What is the general balance?

The balance sheet is an accounting report that shows how the equity and financial position of the organization is. It details the assets, liabilities and equity of the company, such as its assets, rights and obligations.

It is the principle of accounting equality that is behind the term “balance sheet”, a concept that refers to the image of the scales on a scale:  the assets of the company must have the same value as the sum between the liabilities and the equity net  . If there is no balance between the values, there are errors in accounting.

The balance sheet is a static report. This means that, instead of showing an evolution, it is like a photograph that records the situation of the company at a given moment.

Balance sheet analysis allows:

  • Know the capital position of the company, that is, its assets, rights and obligations.
  • Observe the historical evolution of these elements that make up the balance sheet.
  • Understand the sources of funds available for the company to invest
  • Calculate the payment of dividends to the partners of the company.
  • Allow tax planning
  • Provide information on the financial health of the company to investors and other interested parties.

What does the balance sheet show?

The balance sheet should detail, in an organized manner, which are the assets, liabilities and equity accounts of the company and how much they are worth. The list of these elements corresponds to the qualitative dimension of the balance, while their values ​​are the quantitative dimension.

What are assets, liabilities and equity?

Assets are the assets and rights of the organization, that is, everything that can be converted into monetary values. This group includes cash, accounts receivable, product inventories, equipment, and real estate.

Liabilities, in turn, are the obligations that the company has with third parties. The concept corresponds to debts, including loans and pending accounts.

Stockholders’ equity is the difference between assets and liabilities. Generally speaking, it corresponds to the wealth of an organization, or what it has minus the bills it has to pay.

How to make a balance?

The balance sheet is basically a table divided into two columns. The first element lists all the elements of the company’s assets and their respective values. The second column starts by presenting all the liability accounts and, at the end, shows the detailed net worth of the company.

At the end of the two tables are, respectively, the total values ​​of assets and liabilities, which must be equal.

The balance sheet should be fairly comprehensive and should itemize all of your assets, rights, and liabilities. These elements must be grouped according to their nature, according to the categories described below.

asset accounts

In the assets column, the accounts representing assets and rights are arranged in decreasing order of liquidity. In other words, it appears in addition to what can be converted into money more quickly if necessary. Assets are divided into current and non-current assets.

Current asset accounts

Current assets are financial assets, that is, assets and rights that must be converted into cash, sold or consumed in the period of operations covered by the balance sheet. Therefore, they are the most liquid elements of the asset. They are divided into the following subgroups:

Cash and cash equivalents:  These are the most immediate financial resources. This category can be divided into subgroups such as “cash” (cash), “bank account in movement” (amounts in free circulation current account), “financial investments” (short-term) and “bank demand deposits” (for checks or transfers that will enter the company’s account in the short term), among others.

Credits:  These are rights that the company must receive. Its subgroups include “trade accounts receivable” or “customers” (sales receivables), “Provision for credit losses” (default estimate), “accounts receivable” (promissory notes, loans receivable from third parties, etc.) and “other accounts receivable” (services rendered and not yet billed, interest receivable, advances to suppliers, etc.).

Inventories:  This group includes accounts for finished products, products for resale, products in preparation, raw materials and other materials. This category also has a group called “Market value adjustment provision”, an asset reduction account whose purpose is to adjust inventory values ​​considering possible losses, such as deterioration and reduction in sales prices.

Other credits:  these are accounts receivable that do not fit into the previous groups. This group includes recoverable taxes, advances to third parties, advances to employees, active rents receivable, etc.

Prepaid expenses  :  expenses already paid that will only be due in the following year, such as insurance premiums, rents and consumption accounts, in addition to the anticipation of commissions, premiums, fees and the advance payment of interest, among others.

Non-current asset accounts

Non-current assets are the most liquid assets and rights of the company. These items cannot be converted to cash in the short term or can only be monetized after that year’s financial year. Non-current asset accounts are divided into the following categories:

Long-term assets: promissory notes, short-term  investments   , deposits and advances, among others, all long-term.

Investments:  are  investments  and  financial investments  of a permanent nature and with the objective of generating income for the company, such as investments in other companies, the possession of non-essential properties for the maintenance of activities, investments in gold and works of art, among others. .

Property, plant and equipment:  essential assets and rights to maintain the company’s activities, such as real estate, machinery and equipment, furniture and vehicles, among others.

Intangible assets: These  are  non-material assets  , but they have value and are essential to the company’s activities, such as goodwill, trademarks, copyrights, patents, licenses, etc.

liability accounts

Liabilities can be divided into  current liabilities   and  non-current liabilities  . In accounting, the difference between the two classifications is due to the due date of the obligations. Liability accounts are classified on the balance sheet according to their maturity, that is, the accounts that are due first appear first.

Current liabilities correspond to short-term obligations, that is, debts and accounts that must be paid in the year following the presentation of the balance sheet (generally, within a year). If the payment term is longer, these accounts will enter the balance sheet as a non-current liability.

Both current and non-current liabilities can be divided into:

Obligations to suppliers:  amounts payable resulting from the purchase of goods, raw materials and industrial supplies, among others. It is possible to subdivide this group between national and foreign suppliers.

Loans and financing:  financial resources raised.

Taxes to be collected:  taxes and other taxes that the company is obliged to collect.

Labor and social security obligations:  salaries and other charges related to employees.

Net Income Shares and Allowances:  The portion of the determined net income that must be paid to partners.

Other obligations:  rents, water and electricity bills and other obligations not included in the other categories.

capital accounts

In accordance with Law No. 11,638 / 2007, equity accounts can be divided as follows:

Social capital: details  the subscribed amount and the part not yet paid by the partners and shareholders.

Capital reserves:  they are resources obtained by the company that are not linked to the formation of profits. They arise, for example, from the redemption or purchase of shares, the incorporation into capital and the payment of dividends on preferred shares, among others.

Capital valuation adjustments:  the compensation for increases or decreases in assets and liabilities that were not computed in the year, as a result of their revaluation, provided that they comply with legal regulations.

Profit reserves –  values ​​​​of the appropriation of part of the profits as a result of the law or the will of the owner.

Own shares:  it is a reduction account of the shareholders’ equity that records the value of the company’s shares acquired by the company itself.

Accumulated losses:  records of accumulated and not yet covered losses.

Mandatory Balance

The balance sheet is a mandatory document by law. However,  microenterprises and small businesses  , such as those belonging to the MEI (individual microentrepreneur) and those that opt ​​for Simples Nacional,  are exempt from preparing this report  .

However, although optional, the document is generally required for small businesses that wish to participate in tenders.