Profit-and-Loss Accounting

(also economic accountability; in Russian, khoziaistvennyi raschet), the system of economic relations, arising in the process of socialist reproduction, between society as a whole and its various production links (enterprises and associations), as well as between the individual subdivisions themselves, in the context of the socially necessary expenditure of labor and allocation of the enterprises’ net income. Profit-and-loss accounting relations are organized as an official state system governed by laws and administrative acts. In practice, profit-and-loss accounting is an administrative and management method under which the economic performance of each enterprise is commensurate in monetary terms with its production expenditures; each enterprise, by covering its outlays with the monetary income obtained from the sale of its products, ensures the profitability of production. Thus the key features of this method are profitability and self-support.

Profit-and-loss accounting, which is based on the public ownership of the means of production, differs in principle from commercial accounting, which serves private interests. Profit-and-loss accounting serves the interests of society as a whole and is designed to increase the well-being of the working people—that is, to implement the fundamental economic law of socialism; it operates in the joint interest of society, of the various enterprises, and of each individual worker.

Credit for initially formulating the theory of profit-and-loss accounting belongs to V. I. Lenin. In his words, “the conversion of state enterprises to what is called the profit basis is inevitably and inseparably connected with the New Economic Policy; in the near future this is bound to become the predominant, if not the sole, form of state enterprise” (Poln. sobr. soch., 5th ed., vol. 44, pp. 342–43). The theory of profit-and-loss accounting was further elaborated in the official literature of the CPSU, the Soviet government, and the various Communist and labor parties and state and economic bodies, as well as in the writings of economists in the USSR and other socialist countries.

Profit-and-loss accounting is based on the economic independence of enterprises, financial control, and the fact that each enterprise and each individual worker have a stake in their own performance and are held materially accountable for its results.

The economic independence of socialist enterprises is a necessary condition of their economic activity within the framework of centralized state planning to meet the requirements of social reproduction as a whole. In accordance with the national economic plan, the system of plan indexes defines the basic parameters of enterprise activity—namely, the volume of production and of marketable output, the basic nomenclature and quality indicators of production output, the general wages fund, the increase in labor productivity, the amount of total gains, the profitability of enterprises, the size of payments into and allocations out of the budget, the volume of capital construction, and the level of supply of materials and technology. These same plan indexes are used as the basis for evaluating the performance of the various enterprises, associations, and ministries and particularly the effectiveness and quality of their work.

On the basis of the centralized indexes, the enterprises draw up specific plans in relation to such factors as the prime cost of production, the size of the work force, and the wage average; they organize their work program and wage system according to plan—recruiting a labor force; providing training and ensuring the utilization of personnel; establishing the various forms of remuneration of labor, job grades, and ranks of workers; reviewing existing output norms and establishing new ones; and resolving questions related to material and technological supply and sales. The enterprises have at their disposal the resources assigned to them, and they expend part of their profits on their own needs.

The material incentive factor is an important principle in profit-and-loss accounting, ensuring that each worker has a stake in the results of the collective activity of a given enterprise. To implement this principle, enterprises use part of their profits to set up various economic incentive funds: the material incentive fund, which is the major source of incentives for workers in the form of bonuses; the socialcultural and housing fund, to raise the level of housing and social services provided for the workers; and the fund for the expansion of production, to finance capital investments that are used to expand production, to introduce new technology, to perfect new types of production, and to modernize and replenish fixed capital stock.

An enterprise operating under profit-and-loss accounting is materially responsible to the state for the fulfillment of its plan; its responsibility ranges over the rational use of resources, coverage of routine expenditures, timely and full settlement of accounts with the state budget and credit system, the establishment of material incentive funds, and the accumulation of needed financial resources for the expansion of production. Enterprises use their own resources to cover unplanned losses. They are also materially responsible to other enterprises for the complete and timely fulfillment of commitments stipulated by economic agreements, or contracts, which are the major instruments of profit-and-loss accounting relations between the various enterprises. Such economic agreements represent in concrete form the tasks set forth by the national economic plan, and they ensure the matching of production and deliveries to actual consumer needs.

Profit-and-loss accounting is based on the use of commodity and monetary relations, including in particular the categories of price, profit, and prime cost of production. Society exercises monetary control over the enterprises’ activity through the comparison of income and expenditure in the fulfillment of the plan with respect to production profits and profitability and through the allocation of credit for performance. Monetary control in all its aspects prompts the enterprises to make rational use of their resources, to upgrade economic performance indicators, and to pursue a policy of economies.

The further development of profit-and-loss accounting under advanced socialism presupposes the strengthening of the basic link in the profit-and-loss accounting system—namely, the enterprise—through the establishment of production associations; the expansion of the sphere of profit-and-loss accounting relations; the shift to profit-and-loss accounting on the part of enterprises in all branches of material production; the consistent implementation of all the principles of profit-and-loss accounting; and the incorporation of certain aspects of enterprise activity—namely, those that ensure its increased effectiveness—in the orbit of profit-and-loss incentives.

The key to the full implementation of profit-and-loss accounting lies in directing production toward its end results, matching output to social needs, and ensuring the fulfillment of economic agreements. Capital charges and credit interest provide an incentive for more effective utilization of productive capital and state resources. Since the economic performance of the enterprise as a whole depends on the performance of its subdivisions (that is, the primary production and auxiliary units, sectors, brigades, and services), the system of internal profit-and-loss accounting is based on the interrelation of the various production links and the enterprise as a whole.

As the conditions of advanced socialism increase the effectiveness of social production, the management of the higher-level links is directly drawn into the economic production process, and profit-and-loss accounting assumes new forms. For example, the establishment of all-Union (republic) state industrial associations operating on the basis of profit-and-loss accounting resulted in profit-and-loss accounting relations arising between the individual independent units—the production enterprises (or associations) constituting the industrial associations—as well as between the association itself, as a whole, and the state. Such relations encompass the entire production process, from the planning stage to the end product. Each industrial association represents a single profit-and-loss accounting unit, or complex, whose ability to cover its expenses and pay for itself is ensured by the performance of its constituent enterprises.

Within such complexes, profit-and-loss accounting relations are instituted through the establishment and utilization of centralized industrial association funds, including funds for the development of production, material incentive funds, socialcultural and housing funds, scientific research funds, reserve funds, and funds for the improvement of technology and the production of export goods. Such measures ensure the centralization of resources required for the implementation of a unified policy in dealing with such issues as expanded reproduction and the advances of science and technology within the framework of the given branch as a whole. As the sphere of profit-and-loss accounting relations expands, certain aspects of these relations permeate the activities of the relevant ministries.

The present stage of economic development is marked by the conversion to profit-and-loss accounting on the part of production enterprises in branches of the national economy other than industry, including transport, construction, supply, and publishing. The socialist economy also includes a number of organizations in the nonproductive sphere that operate on the basis of profit-and-loss accounting, such as the polyclinics operating on a fee basis. While the management principles in profit-and-loss accounting are the same for all enterprises, the distinguishing features of each branch are reflected in the differences that mark actual profit-and-loss operations.

Specific variations are greatest in agriculture, since agriculture is a combination of interconnected economic, natural, and biological processes that impose a particular rhythm on production and the circulation of resources. For this reason the independence of enterprises and the broad use of credit are particularly important in agriculture. Land rent as a special form of excess surplus product makes it necessary to create equal management conditions and to ensure the profitability of agricultural enterprises in different zones, as well as to adopt measures designed to intensify production. An important factor here is the distribution of rent between the various enterprises and the state by such means as differential prices on agricultural products depending on natural and climatic conditions and the imposition of an income tax on kolkhozes.

Another feature that distinguishes the operation of profit-and-loss accounting in agriculture is the existence of two types of agricultural enterprises—the state enterprises, or sovkhozes, and the cooperative collectives, or kolkhozes. All the sovkhozes in the USSR have adopted profit-and-loss accounting. The kolkhozes—inasmuch as they own the means of production and output—provide the most clear-cut example of profit-and-loss accounting.

Profit-and-loss accounting relations in agriculture were significantly strengthened, after the March 1965 plenum of the Central Committee of the CPSU, as a result of the provisions of the economic reform of 1965, including the introduction of uniform purchase prices on the agricultural products of kolkhozes and sovkhozes, the regularization of financial and credit relations with the state, and the improvement of the material incentive system.

The sovkhozes have a lesser degree of economic independence in spite of having acquired substantially broader rights as they shifted to full-scale profit-and-loss accounting between 1967 and 1975. The state regulates the sovkhozes’ financial resources and applies a greater number of plan indexes to the sovkhozes than it does to the kolkhozes—specifically, the total volume of purchases by the state of agricultural products, the size of budget allocations, the amount of capital charges on productive agricultural capital, the size of capital investments (including construction and installation work), the activation of fixed capital stock in monetary terms, the volume of deliveries of tractors, automobiles, agricultural machinery, fertilizers, and other material and technological resources for distribution by the higher-level organizations, and the general wages fund. Other production indexes, which are independently planned by the farms themselves, include the volume of gross output, size and composition of sowing areas and herds, labor productivity, prime cost of production, and number of workers.

The sovkhozes have been granted broader powers with respect to marketing: perishable garden produce, potatoes, and poultry that are not accepted by the procurement agencies may be sold by the sovkhozes, either to other organizations or in the kolkhoz market, at mutually agreed-on prices; the sovkhozes are also entitled to sell to other state enterprises and kolkhozes their unused agricultural equipment, seed, feed, and other supplies if such surplus is not wanted for redistribution by the higher-level organizations.

Profits are the principal means of financing expanded reproduction under full-scale profit-and-loss accounting; alternatively, agricultural enterprises with insufficient resources of their own can obtain credit from the State Bank of the USSR. This, however, does not exclude straight budgetary financing of certain types of capital investments. For example, planned sovkhoz expenses that are covered out of the state budget include construction costs for new enterprises, poultry farms, hothouse and hotbed complexes, animal-breeding complexes, dwellings, and sociocultural and public service facilities, as well as expenses for clearing and soil improvement work.

The distribution of sovkhoz profits is regulated by the state. For farms whose profitability is 25 percent or more, a given percentage of the planned profit is deductible after fixed production assets have been entered in the budget; specifically, 15 percent (but not more than 12 percent of the annual planned wages fund) is allotted to the material incentive fund, 10 percent to the socialcultural and housing fund, 20 percent to the insurance fund, 10 percent to the fund for farm expansion and consolidation, and 2.5 percent to bonus awards for supervisory workers and specialists. The remainder is used for various other plan objectives—for example, to increase the farms’ productive circulating capital, to establish breeding herds, to finance centralized capital investments, and to cancel bank credits. Some farms show a residual unallotted profit after plan requirements have been met. The higher-level organization distributes such residual profits among other sovkhozes.

The kolkhoz economy is in its very nature a system of profit-and-loss enterprises. Even before the beginning of the mass kolkhoz movement, the decree On Cooperation issued in 1925 by the Fourteenth Party Conference pointed out that the organization of all types of kolkhozes (peasants’ associations, artels, and agricultural communes) must be such as to increase the ratio of commodity output to total output and must be based on the principles of profit-and-loss accounting. Being themselves the owners of their fixed capital stock and circulating capital, the kolkhozes can independently dispose of the means of production, the production output, and the monetary receipts from the marketed output. Kolkhoz activities are relatively less subject to state plan regulation, and relatively more to the effect of the law of value. The only centralized plan indexes applied to the kolkhozes are the volume of production sold to the state and the fixed amount of material and technological resources subject to distribution by the higher-level organization; all other plan indexes are determined within the kolkhoz.

Kolkhozes operate as completely self-sustaining enterprises; while they receive assistance from the state in the form of credit, the state does not finance their production-related outlays (with the exception of land improvement measures stipulated in the national economic plan). The kolkhozes use their own resources and income to cover material expenditures chargeable to production, to maintain the wages of kolkhoz workers at a level not below the guaranteed minimum, to meet their financial obligations to the state, to accumulate resources for farm expansion, and to set up various funds—the social security and material assistance fund for kolkhoz workers, the cultural and public services fund, the material incentive fund for kolkhoz workers and specialists, and the reserve fund.

The wages of kolkhoz workers, the levels and types of material incentives, and the order of responsibility for production performance are determined by the kolkhoz itself in accordance with its own rules and with due regard to the pertinent legal statutes. The kolkhozes use their own discretion in distributing their gross and net income and in establishing the proportions, magnitude, and order of utilization of their productive and nonproductive assets.

The principles of profit-and-loss accounting also extend to the intrafarm subdivisions of agricultural enterprises and to new forms of organization of social production in agriculture—namely, interfarm and agroindustrial enterprises and associations.

In other countries that are part of the worldwide socialist economic system, profit-and-loss accounting relations conform to the regular pattern of development of profit-and-loss accounting in the USSR. The differences lie in the varying degree of state regulation of enterprise activity, as expressed by the differences in centrally established plan indexes, the greater or lesser degree of economic independence, and the different types of material incentives.

In the management of agricultural production, various measures are adopted—as they are in the USSR—to create an improved system of purchase prices for agricultural products, to curtail state subsidies, and to raise the profitability of farm management through higher material incentives. Broader powers have been granted to agricultural enterprises with respect to production planning, marketing of products, construction, and material and technological supply. Profit-and-loss accounting relations within each country are regulated in accordance with the historical, socioeconomic, and other specific features that distinguish the development of agriculture in that particular country. In the Hungarian People’s Republic (HPR), for example, agricultural enterprises have the right to make independent decisions regarding the volume and composition of their production output and the use they make of productive assets and of their own resources. In the People’s Republic of Bulgaria (PRB), the various production categories ordered by the state are determined by value, and the allocation of agricultural production is planned by economic associations. In the HPR and PRB, as well as in the Czechoslovak Socialist Republic, the prices of secondary and seasonal products are regulated by agreements between the agricultural enterprises and procurement organizations.