Meaning of Balance Sheet

Meaning of Balance Sheet

A company’s balance sheet provides information about the origin and use of a company’s capital. The assets, the assets, and the capital, the liabilities, are compared. A profit and loss account is the basis for creating a balance sheet. The balance sheet is a company analysis set for a specific date, while the profit and loss account documents the business success for a specific period. Double-entry bookkeeping is a prerequisite for preparing a balance sheet.

  • The balance sheet provides a legally binding overview of the company’s assets and the business activities carried out in the past financial year.
  • The preparation of a balance sheet is based on the requirements of the German Commercial Code (HGB).
  • The balance sheet is broken down into assets and liabilities.
  • At the end of the day, the balance sheet must be balanced, i.e. on each side, assets and liabilities, the bottom line is the same number.

The tasks of the balance sheet

Short for BS by abbreviationfinder, a balance sheet fulfills different functions. On the one hand, it is used for documentation. It provides a legally binding overview of the company’s assets and the business activities carried out in the past financial year. The equity account provides information about the profit or loss of a company and thus offers options for comparison with previous accounting periods. The detailed list of profits and losses is based on the profit and loss account drawn up beforehand. Last but not least, a balance sheet also contains an information function.

Accounting requirements according to the Commercial Code

A balance sheet cannot be drawn up at the company’s reasonable discretion, but is based on the requirements of the German Commercial Code (HGB). The HGB also regulates which companies are required to be accounted for. This generally includes all corporations as well as sole proprietorships and tradespeople with an annual turnover of more than 500,000 euros or a profit of 50,000 euros. If these numbers are exceeded for the first time, the tax office will request the balance sheet. As long as the claim is outstanding, the conventional profit and loss account can be continued. Freelancers are generally exempt from accounting.

The structure of the balance sheet

Section 266 of the German Commercial Code clearly stipulates how a balance sheet must be structured. The breakdown is made into assets (use of funds) and liabilities (source of funds).

assets

  • Fixed assets, divided into intangible assets, property, plant and equipment and financial assets
  • Current assets, divided into inventories, receivables and securities
  • Prepaid expenses (existing but not yet due receivables)
  • Deferred tax assets (future tax benefits)
  • Difference from asset offsetting
  • Deficit not backed by equity

liabilities

  • Equity, divided into subscribed capital, capital reserve, retained earnings, profit or loss carried forward, net income or net loss for the year and net loss for the year not covered by equity
  • Provisions, divided into provisions for pensions, taxes and other provisions
  • liabilities
  • Prepaid expenses (existing but not yet due liabilities)
  • Deferred tax liabilities (future tax charges)

At the end of the day, the balance sheet must be balanced, i.e. on each side, assets and liabilities, the bottom line is the same number at the end. The shortfall not covered by equity arises when the losses in the reporting period are so high that they exceed equity. Bank balance sheets deviate from the presentation of a normal trade balance sheet and are almost mirror-inverted in the division of the asset and liability positions. A company’s financial assets on the assets side represent liabilities on the liabilities side of a bank. The internationalization of companies has led to an international approach to the structure of the balance sheet according to the International Financial Reporting Standards (IFRS), which deviates from the national requirements for preparing a balance sheet .

Basis of accounting

A balance sheet is based on the “principles of proper bookkeeping”, which in turn are regulated in the HGB. In the end, a balance sheet follows two principles. On the one hand, it is based on the “balance sheet truth” and on the other hand on the “balance sheet clarity”. Truthfulness of the balance sheet means that all business transactions are properly recorded in accordance with the accounting guidelines. The principle of balance sheet clarity states that business transactions and the resulting documentation must be booked in such a way that they are clearly visible and traceable. All facts that are known between two reference dates must be taken into account in the balance sheet.

Delayed business transactions

If a company accounts as of 31.12. one year, it may well happen that the receipt of a service and its payment do not take place in the same year. A classic example is the telephone bill. Calls made in December will not be billed until January. Against this background, balance sheets are rarely drawn up in January, but only two to three months after the balance sheet date. Services that have already been performed on the other side but have not yet been paid for must also be assessed. Nevertheless, the companies have to submit their balance sheets promptly. This fact means that balance sheets are not always one hundred percent clear.

BALANCE SHEET

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