Understanding Annual Accounts: Balance Sheet, Profit & Loss

Posted on Dec 9, 2024 in Economy

Understanding Annual Accounts

Accounting documents are mandatory for enterprises (except the cash flow statement in the case of SMEs). The documents that comprise the annual accounts are:

  • A. The balance sheet
  • B. The profit and loss account
  • C. The statement of changes in equity
  • D. The cash flow statement
  • E. Notes

These documents form a unit and should be drafted in accordance with the law. Their purpose is to present fairly the assets, financial condition, and results of the company.

Formulation of Annual Accounts

The annual accounts are drawn at intervals of 12 months and must be made by the employer or administrator.

The annual accounts are drawn up expressing their values in euros and must be accessible to a plurality of economic and social relations, among them are: shareholders, employees, the government, and financial institutions.

There are two features in the information contained in the annual accounts:

  • Information is relevant when it is useful for making economic decisions. That is, when it helps us to evaluate past, present, or future facts, either to confirm or correct past evaluations and properly show the risks facing the company.
  • Information is reliable when the annual accounts are free of errors and are neutral, i.e. it is the true image of those who seek to represent.

The annual accounts must be comparable in order to determine the status and profitability in relation to previous periods or companies of similar characteristics.

Normal or Short-Model

  • Normal model: Most companies follow this model.
  • Short-Model: Companies may use abbreviated annual accounts in the following cases:

a) Balance Sheet

Companies that, on the date of the financial year, comply with at least two of the following circumstances:

  1. That the total assets do not exceed €2,850,000.
  2. The amount of their net annual turnover does not exceed €5,700,000.
  3. That the average number of employees during the year does not exceed 50.

b) Profit and Loss Account (Short)

Companies that, on the date of the financial year, comply with at least two of the following circumstances:

  1. The total asset items in the balance sheet do not exceed €11,400,000.
  2. The amount of their net annual turnover does not exceed €22,800,000.
  3. That the average number of employees during the year does not exceed 250.

Individual entrepreneurs are obliged to make at least abbreviated annual accounts, as well as other less common forms of companies.

A. The Balance Sheet

Balance sheet: An inventory that includes the capital which at one time the company has arranged in pools of assets, forming assets, net assets, and liabilities. Your available equity and liabilities with investment assets.

The balance is the accounting item that represents and measures the synthesis of the balance sheet of the company. The balance should reflect clearly and accurately the financial position of the company and the profits or losses at the end of the last year.

B. The Profit and Loss Account

Accounting, in addition to providing information on the assets of the company through the balance sheet, also allows the results after a period of activity, usually coinciding with the calendar year. Calculating the difference between revenue and expenditure at the end of the fiscal year, we will know if the company has had losses or gains.

Profit and loss account: This includes income and expenditure for the year and calculates the differences, the result of it, counting the losses or gains of the last financial year, as outstanding.

Reflects the economic flows along the underwriting year and provides important information on the sources and uses of income and expenditure of the company, therefore it is a dynamic state.

The result of the profit and loss account appears in the balance sheet equity as part of own funds, as positive or negative. The set must have income and expenses. When the account credit balance appears to have made profits and if it has obtained outstanding balance losses.

Income and Expenses

Income: Increases in equity of the company during the underwriting year, either in the form of inflows or increases in the value of assets or reducing liabilities, unless they have their origin in monetary contributions or not, partners or owners.

Expenses: Declines in the equity of the company during the year, either in the form of outflows or decrements in the value of the assets or for recognition or value increase in liabilities, if not originating in distributions, monetary or not, partners or owners.

C. Statement of Changes in Equity

Statement of income and expenses, tracks changes in net assets resulting from:

  • The result of the exercise of the profit and loss account.
  • The income and expenditure to be charged to the equity of the company.
  • Transformations made to the profit and loss account as required by the General Accounting Plan.

Statement of changes in equity, reports of changes in equity derivatives of the total balance income and expenditure, as well as variations in the PN from transactions with shareholders or owners of the company.

D. Cash Flow Statement

Cash flow statement: Reports on the origin and use of monetary assets, cash and cash equivalents, sorting activities and movements, and indicating the net change of this magnitude in the year.

This paper analyzes the initial cash balance at the beginning of the period plus the cash inflows less cash outflows.

E. Notes

Notes: Complete document, expands and explains, with a sufficient level of detail, economic events occurring in society, which are set at the global level, the balance sheet, income statement, the statement of changes in equity, and cash flow statement.

Formulated taking into account that:

  1. The notes model contains minimal information, although in some cases where the information sought is not relevant, paragraphs are not completed.
  2. Any other information not included in the model notes that is needed to enable knowledge of the true image of the company should be provided.
  3. The information should refer to the exercise under the annual accounts, as well as the previous year for which comparative information is provided, unless an accounting standard specifically indicated otherwise.