Understanding Financial Statements: Assets, Liabilities, and Equity

Posted on Jan 23, 2025 in Accounting and Finance

T.12 The Balance Sheet

The balance sheet reflects the assets and rights that constitute the assets of the company and the funding sources that comprise the net patrimony and liabilities. It is a static document that refers to the situation of the company at the date of financial close. This document is made from the balance sheet accounts, the first five groups of the General Accounting Plan (PGC). Systematized information is included in the closing entry accounting made in the journal.

Companies that satisfy at least two of the conditions stated in the following table may use the Abridged Balance model, which is simpler than the normal model:

  • Total assets: €2,850,000
  • Net amount of annual turnover: €5,700,000
  • Average number of employees: 50

If a company fails to meet two of the limits for two consecutive years, then it will have to formulate the standard model of balance.

Structure of the Balance Sheet

ASSETS

  • A) Non-current assets
  • B) Current assets

EQUITY AND LIABILITIES

  • EQUITY
    • A-1) Equity
    • A-2) Adjustment for change in value
    • A-3) Subsidies received
  • B) Non-current liabilities
  • C) Current liabilities

TOTAL EQUITY AND LIABILITIES (A + B + C)

TOTAL ASSETS (A + B)

The Profit and Loss Account

The profit and loss account includes the proper segregation of income and expenditure for the year and, by difference, the outcome. This document is made from the accounts, groups 6 and 7 of the PGC. Systematized information is contained in the entries for determining the outcome that is made in the journal. While the balance sheet only reports on the amount and sign of the result obtained by the company during the year, the profit and loss account also shows its composition.

Profit and Loss Account Structure

Operating result + Financial result = Result before tax + Income tax = Income from continuing operations + Result from discontinued operations = Result for the year.

Remember the difference between revenues and expenditures in each group!

The Report

The report is an explanatory document that completes and comprehensively expands on the information contained in other documents that make up the annual accounts.

It has a twofold function:

  • Descriptive function: Ensures the connection of the other four documents making up the annual accounts with the reality they purport to represent, providing authentic content and rules that facilitate users’ proper interpretation.
  • Interpretative function: Provides additional information and explains, where appropriate, exemptions in the application of accounting rules and principles.

The PGC prescribes the minimal information that must be contained in the report in normal and abbreviated versions, with the requirements that a company must meet in order to complete the abbreviated model being the same as for formulating the balance sheet in this version.

Short version:

  1. Company activity
  2. Basis of presentation of the Annual Accounts
  3. Application of Result
  4. Recording and valuation standards
  5. Tangible assets, intangible assets, and investment property
  6. Financial assets
  7. Financial liabilities
  8. Equity
  9. Fiscal situation
  10. Income and expenditure
  11. Grants, donations, and bequests
  12. Operations with related parties
  13. Other information

The Statement of Changes in Equity

Aims to identify all changes in net equity items between two exercises, thus supplementing the profit and loss account to show the variation of the wealth of the company. It has two parts:

  1. Income and expenses recognized.
  2. Total changes in equity.

The Cash Flow Statement

This statement complements the balance sheet and profit and loss account by providing specific information on inflows and outflows of cash. It shows receipts and payments made by the company throughout the year, and reports on the origin and use of monetary assets represented by cash and cash equivalents. It is only mandatory for companies that cannot perform the abbreviated balance sheet.

Other Financial Statements: The Annual Report

There are a variety of complementary financial statements in addition to the accounts, such as:

  • Intermediate: Information relating to periods below the business year.
  • Forecasted: Made with prospective information, i.e., with the figures expected by the different accounting magnitudes.
  • Segmented: Relative to the various lines of business or geographical areas.
  • Consolidated: Referring to all companies linked by a group relationship.