Internal equity sources of

finance

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 Internal financing
¡ Internal financing (self-financing)
can be understood:
- in the strict sense – self-financing
resulting from profit as a positive
difference between the profit and the
volume of its distribution outside a
business
- in the broader sense – self-financing
resulting also from the depreciation or
other internal sources of a business

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 Internal financing
¡ Forms of self-financing:
- open financing – achieved profit is left in a
business (as retained earnings) and used to
expand production and operating capacities, i.e.
to finance development of a business
- hidden financing – creation of hidden reserves
when the profits are achieved, increased value of
assets is not shown in the balance sheet or the
reserves are hidden in the claims items (for
example undervaluation of the assets by means
of depreciation)

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 Profit as an internal source of finance

¡ Profit – the most important internal

source of finance
¡ Accounting point of view – an item
of retained earnings which
represents a residual item of the
process of the profit distribution
¡ Profit = revenues – expenses

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 Profit as an internal source of finance
¡ The process of the profit distribution:
Profit for a current period
- income tax
- allocation to the reserve fund
- allocations to other funds
- payments of directors´ fees and similar fees to members
of statutory bodies
- dividend payments or profit shares
= retained earnings for a current period

Retained earnings for a current period

+ retained earnings of previous (past) periods
= retained earnings to the balance sheet date

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 Profit as an internal source of finance

¡ Factors influencing profit:

• the amount and structure of costs
(fixed and variable costs, calculating
categories of costs etc.)
• the volume of realized (sold)
production
• tax policy
• dividend policy
• generation of reserve funds
(compulsory funds, voluntary funds)

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 Income tax

¡ Income taxes are regulated by the

Act no. 595/2003 Coll. of acts in
wording of further regulations on
income taxes. This act regulates the
personal income tax and the
corporate income tax.
¡ The current tax rate in the Slovak
Republic is 19% of the tax base.

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 Personal income tax

¡ The income from dependent

activities, the income from business
activities, the income from other
independent gainful activities and
tenancy, the income derived from
capital and sundry income is liable
to the personal income tax.

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 Personal income tax
¡ The tax base – the amount by which the
taxable income provably exceeds the tax
expenses used to achieve this income.
¡ Income from business activities, other
gainful activities and tenancy – lump-sum
expenses equal to 40% of the aggregate
income or 60% of such income (in case of
crafts defined by special legislation)

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 Personal income tax
¡ The tax base shall be reduced by the
following tax allowances:
- a yearly amount corresponding to 19,2
times the living wages in force as of
January 1 of the relevant tax period with
respect to the taxable party (NEW – 22,5
times from 1 March 2009!),
- a yearly amount with respect to the
spouse sharing a common household with
the taxable party, if he/she does not have
his/her own income

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 Personal income tax

¡ Tax bonus
- any taxable party who earned
taxable income equal to not less
than 6 times the minimum wage
may claim a tax bonus with respect
to each maintained child,
- the tax bonus shall be deducted
from the tax payable.

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 Tax calculation 2008 – physical entity (a small
trade)

¡ Tax base (receipts – expenditures)

300 000 Sk
- a yearly amount per tax-payer
98 496 Sk
= 201 504 Sk
Income tax 19% ... 38 285 Sk
Tax bonus (2 children...
555x6x2+582x6x2=13644 Sk)

Income tax payable for 2008 is 24 641 Sk.

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 Corporate income tax

¡ The tax base is the accounting

profit adjusted for tax purposes (for
companies using double-entry
bookkeeping) or the difference
between the income and expenses
(for businesses using single-entry
bookkeeping).

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 Tax calculation 2008 – legal entity
(a joint-stock company)

¡ Tax base (revenues – costs)

300 000 Sk
19% ... 57 000 Sk

Income tax payable for 2008

is 57 000 Sk.

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 Depreciation
¡ a term used in accounting, economics and finance
with reference to the fact that assets with finite
lives lose value over time,
¡ a newly generated source of finance within a
business, it is a non-cash expense,
¡ a measure of wearing out, consumption or other
reduction in the useful economic life of a fixed
asset,
¡ the amount of depreciation that has cumulatively
been charged to the profit and loss account from
the date of its acquisition = depreciation provision
(accumulated depreciation)

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 Depreciation
¡ fixed assets are stated in the
balance sheet at their net book
value,
¡ companies are not obliged to
dispose of depreciated assets, many
depreciated assets continue to
generate income,
¡ often it is the main and stable
source of cash flows.

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