The most important annual financial statement components explained

The most important annual financial statement components explained

With this blog article we explain to you what the most important annual financial statement components are. Ultimately, as the person responsible for a company, you are faced with the challenge of preparing annual financial statements. This comes with several requirements. All relevant positions must be recorded, deadlines must be adhered to and tax traps must also be avoided. The creation ranges from thoughtful preparation and sorting of the required documents to the final approval of the annual financial statements.

Annual financial statements simply explained

The annual financial statements serve to record the current financial situation of a company and thus provide conclusions about its success. In principle, every entrepreneur is obliged to prepare annual financial statements for the commercial financial year if there is an obligation to keep double-entry books. Basically, this applies to corporations (AGs, GmbHs UGs), partnerships (e.g. OHG, KG and GbR) as well as mixed forms such as GmbH and Co. KG or AG and Co. KG).

Freelancers and small businesses are exempt from annual financial statements within the meaning of the German Commercial Code (HGB). For these groups, a simplified form of profit determination, the EÜR (revenue surplus accounting), is sufficient. Sole traders (e. K.) can also be exempt from annual financial statements. A certain sales limit applies to these. If no more than 60,000 euros in annual profit and no more than 600,000 euros in sales were generated on the closing dates of two consecutive financial years, there is no accounting obligation and therefore no obligation to prepare the annual financial statements.

Overview of the annual financial statement components

Depending on the size and legal form of the company, more or fewer positions may be required.

In general the components are as follows:

  • Balance sheet
  • Profit and loss statement (P&L)
  • Attachment
  • Situation report
  • Statement of equity
  • Segment reporting

For partnerships and sole traders, the annual financial statements essentially consist of a balance sheet and a profit and loss statement.

Prepare the annual financial statements with their components

In the demanding project of annual financial statements, a whole range of components must be taken into account. It is advisable to start preparing for your annual financial statements early on.

Compile documents and documentation

Please note that it can take a lot of time to collect all the necessary elements and documents. For example, all commercial register extracts, shareholder agreements as well as copies of invoices, rental and lease agreements are required. Receipts, for example for donations, must also be compiled in the preparatory work.

Company inventory

During the inventory, you determine the company’s entire inventory, including all assets and debts. At the end of the financial year, these must be determined and recorded in an inventory.

Compile contracts

Another essential basis for the annual financial statements are contracts of all kinds. Insurance contracts and credit agreements are particularly relevant here.

Accounting and receipts

All accounting documents must be recorded and sorted in advance. All receipts must be managed correctly and comprehensibly in accordance with the principles of proper accounting (GoB). This includes evidence of business transactions such as income and expenses. If necessary, invoice corrections must be requested in a timely manner.

Determine depreciation

Reductions in value must be determined and recorded as depreciation. They reduce the company’s fixed assets. Every year, machinery, company buildings, vehicles and other components of company assets lose some of their value.

requirements

Claims must be checked and recorded. Expected bad debt losses must also be taken into account. Open claims are checked for creditworthiness. In the event of a risk of payment default, such cases must be recorded as individual value adjustments.

accruals

Companies create provisions for expenses whose amount and due date are not yet known at the time of booking. Provisions are used to record certain expenses on an accrual basis in the accounting period in which they arise (even if payment as such is made later). These include, for example, guarantees and taxes, but also impending losses.

Logbook

The logbook must also be checked. It should always be complete and up-to-date, which is particularly relevant for tax audits.

After these preliminary considerations and work, you are ready to prepare the annual financial statements. Several steps are also required during the actual creation.

Preparation of the annual financial statements

The creation itself ranges from recording all balances to listing all beginning and ending stocks in a financial statement overview to the final approval of the annual financial statements.

The first step is to close all main and sub-accounts. For the sake of clarity, corporate business transactions are posted in different sub-accounts as part of the accounting. When you create the annual financial statements, these subaccounts are merged into the corresponding main account. This is where the account balances are determined and then transferred to the balance sheet.

The next step is to create the final overview. In this you list all beginning and ending stocks clearly and organize them according to the stock and profit accounts. The financial statement overview is used to prepare the annual financial statements and provides additional information, for example by displaying sales transactions. Tax offices often require such a final report in addition to the balance sheet and income statement.

The final step is to approve the annual financial statements. The so-called determination represents a formal act. Depending on the legal form of your company, the annual financial statements are determined by the supervisory board, by shareholders or by another social representative.

Individual steps for preparing the annual financial statements

Fixed assets include all company property and machinery, but also furniture and any renovations. These are asset components that you list in asset accounting. The fixed assets can be checked based on the plant overview. A prerequisite is careful accounting beforehand.

When you go through the various points of the investment overview, there are various aspects to consider. For example, the acquisition value must be adjusted to the current value. Depreciation must also be taken into account within the financial year. If parts of the fixed assets are no longer assets in the company, they must be removed from the investment overview.

Recording current assets

Current assets correspond to your company’s inventory. An inventory provides an overview of current assets. As part of this, all objects in the company must be counted, measured and weighed. These items include goods, supplies, office supplies and tools, but also accessories such as bags or decorative items.

So it corresponds to everything that can be found in the company. After all items have been recorded in terms of quantity or weight, the basis for an evaluation is provided. Evaluation standards provide support here. The company’s cash holdings and bank balances also count as current assets. When it comes to inventory, most companies rely on merchandise management systems and software solutions.

Record receivables and payables

Liabilities include any loans, loans or personal loans taken out. Banks can send balance confirmations for recording purposes. Regular bank statements are also acceptable as proof of liabilities. Open invoices or items are recorded in the so-called OPOS list (open item list). This includes both open invoices and amounts from the company as well as open customer invoices. The receivables from services and deliveries must then be listed. This is followed by a list of trade payables.

Record depreciation

Depreciation and its nature are subject to strict regulation. A depreciation table is helpful for depreciation. This is a table in which the normal useful life of assets in fixed assets is determined.

Depreciation on fixed assets relates to missing or damaged items. If missing, the items must be written off in full. In the event of damage or wear and tear, it is possible to write off some of the items. Depending on the degree of damage, a complete write-off is also possible. After inventory, depreciation can also be made on current assets. It is possible to set a lower rating for certain items

It is also possible to write off customers’ outstanding claims. This occurs when the customer is unlikely to be able to pay the claims. This can be assumed, for example, if the customer files for bankruptcy.

Active and passive deferred items

In order to correctly determine the profit for the period, a company needs prepaid expenses. They serve to allocate the amounts according to the period. Prepaid expenses can be divided into active (ARAP) and passive (PRAP) variants.

Active items are to be understood as paid invoices for which the service relates to the following year. Here, a payment is made before the balance sheet date, some of which affects the next year. An example is advance payments to insurance companies. Likewise, some suppliers require down payments in connection with long-term contracts.

Deferred income is the opposite business case. Your company receives an advance payment before the balance sheet date. This advance payment does not apply to the current year, but to the following year. In the passive and active variants, the delimitation serves to provide a realistic representation in the balance sheet.

The correct delimitation and accounting of these items depends on precise accounting. For smaller amounts, accruals are of less relevance, but are worthwhile for larger amounts.

accruals

Provisions are particularly important when it comes to profits. Provisions are liabilities whose amount and timing are not yet known. With the provisions you describe expenses that will most likely still be incurred. It should be noted that there are different types of provisions. These include, for example, tax provisions, expense provisions or provisions for impending losses.

Annual audit and annual review

****Before the annual financial statements are finally drawn up, the annual financial statements are audited or the final discussion takes place. After the previous steps, it may be worthwhile to take a closer look at all positions again in order to identify scope for certain valuations. Certain factors can have a positive impact on the financial statements. For example, previously undetected provisions may appear. It is also beneficial to sit down with a tax advisor and discuss the impact of profits or losses on taxes.

Tax optimization of the annual financial statements

Although tax law rules must always be adhered to, there are options for tax optimization of the result. High profits are beneficial for the company, but they cost taxes that have to be paid to the tax office.

The tax burden can be reduced by reducing profits. A sensible option is to bring forward upcoming investments. If you plan larger expenses, these will reduce the tax burden. If the investments are planned anyway, it is worth making them before the end of the financial year.

Another way to reduce the tax burden is to defer income into the next year. There may be open items at the end of the year. If customers do not pay these until next year, they will no longer be allocated to the current financial year. The annual profit is therefore slightly lower.

However, when it comes to your own outstanding invoices, it is worth paying them as soon as possible. With higher expenses, profits and thus the tax burden decreases. For example, you can ask suppliers or service providers to send you an invoice before the end of the year.