Understanding Company Financial Statements
Annual Accounts
Annual accounts are useful for financial reporting of assets, financial position, and results of a company. The annual accounts must be prepared within a maximum of three months from the closing date of the financial year. The annual accounts are:
- Balance sheet: Shows the company’s financial situation at the closing of the financial year.
- Income statement: Shows the company’s performance during a financial year.
- Statement of cash flows: Shows the change in monetary position from one year to another.
- Statement of changes in equity: Shows changes in the composition of the company’s equity from one year to another.
- Notes: Provides relevant quantitative and qualitative information about the company.
The annual accounts are based on the PGC (General Accounting Plan). There are three types of PGC:
- Normal: All companies are eligible.
- SMEs: Firms are eligible if, for two consecutive years, they meet these requirements: Total Assets < 2,850,000; Net Turnover < 5,700,000; Average number of employees <= 50.
- Micro: Companies that meet the following requirements: Total Assets < 1,000,000; Net Turnover < 2,000,000; Average number of employees <= 10.
Initial Balance Sheet
The balance sheet is an initial document that shows the company’s patrimony at a given time; that is, its static position. It reflects all assets, rights, and obligations of the company at a specific date. It must fulfill:
Total Assets = Liabilities + Equity
Profit and Loss Account
The profit and loss account is an accounting document intended to calculate the result that a company has obtained during a financial year. It is an account that every company has the annual obligation to provide, offering important information about the expenses and income of the company.
Statements of Change in Equity
Objective: To provide a comprehensive overview of the changes that have occurred during the financial year and how they relate to the following aspects:
- The result of the income statement for the financial year.
- Capital increases.
Notes to the Financial Statements
The notes are a document that extends the explanatory content of the other financial statements. The more applicable these comments are, the more they help to understand the company’s situation. The contents of the notes must contain information about:
- Company activity: The activity that the company develops.
- Basis of presentation of annual accounts.
- Application of the result: What the benefits are used for. It can be used for reserves, offsetting losses from previous financial years, or as dividends.
- Standards of registration and accounting criteria: Explains the accounting criteria used throughout the accounting process.
- Fixed assets – Tangible and intangible real estate investments: Explanation of the movements between accounts of owned real estate and investment real estate accounts.
- Financial assets: Analysis of financial assets and their movements.
- Financial liabilities: An analysis of all financial liabilities that the company currently has.
- Equity: Explains the breakdown of capital.
- Tax situation: Report on corporate income tax and other taxes that the company must deal with.
- Revenues and expenses: Increase in the income statement and an explanation of the relevant data.
- Grants, donations, and bequests: Explanation of all money received in the form of grants, etc.
- Transactions with related parties: Explaining the operations carried out with the companies in our business group.
- Other information: Environmental aspects that the company conducts.