Every year, at the end of the accounting period, a summary of the company’s assets is produced at a specific time: the balance sheet. Indeed, the balance sheet is mandatory for each company director and its implementation is guided by legal provisions (the Commercial Code, the General Accounting Plan).
When carrying it out, reading it and analyzing it correctly, the balance sheet allows you to know the financial position of your company at the end of the accounting period. You can then assess and estimate its solvency as well as its financial performance.
The balance sheet in detail ?
By balance sheet, we mean a kind of accounting picture from the date of the end of the accounting period. Two major components : what the business owns (the assets) and what it owes others (the liabilities).
Along with the income statement or the annex, it is a component of the annual reports. Therefore, the balance sheet makes it possible to read the financial position of the company and to assess its potential and its solvency. Your financial partners will also be able to assess your internal financial structure.
What does a French balance sheet look like ?
The balance sheets are all made of a table with two symmetrical parts.
The assets on the top left of the table while the liabilities are on the right side of the document. Bank flows must balance out.
Assets are the sum of everything the business owns. Including in this set the fixed assets (durable goods) and the current assets (debts, statement of cash flows, stock and outstanding invoices etc.).
On the other hand, liabilities refers to what the company owes. First of all, it collects equity capital such as share capital, reserves, retained earnings, profit, etc. Then, the liabilities include provisions for liabilities and charges (the most probable debts) and debts (financial, fiscal, suppliers, social, etc.).
Efficiently read your balance sheet
Understanding the different elements of your balance sheet makes it possible to better study it and to extract some financial indicators that are useful for the management of your company in France (working capital, debt ratio, etc.).
What do “n” and “n-1” mean ?
In accounting language, “n” refers to the chosen period (i.e., the accounting period) and “n-1” to the previous period. It allows to compare the dynamics of the company over time.
Why does the asset is made up of three columns?
In the assets part of the balance sheet, the first column matches the “historical” value of the asset. The second one, the value of the asset taking into account the drop observed over time; and finally, the last one, the net value (equals the difference between the first two).
How are the different elements classified?
In the asset section, these are listed in order of liquidity. Namely: from the one requiring the most time to be transformed into cash (land for example) to the one requiring the least (your company’s bank account or cash register). In the liabilities section of the balance sheet, debts are classified from “least urgent” to “most urgent”.
Why do assets and liabilities need to be balanced?
In a balance sheet, what a business owns should always equal what it owes. However, that doesn’t mean the company can’t make a profit. Indeed, in the balance sheet, the profit causes an increase in the assets and a debt of the company to the shareholders.
For a better understanding of your company’s balance sheet, you can partly rely on the annual accounts annex which will provide you information, including on cash flow.
What are the requirements for the balance sheet ?
In France, this balance sheet is supervised by specific legal provisions (Commercial Code, General Accounting Plan). It is compulsory for all managers to make an accounting balance sheet.
Moreover, it is not mandatory to rely on a certified public accountant. If you want to, you can do it yourself. But, drawing up the balance sheet yourself is not recommended as it requires specific tax service skills. This is why we advise you to use an accountant law firm such as CF Henderson to avoid any risk of errors which will be detrimental to you in the long and medium term.
How to make an accounting balance sheet ?
It all starts with the choice of your management tool: a good tool must be tailored to the size, activity and location of your business.
Then, it is necessary to master the input of accounting entries. It is tedious and complex to input your accounting entries yourself. This process is most of the time done by accountants, they are more qualified to list and record each banking transaction in its category of income or expenses.
Audit
This process is used to check and validate all of your bank balances. This is a series of checks to ensure the consistency, plausibility and reliability of your annual accounts.
Filling of annual financial statements
It is required to file your annual accounts with the Registry of the commercial court, within 7 months after the end of your financial year. You can submit your accounts by going there, by registered mail or electronically (on the i-greffes website).
What are the risks with an inaccurate balance sheet ?
Under French law, you should know that keeping inaccurate or fictitious accounting documents is subject to criminal prosecution. The business leader risks a fine of up to €500,000- and 5-years’ imprisonment.
For the drawing up of the balance sheet, it is recommended to use a certified public accountant offering taxation services in order to avoid any risk of error.