Accounting is a complex and sometimes difficult subject for any entrepreneur or freelancer. In the article below we set out to unravel the mysteries of a balance sheet. Once you understand some key aspects, it will be much easier for you to make strategic decisions that will help you grow your business and bring you closer to your dream. 

What is the balance sheet

According to Ordinance 2634/2015 on financial-accounting documents, the balance sheet is defined as the accounting document used to verify the correct recording in accounting of transactions and control the concordance between synthetic and analytical accounting, as well as the main instrument on wich annual financial statements are prepared and accounting reports established by law. In short, the monthly balance reflects all your work.

Types of balance sheet

There are two types of balance sheets in accounting:

  • the summary balance is the document in wich the accounts are presented withoult detailing their composition;
  • the analytical balance is the one that presents all the details about the accounts.

For example, in a synthetic balance you can see the overall amount you have to pay, and the analytical balance shows you in detail all the creditors and how much you have to pay each one.

Account classes in the balance sheet

There are seven classes of accounts in the balance sheet, grouped according to their common characteristics.

Class 1

Class 1 contains the share capital, reserves, retained earnings, profit or loss and loans contracted. Here we check if the company records profit or loss. If account 121 has amounts registered on debit, the LLC is at a loss. The amounts registered on the credit in account 121 show you that the company registers profit.

Class 2

Class 2 represents the company's fixed assets and their depreciation stage. If the company has acquired fixed assets, they will be found in the amounts transferred to period-flow turnovers. Depreciation over a period of time is found in accounts starting with 28 in the period-flow turnover column. If the total amounts in the final balance column for this debit and credit class are identical, it means that the fixed assets have been fully depreciated.

Class 3

Class 3 comprises accounts of raw materials, materials, goods, production and inventory items purchased or produced by the company. The ammounts recorded in the debit columns of this class represent the purchases, and those in the credit columns show the sale of these materials / materials/ products. The amounts from the final debit balance show that at the end of the period there are materials/ materials / goods within the company. 

Class 4

Class 4 centralizes accounts for customers, suppliers, obligations to the state budget-taxes, contributions to social and health insurance and other contributions, VAT, salaries, advances invoiced and loans received by the company from various creditors. If you are a VAT payer, you will find records in accounts 4423, 4424, 4426, 4427 and 4428. The payment VAT for a period can be found in account 4423 on the credit balance. The VAT recoverable for a period is at the final debit balance in account 4424.

In short, the final credit balances of the 4th class represent the debts of the company, and the final debit balances represent a receivable, is a right that belongs to the company. The negative balance of a customer account means receipts higher than the value of invoices issued. While a negative balance in a supplier account means a higher payment than was necessary. 

Class 5

Class 5 represents the cashier's and back accounts and the accounts showing the transfers between them. All the available money of the company is found in the debit balances at the house in lei and the back accounts from class 5. The receipts from this period represent the debit turnovers. Payments are found on credit turnovers. The final balance of turnovers between the house and the bank must be zero

Class 6

Class 6 is the class of expense accounts. All expenses incurred for carrying out the activity will be found here. These accounts cannot have a final balance at the end of the period. In the debit turnover you will find all the expenses incurred during this period.

Class 7

Class 7 is the class of income accounts. The revenues realized during this period are found in the credit turnovers. As in class 6, income accounts cannot have a final balance at the end of the period.

5 aspects that any entrepreneur must follow

For a good functioning of your company you have to consider and understand some essential aspects.

1. Equity - the net assets of the company 

Equity is one of the most analyzed financial indicators by third parties (banks, investors, Financial Administration, etc.) to establish the "health" of society. The value of equity is one of the indicators that shows that a company is solid and has growth prospects. Capital and reserves (equity) are the shareholders right over the assets of a company, after deducting all debts.

Equity includes:

  • social capital;
  • capital premiums;
  • reserves;
  • reported result;
  • result of the financial year - current profit / loss;

In the company's balance sheet, the amount of equity is found in the accounting accounts beginning with figure 1. 

Why is it important

If for 2 years the equity is less than half of the share capital, any person can request the dissolution of the company. For example: the share capital is 200 lei and the loss of the company is 500 lei. This results in an equity of minus 300 lei. In this case, a supplier may request the dissolution of the company. To avoid this action, keep an eye on your own capital and keep it positive.

Bonuses

Starting with 2021, the Gouvernment adresses the subject of equity by covering this indicator in the form of a fiscal measure. Thus, it tries to stimulate by the state the growth of the Romanian capital and the competitiveness of the economic operators for a period of 5 years, respectively 2021-2025. The reason why capital growth is encouraged is to keep money in the company and encourage investment in equipment or services. In addition, the aim is to avoid excessive dividends for personal gain.

The allowances granted from the payment tax - profit tax, micro-enterprise income tax or specific tax- can vary from 2% to 10% depending on the evolution of capital during this 5 year period. 

2. Correctness of balances of suppliers and customers in the balance sheet

It is recommanded that you schedule a monthly or quarterly meeting with the accountant to check the detailed list of unpaid clients and unpaid suppliers. Here is a hypothetical example of what might happen if you do not have such a meeting. A customer invoice was canceled and this information was not passed to the accountant. At first glance, you will say that this cannot influence the company's activity. However, the impact of this omission can have a number of consequences:

  • exceeding a ceiling set by law to become a VAT payer;
  • payment of larger sums of money to the state;
  • a negative cash flow, and implicitly, the inability to pay.

It is a useful check trough wich you will make sure that all customer and supplier invoices have beem registered in the accounting. Also, annually, when drawing up the company's inventory file, it is mandatory to obtain balance confirmations from customers. This confirmation of the balance is the justification before a court in case the customer refuses to pay the outstanding invoices.

3. Financial indicators

Financial indicators provide valuable information about the company's situation based on wich decisions can be made regarding the company's management in the coming years. These indicators should help you and other third parties to analyze the current situation of the company, its performance and its problems. The bank may be one of these third parties interested in these indicators. Based on these values, for example the bank may decide to grant or extend a line of credit. The same principle applies if you are looking for an investor at some point.

The most used and relevant financial indicators
  • Current liquidity. It measures the ability to pay short-term debt using short-term assets0 receivables and bank accounts in the balance sheet. In the case of a company that has sufficient resources tho finance itself, the value of the indicator is 1.2. If this indicator has a negative value, you must ask yourself a question if in the medium or long term the company will not reach insolvency.
  • Bearing fund reflects the degree of liquidity of the company, respectively the degree of payment of current payments debts.

 

4. Income and expenditure analysis

It is recommended to do a quarterly, or even monthly, a detailed analysis of the composition of income and expenses. In addition, it analyzes all the indicators that can be calculated based on them. The difference between income and expenses is reflected in the company's profit or loss account. One of the most relevant indicators in this case is the profit margin. This helps you identify how much money you have made for the company. Profit margin = (turnover-cost of goods/ services sold) / turnover

5. Preparation of the manual of accounting policies and procedures

The Accounting Policies and Procedures Manual sets out the specific principles, conventions, rules and practices applied by a company to carry out its business. It is recommended to be prepared by a specialized person, accountant or consultant, with the participation and input of the company to address the specific needs of its profile.

Why is it necessary?

The accounting policy manual sets out the conditions under wich certain transactions with an impact on the company's accounting are carried out and whose accounting information will be the basis for decisions taken by the company's management. You will choose good practice procedures that will audit or control the company financially. It must be available at the request of the tax authorities and its absence is sanctioned within fine of up to 4,000 RON.

Checking the balance sheet

Tracking a series of indicators in the balance sheet can reveal certain errors that indicate accounting irregularities.

What to pay attention to

  • All classes of accounts must be recorded in the balance sheet;
  • The general totals in each column have a debit equal to the credit. If they are different you have what is called a "lame balance";
  • Class 7 revenue and class 6 expenditure accounts never have final balances;
  • The final balance of account 121 must be equal to the difference between the total amounts in class 7 and the total amounts in class 6;
  • Account balance 5121 must be the same as the balance on the account statement;
  • The balances of foreign currency accounts must be updated at the end of the month accourding to the NBR exchange rate on the last day of the month;
  • The figures in the synthetic balance must correspond to those in the analytical balance;
  • If the company registered a profit, it appears in account 121-legal reserves.

This article was written in collaboration with Alina Radu, an accounting expert and founder of Financess – your reliable help in accounting and tax consulting. Alina can be contacted at alina.radu@financess.ro and 0749.097.969.