The company balance sheet - a fundamental accounting tool

Experts in the field are of the opinion that the owner of the company must know how to analyse it and how to use it to his advantage if he wants to have a high profit business. The balance sheet is, in fact, a fundamental accounting tool that every company in Romania must have, an official document that records its assets and sources of financing. Basically, it can be said that the balance sheet is the mirror of the business, through which it is possible to see clearly which are the directions of action for efficiency or development.

Publication date: 18 December 2022

In the article below you will discover what the balance sheet is, what is its role, importance and structure, you will learn the three functions of the balance sheet and how it is made, as well as many interesting and extremely important details if you want to know when to draw up the balance sheet, who can sign it, where to submit it and how to analyse and interpret it to better understand your business.

 Contents:

1. What is the balance sheet of a company?

1.1. The role and importance of a company's balance sheet

1.2. Structure of a company's balance sheet

1.3. Features of the balance sheet

2. Functions of the balance sheet

2.1.Economic and financial analysis function of the balance sheet

2.2. Accounting data generalisation function

2.3. Balance sheet forecasting

3. Useful tips on balance sheet preparation

3.1. When is the balance sheet drawn up?

3.2. Who can sign the balance sheet?

3.3. Where is the balance sheet submitted?

3.4. How is the balance sheet analysed?

1. What is the balance sheet of a company?

A company's balance sheet is a document that sets out the financial position of the business over a period of time. The term balance sheet comes from the Italian word 'bilancia', which means 'weighing scale', which in turn comes from the Latin word 'bilanx', which translates as 'two scales'. In the common sense, the balance sheet is a table made up of two parts (assets and liabilities) and includes the following elements: capital, assets and liabilities. Depending on the size of the company, the balance sheet can be a simplified balance sheet (for small and medium-sized enterprises) or a basic balance sheet (for large enterprises).

The balance sheet must be filed by all economic entities undertaking economic activities, such as private or state-owned companies, autonomous regions, research and development institutions, NGOs, etc.

 1.1. The role and importance of a company's balance sheet

A balance sheet provides an opportunity to identify potential economic risks to which the company may be exposed, to forecast the gap between company expenses and receipts, to properly manage resources, to identify new sources of financing, even to draw up plans and strategies for growth and efficiency. With the help of a chartered accountant any businessman can make an analysis, where it is explained exactly what each amount on the balance sheet means. In this way, he can also find out the following:

• the value of the assets and the company;
• the value of debts;
• what the company is backed by (creditors or equity);
• the efficiency of the use of money;
• the profit made;
• how to develop the business.

The balance sheet is important for the development, planning and activity of the company, drawing attention quickly to issues such as how to improve the stock, attract new investors, how to limit the expenses incurred up to the time of the balance sheet analysis, how to develop the production in order to obtain a higher profit or how to expand the company.

In order to achieve the desired success, some companies have outsourced their accounting services to financial and banking specialists, who are able to meet all the accounting and financial reporting, payroll or administrative service requirements that the companies in question want. In practice, these specialists also assist with balance sheets, so any company in need of accounting advice and outsourced services can complement their existing team with a great deal of expertise.

 1.2. Structure of a company's balance sheet

The balance sheet has several elements in its structure that need to be mentioned for proper understanding:
The balance sheet itself, which comprises assets, liabilities, accruals and deferred income and bond redemption premiums;

• The profit and loss account, which implies the existence of inputs and outputs (salaries, receipts, payables, invoices, etc.);
• the balance sheet annex, which is made up of any information on the financial situation;
• The management report includes the financial statement, equity holdings, research and development activity, etc.

The balance sheet is made up of assets, liabilities and capital, with a balanced relationship between them. Assets are current and non-current and liabilities are current or long-term. To keep track of them, it is necessary to have accountants who are specialists in the field, especially if the company does not have a proper accounting department.

 1.3. Features of the balance sheet

Among the features of this financial instrument are:

• Equality between assets and liabilities;
• Each balance sheet position is expressed in value;
• The balance sheet is presented at a specific date in the year.

It may also be mentioned that the balance sheet may be initial, i.e. drawn up when the firm is set up, it may be current, i.e. drawn up during the course of the year, and it may be final, when it is drawn up at the time of liquidation

 2. Functions of the balance sheet

Many entrepreneurs consider the balance sheet a formality and a tax obligation, without realising that it is actually an asset for them. The information contained in the balance sheet is useful both for the company in question and for suppliers, banks, investors, customers and public institutions, as it gives the entrepreneur a clear understanding of his company's history and gives others useful information for making or rejecting a decision to work with the company. The balance sheet can be assigned several functions, which the entrepreneur needs to know in order to better understand the financial situation of his company. These include the economic and financial analysis function, the generalisation function and the forecasting function.

2.1. Economic and financial analysis function of the balance sheet

Balance sheet indicators need to be closely monitored to see how they are evolving so that the owner can make the best decisions about their business. Obviously, it is important that the owner understands these indicators and all the mechanisms they entail in order to find the best ways to achieve success in the coming period.

It is very important for those thinking of investing in a company or buying a business to look carefully at the balance sheet to see whether the economic and social situation is optimal or whether there are problems that need to be taken into account. Among the indicators that will be useful to those who want to buy or invest in a company can be mentioned:

• the market value of the company;
• the company's level of debt;
• its ability to pay;
• stock turnover rate.

2.2. Accounting data generalisation function

The trial balance is the basis for the preparation of the balance sheet and allows a proper analysis of the company's activity. However, specialists say that the balance sheet is preferable because it greatly simplifies the way the financial situation of the company in question is presented. An example of this can illustrate this very well. Basically, it is the payroll tax, social security contributions and health insurance contributions that are shown separately in the balance sheet. These can be looked at in this very simple way, without any problems, but in fact all these items are part of a larger category, that of payroll debts to the budgets, so it would not be of any real help to anyone to look at them individually.

2.3. Balance sheet forecasting function

Last but not least, there is the balance sheet forecasting function, because all the data provided by this tool will show the entrepreneur what will happen in the future or in the immediate future with the company he owns. He will thus understand many things related to: how to increase the company's sales, what expenses he should reduce in order to save money, whether or not he can increase the salaries of his employees, how much he could borrow for possible investments he has in mind or how to reduce the company's indebtedness, etc. With the balance sheet in front of him, the owner or partners of the company will find possible new resources through which they can develop their business in the medium or long term. 

 3. Useful tips on balance sheet preparation

The balance sheet is drawn up in the form of a table, consisting of two parts: assets and liabilities (presented in monetary form only). The two parts must be equal, because it is the same mass of assets, but viewed from two angles. 

 3.1. When is the balance sheet drawn up?

The balance sheet must be drawn up once a year with all the information existing on 31 December. Some companies above a certain turnover have to file half-yearly financial statements with accounting information also as at 30 June. There is also a situation where a company wants to collect dividends made in that quarter, which requires financial statements to be filed at the end of each quarter, i.e. on 31 March, 30 June and 30 September.

A distinction must be made between the balance sheet and these quarterly or half-yearly financial statements, although they are quite often referred to in practice as 'balance sheets'. In fact, there is only one commercial balance sheet, which is, of course, the one filed on 31 December.

 3.2. Who can sign the balance sheet?

Another important thing for entrepreneurs to know is that the balance sheet can be prepared by the accountant they have hired for this purpose, but also by a specialised firm if they have outsourced their services. It is important that the person in question is experienced and qualified in drawing up the balance sheet in order to complete it correctly, quickly and easily, but also to be able to clarify to the owner any doubts he may have at any given time. The signature on the balance sheet may be that of the person who drew it up, who must be a chartered accountant, the company's chief accountant or even the economic director, even if the latter is not a chartered accountant.

3.3. Where is the balance sheet submitted?

The balance sheet must be filed with ANAF, online, with an electronic signature. In certain cases, when companies have a high turnover, it must also be published in the Official Gazette. If this balance sheet is not filed, serious problems can arise, which are reflected in the receipt of various fines given according to the number of days late. The legal duty to submit the balance sheet to the ANAF lies with the accountant, who must do so within 150 days of the end of the financial year. For other institutions, such as NGOs, the deadline is 120 days after the end of the financial year.

3.4. How is the balance sheet analysed?

The analysis of a balance sheet is very important, whether it is a public or private institution, a construction company or a farm. This analysis must include the liquidation of assets, i.e. turning assets into cash (current assets, receivables, inventories and fixed assets will be taken into account), financing structure (debt and equity), book value versus market value (the book value of the company is calculated by subtracting total liabilities from total assets).

In conclusion, given how important the balance sheet is, it is essential that it be drawn up by a certified accountant, because this is the only way for the entrepreneur to become a successful one, developing and planning his company's business successfully. Based on the figures in the balance sheet, the owner will develop better marketing and management strategies and make better decisions in the future.

*This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.