Accounting: the closing balance sheet, what is it used for and how is it prepared?
Do you have any doubts or difficulties in understanding accounting technique and subjects such as accounting? Not sure where to start and need help?
If you are looking for advice, read on. In fact, the purpose of the article is to explain what the closing balance sheet is and what it is for. And here you can find all the steps to follow for its editing.
The determination of income and the management budget
Since the establishment and in the course of its activity, the company has been faced with various management events. Let’s think, for example, about the purchase of instrumental goods to be used within their own production processes. Or hiring dedicated staff to carry out specific development projects.
These are transactions that take place whenever the company has relationships with external parties. And that are measured and identified through a special accounting system using the Double Match method (if in doubt, see the dedicated article on this).
In detail, all these transactions and the corresponding financial values are recorded on specific accounting accounts. As defined by the company accounts plan, and allow to achieve a double objective:
The determination of the result achieved in a given period of time, for example the financial year that usually coincides with the calendar year, and the consequent definition of the working capital necessary to be able to continue to carry out its business.
Control of economic management and mainly of monetary-financial variables. Indispensable for detecting changes in money, receivables and payables as well as changes in the structure of working capital.
As we know, during the administrative period, revenue and cash outflows measure costs and revenues. It would be more appropriate to talk about negative and positive components of income. And the entries that concern the management events flow into the Financial Statements at the end of the year.
A DOCUMENT THAT SUMMARIES THE COMPANY SITUATION AND IT IS ESSENTIAL OF 3 ELEMENTS:
The Balance Sheet = represents the photograph of the organization at a given moment and identifies everything that is part of the company since its establishment, such as the goods purchased, debts and credits, cash consistency etc.
The Income Statement = focuses on a flow dimension and serves to understand what the management result was based on the reference accounting period.
The Notes to the Financial Statements = is a document that provides an explanation of the choices made and evidence of corporate events, illustrating in qualitative terms what the 2 previous statements described by numbers.
From management to the closing balance sheet
During the administrative period under consideration we said that the company bears costs. Mainly operational, financial, tax, structural, against financial exits. That is, payments in cash or financing and operating debts. And it derives revenues from the sale on the market of its products / services thanks to which it records financial revenues.
It should be noted, however, that financial income and expenses record management events when they occur. This is a numerical dimension that measures costs and revenues regardless of their actual economic use. These components are in fact not entirely the responsibility of the financial year. And this is because the recording of management operations that took place during the accounting year takes place based on the criterion of financial competence. It does not therefore coincide with the economic competence of costs and revenues.
At the end of the year and in order to correctly proceed with the preparation of the Financial Statements, the administrative function must classify the management events. And the related economic values, identifying those that contributed to the determination of operating income. And those that will be transferred to future years. Because they refer to negative and / or positive income components for which the corresponding financial event has already occurred but whose economic effects have not yet matured in the current year.
In order to correctly proceed with the preparation of the closing balance sheet, it is therefore necessary to carry out some adjustments to the general accounts. In order to transform the data previously recorded on the basis of the financial event into values calculated according to the criterion of the economic competence of the closing year.
At the operational level, it means defining the company’s revenue for the year. And therefore pertaining to the operating result of the current year, when the assets have actually been placed on the market or the services provided in full to the customer.
IN SUMMARY A REVENUE IS DEFINED OF COMPETENCE IF IT SIMULTANEOUSLY PRESENTS THE FOLLOWING 2 FEATURES:
when the economic maturation occurred in the reference period.
when in the same year the related cost was also sustained (the so-called principle of inherence).
ANALLY YOU CAN DEFINE A COST OF COMPETENCE OF THE EXERCISE WHEN:
the same matured during the reference period.
has found coverage in a related revenue (or we know in advance that there will be no related future revenue for the financial event).
The closing balance sheet constructed according to these criteria therefore defines the operating result, and more precisely the economic values of the income that have been integrated and adjusted flow into the Income Statement. While the financial values together with the economic values pertaining to future years will be entered in the Balance Sheet. And both statements as mentioned at the beginning of the article together with the Notes to the Financial Statements will be an integral part of the company financial statements.