Balance Sheet – The Mirror of the Company’s Financial Position
“The balance sheet is an accounting document that, as of a specific date, presents the assets and liabilities of the entity, their value, in appropriate breakdown, taking into account the accounting principles.”
The balance sheet is one of the most important financial statements in accounting, which presents the company’s assets and their sources at a given date – typically the balance sheet date. The purpose of the balance sheet is to provide a transparent picture of the company’s assets, financial and liquidity position, thereby supporting owners, investors, creditors and other stakeholders in making well-founded decisions.
The Hungarian Accounting Act (Act C of 2000) prescribes the obligation of companies to prepare a balance sheet, while for companies operating in international markets, compliance with IFRS regulations may also be necessary.
Structure and main parts of the balance sheet
The balance sheet is a two-sided statement of assets: on one side are the assets of the company, and on the other side are the sources of financing for them.
The balance sheet consists of two main parts:
Assets (Actives) – assets available to the company that promise future economic benefit. This includes fixed assets (e.g. real estate, machines, intangible assets) and current assets (e.g. inventories, receivables, cash).
In the balance sheet, those fixed assets and current assets made available to the entrepreneur and serving the operation of the enterprise, as well as active accruals, must be presented as assets (in accounting, on asset accounts).
Liabilities (Passives) – the financing sources of the assets. Their two main categories are equity (e.g. subscribed capital, retained earnings, profit for the year) and liabilities (e.g. loans, trade payables, other short- and long-term obligations).
Liabilities show from which sources the assets of the enterprise were financed: from equity or by using debt. The acquisition and maintenance of assets – for example in the form of machines, equipment, inventories or energy sources – is always linked to some financing background. In the accounting system, class 4 accounts contain the main groups of liabilities: equity, provisions, liabilities, and passive accruals (Accounting Act §34). This account class also includes technical accounts required for preparing the opening and closing balance sheet and for recording the profit after tax.
One of the most important principles of the balance sheet is the principle of equality: The total value of the assets always equals the total value of the liabilities. This ensures that every element of the company’s assets has an equally valued source of financing.
Types of balance sheets and areas of use
The balance sheet can be prepared in several ways, depending on the type of reporting obligation:
Balance sheet of the simplified annual report – typically used by small and medium-sized enterprises (SMEs), with fewer lines and data breakdown.
Balance sheet of the annual report – mandatory for larger companies, with a more detailed breakdown.
IFRS-compliant balance sheet (Statement of Financial Position) – based on international standards, with different structure and terminology.
The role of the balance sheet
The balance sheet provides useful information from several perspectives:
Presentation of financial position – helps assess the solvency and capital structure of the company.
Liquidity analysis – by ordering assets by liquidity, it can be determined how quickly the company can meet its obligations.
Basis for financing and investment decisions – a fundamental source of information for banks, creditors and investors.
Rules of balance sheet preparation and practical information
The balance sheet is compiled based on the balances of accounts in classes 1–4 and the profit after tax determined in the income statement, using the general ledger trial balance.
The structure of general ledger accounts closely follows the structure of the balance sheet, so the corresponding balances must be shown in each balance sheet line – in the prescribed grouping, in aggregated form – in the column for current year data.
The format of the balance sheet is defined in Annex 1 of the Accounting Act in two forms: version “A” and version “B”. The company may choose which version to use to prepare its balance sheet.
In summary, the balance sheet is not just a mandatory accounting statement, but one of the most important summary documents of the company’s economic situation.
With its help, the asset and financial state of the company becomes transparent, which is indispensable for management, owners, investors and creditors alike.
Accurate and legally compliant balance sheet preparation ensures that decision-makers can rely on trustworthy information in matters affecting the future of the company.
During the preparation of the balance sheet, the accounting principles defined in the Accounting Act must be followed:
Principle of fairness (reality) – the items in the balance sheet must reflect the actual asset position of the company.
Principle of continuity – when opening the balance sheet, the opening data must match the closing data of the previous period.
Principle of gross accounting – assets and liabilities cannot be netted, and must be shown separately in the balance sheet.
The data in the balance sheet comes from multiple sources: accounting records, inventory, and other financial documents. To prepare an accurate and reliable balance sheet, reconciliation of general ledger accounts, valuation of assets and liabilities, as well as the recording of accruals and impairments are necessary.
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