Preparing the Annual Financial Statements - An Overview
This is Mr. Meischert. He's a new employee in the accounting department at Teleprod OHG. He's about to prepare an annual financial statement for the first time. He's wondering what that even means. AN ANNUAL FINANCIAL STATEMENT… He asks Konrad, an old hand at the job, for help… and Konrad immediately starts explaining…
On the balance sheet date, which at Teleprod OHG is December 31st, all accounts are closed.
This means that preliminary closing balances are calculated for both asset and liability accounts. Here's an example using the vehicle fleet. Then, the balances of expenses and revenues are calculated and transferred to the profit and loss account to determine the company's profit. This calculated profit or loss is then transferred to the equity account.
Sounds easy! Mr. Meischert thinks. I can do this…
WAIT, says Konrad… now it really gets started…
You receive the figures from the inventory. How many raw materials are actually in the warehouse? How much cash is ultimately in the till? Etc. You have to reconcile the actual inventory with the accounting records, and if you find any discrepancies, adjustments are made.
Then accruals and deferrals are made. The goal is to determine a profit for the correct period. So, you take a closer look at the payments around December 31st. For example, did Teleprod already pay the rent for the storage space for the following year in December? Or did Teleprod's tenants already pay their January rent in December? These items are called accrued and deferred expenses, or deferred revenue and expenses for short, and they must appear as separate items in the balance sheet.
Aha… (Mr. Meischert)
You're still not there, says Konrad.
Because you also have to create provisions. At the very least, you have to check whether there are any uncertain liabilities to third parties, for example, whether actual liabilities could arise next year from an ongoing lawsuit. These uncertain liabilities must also be included in the balance sheet.
And now it gets really interesting, says Konrad.
There are legal loopholes, so-called accounting options. You can use these depending on your accounting policies. This means that fixed and current assets, as well as liabilities, are valued. The overriding principle here is: CAUTION. This principle of prudence is followed by the realization principle.
So when will the annual financial statements be finished? Mr. Meischert asks.
Once you've done all that, you can prepare the final balance sheet and you're done. But be careful: there isn't just one balance sheet, but two. The commercial balance sheet and the tax balance sheet…
Oh man, this is getting more and more complicated… (Mr. Meischert)
But at Teleprod, we have a single balance sheet. So you don't need to stress about it. We're a general partnership (OHG). That means the annual financial statements consist of the profit and loss statement and the balance sheet. For corporations, the annual financial statements would have to be supplemented with notes, and equity is presented differently in the balance sheet. You can find out more about that in the German Commercial Code (HGB). You'll find all the legal regulations there.
"Smart aleck," thinks Mr. Meischert, already starting to sweat a little... So that's the key to preparing the annual financial statements... Well then, I'll get right to it. I've got a lot of work ahead of me...