Are you having trouble understanding your balance sheet? Don't worry, it's normal. If accounting may seem abstract, it's because it relies on strict rules. Thus, you need to know how to "decode accounting information" in order to fully understand the wealth of information contained in your Balance Sheet.
At Advanced Conseil, we enjoy helping our clients decode accounting because financial data provides a wealth of analysis and improvement opportunities for an informed reader. Additionally, to make this information more readable, we use presentation tools with beautiful graphics (this avoids having to delve into the tax bundle, which lacks a bit of color and flavor!).
But, if you want to understand for yourself, we have summarized 7 essential concepts to understand accounting. Happy reading!
1. Keeping accounts is mandatory
The corporate officers (manager of SARL/EURL or president of SASU/SAS) of a company registered in the Trade Register must ensure accounting records that include at least the preparation of the balance sheet at the closing date and tax declarations (VAT, Tax Return).
The company can be assisted by a chartered accountant. When setting up the business, the accountant advises the business leader on several key steps (choosing the company's legal status; social status: self-employed or employee, tax optimization of the project; financial projections, cost calculation, assessment of financing needs...).
In a growth phase, the accountant can also become an external financial director and help optimize performance, being a true supporter for the business leader to advise them on company management and achieving objectives.
2. Accounting is done "in double entry"
Double entry accounting is a mandatory principle for all companies registered in the trade register.
Each event is subject to a double entry in two distinct accounts (with an amount debited and a similar amount credited).
The principle of double entry is that all receipts and payments must be recorded as accounting entries. This is referred to as debit/credit.
A resource is called a credit; it can be a reduction of assets, a loan, an increase in revenue...
The debit is in turn an use of this resource (purchase, increase in expense...)
Consequence: the Revenue is accounted for not at the time of collection but at the moment of the execution of the service or the delivery of the good at invoicing (debit of the Accounts Receivable account and credit of the Revenue account)
3. Every accounting entry must be "justified"
All your entries must be justified. It is mandatory to provide a supporting document (invoice, bank statement, legal document...).
Gone are the binders or shoeboxes, there are now IT solutions that allow you to keep all your invoices in digital form. You just need to take a photo of your invoice or upload the invoice in your secure space, and your accountant will take care of linking these invoices with your bank statements and we will inform you if any invoices are missing or if there are points of attention.
4. Each event is attached to a fiscal year (period of time)
A fiscal year lasts one year except in special cases (for example, at the creation of the company, it is possible to have a fiscal year of more than one year).
In general, the fiscal year runs from January 1 to December 31 (unless your activities have specific seasonality).
Fiscal years must be independent of each other. Thus, each fiscal year must contain all the elements that concern it and only those that concern it (this is called the principle of separation of fiscal years)
A purchase that lasts more than one fiscal year is not an expense but an investment
5. VAT has no impact on the result
VAT does not appear in the company's income statement (it only appears on the balance sheet). Indeed, VAT is not an expense; it is reimbursed by the State when the company pays VAT to a supplier. Thus, the turnover and all the expenses included in your Income Statement are excluding taxes (ET) (unless there is a VAT exemption).
6. If the company generates a positive result, it must then pay corporate tax
Corporate tax (IS) is calculated based on the taxable result. The taxable result is itself calculated based on the accounting result.
IS is calculated from the taxable profit. In small companies owned at least 75% by individuals, it is sufficient to multiply this profit by 15%. The taxable result must be less than €38,120. For a taxable result exceeding €38,120, the IS rate is set at 25% (new rate applicable to fiscal years opened in 2022).
7. The preparation of annual Financial Statements
A company must publish financial statements each year. The financial statements of a company are the balance sheet, the income statement, and the notes.
A balance sheet is a document summarizing the assets (what is owned by the company) and the liabilities (the resources available to a company). It is the accounting snapshot of the company at the chosen date to close the accounting period.
The income statement outlines the various flows of income and expenses for the past accounting year. This document explains how the annual result (profit or loss) was constituted.
The accounting annex is a document whose purpose is to provide information and help in understanding the income statement and the balance sheet of a company. It must therefore be produced annually by trading companies in addition to the balance sheet and the income statement.
The financial statements are an annual view of your business. They help you take stock to see if your year has been good or if you have losses. A good accountant must therefore:
1. Ensure a proper closing of your financial statements (and properly anticipate the necessary supporting documents in advance, a digital platform can save a lot of time for managers, as the communication of documents can be very time-consuming,
2. Assist you in reading and understanding this data.
Moreover, beyond a certain size, it should offer you a monthly or quarterly dashboard.
It is therefore quite possible (even recommended) not to limit yourself to just the annual balance sheet; you can certainly ask your accountant to schedule a quarterly review (or monthly if needed).
Our advice: implement collaborative digital solutions to access all information and to automate the retrieval of supporting documents and your invoices.