A balance sheet is a financial document that shows the assets, liabilities and equity of a company as at a specific reporting date. It is one of the basic components of the annual financial statements and provides a snapshot of the company's financial situation.
The balance sheet is divided into two main sections: the assets side (assets) and the liabilities side (liabilities). The assets side lists all resources and assets belonging to the company, such as cash, inventories and fixed assets. The liabilities side shows how these assets are financed, through debts such as loans and liabilities, and through equity, which includes the funds provided by the owners of the company and left in the company.
The balance sheet must be balanced according to the principle of the balance sheet equation, whereby the sum of the assets is equal to the sum of the liabilities and equity. It serves as an important source of information for various stakeholders, including investors, lenders and Corporate Management, to assess the financial health and stability of the company.
The term "Balance Sheet" is derived from the way this financial statement is structured, reflecting a fundamental accounting principle: the equation that assets must equal the sum of liabilities and equity. The "balance" in the balance sheet comes from these two sides needing to balance out or be equal, showing a snapshot of a company’s financial position at a particular moment in time. The balance sheet is thus named because it displays this balance between the assets, and the liabilities plus equity, ensuring that the financial statement is in equilibrium.
The layout of a balance sheet follows a certain structure, which is divided into two main parts: the assets side and the liabilities side. Here is a detailed description of these two pages:
The balance sheet is always prepared in such a way that the sum of the assets equals the sum of the liabilities, which reflects the basic principle of the balance sheet equation:
Assets = Equity + Liabilities
This equation forms the basis for the balance sheet and ensures a balanced relationship between assets and sources of capital.
The following table provides an overview of the different types of balance sheet that are commonly used in the business world and are used for different legal, tax and business purposes in Corporate Management:
| Type of Balance Sheet | Description |
|---|---|
| Commercial Balance Sheet | Prepared in accordance with commercial law to present the annual financial statements of a company. |
| Tax Balance Sheet | Prepared on the basis of tax regulations to determine the tax base. |
| Opening Balance Sheet | The balance sheet prepared at the beginning of the financial year to show the initial position of assets and liabilities. |
| Closing Balance Sheet | The balance sheet at the end of a financial year, which summarizes all assets and liabilities at that time. |
| Consolidated Balance Sheet | A balance sheet that summarizes the financial information of all subsidiaries of a group in a single balance sheet. |
| Interim Balance Sheet | A balance sheet drawn up at any time during the financial year, often at the end of a quarter or half-year. |
| Liquidation Balance Sheet | Prepared when a company is liquidated to show the remaining assets and liabilities. |
The balance sheet has several important functions and benefits, both for the internal management of a company and for external stakeholders:
The balance sheet is therefore an essential tool in a company's Financial Management and external communication, helping to promote trust and understanding among all stakeholders.
The ability to view a balance sheet depends on the type of company and the country in which it is registered. Here are some general ways in which balance sheets can be viewed:
These resources allow interested parties to assess the financial situation of a company and gain a deeper insight into its economic situation.
Important terms relating to
the balance sheet explained
| Term | Definition |
|---|---|
| Assets | The left-hand side of the balance sheet, which represents all of a company's assets, such as fixed and current assets. |
| Liabilities | The right-hand side of the balance sheet, which includes a company's equity and liabilities. |
| Total assets | The total amount of assets or liabilities on a balance sheet, which must be equal. |
| Opening balance sheet | The balance sheet at the beginning of a financial year, which shows the starting position of the company's asset and capital structure. |
| Closing balance sheet | The balance sheet at the end of a financial year, which shows the financial situation at that time. |
| Fixed assets | Long-term assets that are used over several years, e.g. buildings, machinery, patents. |
| Current assets | Short-term assets that are to be liquidated within a financial year, e.g. inventories, receivables. |
| Equity | Funds contributed by the owners and retained in the company, including retained earnings. |
| Debt | Funds that come from external sources, such as loans and other liabilities. |
| Liquidation balance sheet | A balance sheet prepared when a company is dissolved to show the remaining assets and liabilities. |
| Consolidated balance sheet | A balance sheet that combines the financial information of several subsidiaries into the parent company's balance sheet. |
This table provides a comprehensive overview of the key terms related to the balance sheet that are important for understanding the financial presentation of a company.
An electronic balance sheet, often referred to as an e-balance sheet, is the digital form of the balance sheet that is created and transmitted electronically. In many countries, including Germany, the submission of the balance sheet in electronic form is required by law for many companies. The e-balance sheet is intended to make tax administration more efficient by enabling the direct digital transmission of annual financial statements to the tax office. This improves accuracy, speeds up the process and facilitates data analysis and management.
The introduction of the electronic balance sheet is part of a global trend towards the digitization of financial reporting, which increases transparency and efficiency in corporate reporting worldwide.
Changes in the balance sheet occur for various reasons and can have a significant impact on the financial structure of a company. These changes can be the result of business transactions, changes in accounting policy, economic events or legal changes.
Here are some typical balance sheet changes, a few examples and how they can change the balance sheet.
The following diagram shows the typical balance sheet changes that frequently occur.
The following balance sheet changes are known and have different consequences.
By actively managing and adapting to changes in the balance sheet, a company can maintain its financial health and respond strategically to challenges and opportunities.
In Germany, it is primarily corporations such as the GmbH (Gesellschaft mit beschränkter Haftung) and the AG (Aktiengesellschaft) that are required to prepare balance sheets. This also applies to partnerships in which no natural person is involved as a fully liable partner, such as the GmbH & Co. KG. Cooperatives and certain forms of legal entities under public law are also obliged to prepare balance sheets.
Smaller companies and sole traders only have to prepare a balance sheet if they exceed certain size criteria defined in the German Commercial Code (HGB). These criteria relate to aspects such as turnover, balance sheet total and number of employees. If these thresholds are exceeded, these smaller companies must also prepare a balance sheet and a profit and loss account.
In addition to the legal requirements, companies that make use of certain financing or subsidies may also be obliged to prepare a balance sheet, regardless of their legal form or size, as banks or other lenders often require detailed insights into the financial situation.
This overview summarizes the general guidelines on accounting obligations in Germany and shows that the requirements can vary depending on the type and size of the company. This table briefly shows who is obliged to prepare financial statements in Germany:
| Type of Company | Accounting Obligation | Conditions/Criteria |
|---|---|---|
| Corporations (e.g. GmbH, AG) | Yes | Automatic obligation regardless of size or turnover |
| Partnerships without natural partners (e.g. GmbH & Co. KG) | Yes | Automatic obligation regardless of size or turnover |
| Cooperatives | Yes | Automatic obligation regardless of size or turnover |
| Legal entities under public law | Yes (in certain cases) | Depending on the specific legal regulation |
| Smaller companies and sole traders | No (unless certain thresholds are exceeded) | Turnover, balance sheet total and number of employees according to HGB |
| Small companies that receive subsidies or special financing | Yes (in certain cases) | Requirements of funders regardless of size or form |
The golden balance sheet rule is a principle of finance that is used in particular in balance sheet analysis. It states that a company's fixed assets should be financed by long-term capital, i.e. equity and long-term debt. This rule aims to ensure an appropriate maturity match between the financing and the useful life of the assets. Short-term capital should therefore only be used to finance current assets.
Adherence to the golden balance sheet rule is intended to safeguard the financial stability and solvency of the company by ensuring that the company can meet its financial obligations from current operations without having to resort to long-term assets. This rule also helps to minimize the risk of liquidity bottlenecks and promotes a balanced ratio of equity and debt capital.
The balance sheet and the income statement are both components of a company's annual financial statements, but serve different purposes. The balance sheet provides a snapshot of a company's financial position on a specific reporting date. It shows what the company owns (assets) and what it owes (liabilities), including equity. In contrast, the profit and loss account shows the company's financial performance over a specific period, usually a financial year. It documents income and expenditure and uses this to determine the company's profit or loss. While the balance sheet shows the stability and structure of the company's assets, the income statement reflects its operational efficiency and profitability.
In Germany, all corporations such as GmbHs and stock corporations as well as partnerships without a natural person as general partner, such as the GmbH & Co. KG, must prepare a balance sheet and profit and loss account (P&L). Registered cooperatives are also obliged to do so. Sole proprietors and partnerships, such as the general partnership (OHG) and the limited partnership (KG) with natural persons as general partners, only have to do this if they exceed certain size criteria in terms of turnover, profit or number of employees. These legal requirements are intended to ensure that external stakeholders such as investors, lenders and government authorities have an insight into the financial situation of companies.
The balance sheet is divided into two main sections: the assets side and the liabilities side. The assets side lists the company's assets, which are divided into fixed assets and current assets. Fixed assets include longer-term investments such as machinery, buildings and land, while current assets include short-term items such as inventories, receivables and cash and cash equivalents. The liabilities side shows how these assets are financed, divided into equity and liabilities. Equity represents the funds contributed by the owners and retained in the company, including retained earnings. Liabilities comprise liabilities to third parties, such as loans and other financial obligations. The balance sheet is structured in such a way that the sum of the assets always equals the sum of the liabilities, which is known as the balance sheet equation.
A HGB balance sheet refers to a balance sheet that is prepared in accordance with the provisions of the German Commercial Code (HGB). The HGB regulates accounting and ensures that balance sheets are comparable, clear and comprehensible to third parties. The HGB balance sheet must comply with certain classification rules and is characterized by the principle of prudence, which states that all risks and losses must be taken into account, while profits may only be reported if they have actually been realized. This principle is intended to prevent an overstatement of the company's financial position. The HGB balance sheet is particularly relevant for medium-sized companies in Germany and forms the basis for determining profits for tax purposes and the distribution of profits.
Stocktaking, inventory and balance sheet are accounting terms that are closely linked but represent different aspects of a company's asset recording and presentation. Stocktaking is the physical process of taking stock of all assets and liabilities of a company at a specific point in time. This includes counting, measuring or weighing the inventory. The result of the inventory is recorded in the inventory, a detailed list that describes all assets and liabilities in quantitative and qualitative terms. The balance sheet, on the other hand, is a summarized financial presentation of this data in account assignment form, structured into assets and liabilities, which is derived from the inventory and shows the financial situation of the company on the balance sheet date. While the inventory is a detailed list, the balance sheet provides a structured and condensed financial overview.
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