balance.
Most financial systems can imitate this style of accounting by imposing constraints on the way traditional journals are structured, but the real difficulty arises when you try to construct your statutory reports, since these rely on the corresponding account being known for every debit or credit. There’s even a kind of cross-reference report, a vast table, showing the values that have been posted between corresponding accounts. Statutory auditors, when not soliciting bribes, need only glance at this table to determine if the rules have been broken, and if fines are therefore due.
A small team of Russian auditors
All this is possible in ‘Western’ financial systems and in our company we’ve worked out a method that makes it possible. But it means that implementation time is longer and more expensive.
What is it all for? Who benefits? What possible management benefit comes from all of this? What statutory benefit?
Can someone tell me?!
And then there are ‘negative’ credits and debits!
I was told I had to book in that way in Czechia 20 years ago. It is also called accounting “correspondance” (účetní souvztažnost). There is a special law stating which accounts can be linked with which in debit/credit. For example, it was forbidden to account for (say) work-in-progress with any other account than year-end closing account. I’m sure it still is…
The nicety of the law is that although it is compulsory to account absurdly according to the law, there is no fine for accounting the way you need/want. The law fell rapidly into oblivion (it is still valid and one can buy a nice book of Kafkaesque accounting literature called “Sbírka souvztažností k účtům směrné účtové osnovy se vzorovou účtovou osnovou s opravami pro rok 2015”). The only fines are for tax evasion and improper financial disclosure (financial reporting). The way on how you set-up you tax report and your financial reportings are not subject to fines.
LLP could advise its Russian clients to do the same thing as it advised its Czech clients (but had no idea it did): forget Kafka or Gogol, book what you need to book the way you need.
I, too, remember those days. In Romania auditors still sometimes expect to see a ‘cross-reference’ report but there are no serious sanctions if you can’t produce it.
Another piece of accounting madness – Adam Bager
SunSystems Implementations – Short is Beautiful – Adam Bager
The Illusion of Remote Control – Adam Bager
You probably don’t need any explanations after 2 year, but I feel like sharing.
It is most likely that you misunderstood/was not given clear explanation on the subject. It is actually possible to have a three way correspondence in Russian (or other post Soviet country) accounting. However it is indeed required by state regulations to use a separate expense account for VAT expense, so your second table actually does not actually make any sense. The right correspondence would be:
Debtor 1000 D
Sales 1000 C
VAT Expense Account 200 D
TAX 200 C
The only difference with the “western accounting” would be the use of additional account (VAT expense) and showing Gross Revenue and VAT in separate accounts in P&L.
I guess, the business sense of having 2 accounts that netted in P&L is the same of having two separate accounts for PPE and PPE depreciation that netted in Balance Sheet: Financial Statement presentation regulations.
And philosophy of accounting is indeed different: Concept-based vs Rules-based standards. As opposed to western accounting ex-soviet accounting is more regulated on the levels of each transaction, not only the overall financial statement fair presentation thing.
Merry Christmas 🙂
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Thanks so much for your corrections. My blog stemmed from practical experience of implementing systems in Moscow, and though i repeatedly sought some theory on the subject, i never found any. Do you know of a good English-language high-level introduction to the differences in approach between former Soviet and Western accounting? If not, you should write one! What is your background?