A provisional balance sheet is drawn up at the end of the accounting period. It is essential for understanding your company’s financial position over a given span of time.
In Spain, the deadline for filing this document with the Commercial Registry (Registro Mercantil) is the last day of July. Before that, the company’s General Meeting must give its formal approval.
What is a provisional balance sheet for?
- The balance sheet is essential in a company’s accounting and for making future decisions, since it shows the assets the company holds at that moment in time.
- Information about liquidity, income-generating assets and financial risk, among other key factors, is analysed by the company’s potential investors, which makes getting the analysis right absolutely vital.
- In business growth strategies, the balance sheet highlights the items that could be optimised going forward.
- It is the most precise diagnosis of a company’s condition, allowing you to anticipate financial indicators and ratios and to adjust your business plan more effectively.
How do you prepare a balance sheet?
Calculating a provisional balance sheet follows a structure based on the concepts of assets, liabilities and equity.
Broadly speaking, the balance between a company’s assets and its liabilities plus equity should remain constant on the company’s balance sheet.
The formula for checking the balance sheet must be built around the criterion of what I have in my company (that is, Assets) versus Liabilities and Equity.
Assets = Liabilities + Equity
Current assets
This section lists the assets that are expected to be sold, consumed or realised within the normal operating cycle, which generally will not exceed one year, along with other assets whose maturity, disposal or realisation is expected to take place within a maximum of one year.
This category also includes financial assets classified as held for trading, as well as cash and other equivalent liquid assets.
If we take the provisional balance sheet model, current assets are made up of the following items:
- Non-current assets held for sale.
- Inventories
- Trade receivables and other accounts payable
- Short-term investments in group companies and associates
- Short-term financial investments
- Cash and other equivalent liquid assets
- Prepayments and accrued income
Non-current assets
Non-current assets include all the remaining asset items, that is, those that are not current assets, among which we can mention the following:
- Intangible fixed assets
- Tangible fixed assets
- Property investments
- Long-term investments in group companies and associates
- Long-term financial investments
- Deferred tax assets
The most notable differences compared with the previous model include the following:
The following items disappear from the assets side:
- Shareholders (partners) for called-up capital not yet paid (these now reduce equity).
- Formation expenses (no longer exist).
- Treasury shares (these now always reduce equity).
- Expenses to be allocated over several financial years (no longer exist).
Some new headings are introduced, notably:
- Deferred tax assets.
- Non-current assets held for sale.
- Property investments.
Valuation adjustments are not itemised separately. Fixed assets appear net of the offsetting accounts. Information on the offsetting accounts is provided in the notes to the financial statements.
There is now an obligation to expand the information on investments in group companies and associates through a clear separation between them.
Inventories from production cycles longer than one year, whether “work in progress” or “finished products”, must be broken out so that short-cycle and long-cycle items appear separately.
Trade receivables maturing in more than one year must be broken down within current assets according to their maturity date.
Equity
Equity is defined in the Conceptual Framework as a residual figure, stating that it makes up the residual portion of a company’s assets once all its liabilities have been deducted.
In turn, it is made up of three headings:
- Shareholders’ funds, which may have been contributed by the partners or the owner, or may consist of accumulated earnings that have not been distributed.
- Adjustments for changes in value, which arise from applying fair value to certain balance sheet items
- Grants, donations and legacies
The current concept of equity is much broader than the shareholders’ funds of that plan. On the one hand, it includes a new concept such as adjustments for changes in value; on the other, grants and similar items, which are now considered part of equity.
Non-current liabilities
These are the liability items not classified as current, among which we can mention:
- Long-term provisions
- Long-term debts
- Long-term debts with group companies and associates
- Deferred tax liabilities
Current liabilities:
Current liabilities refer to obligations expected to be settled within the routine operating cycle, obligations that mature or are extinguished within a maximum of one year from the closing date, and financial liabilities classified as held for trading.
The current liabilities shown on the balance sheet model are:
- Trade payables and other accounts payable
- Short-term provisions
- Short-term debts with group companies and associates
- Short-term debts
- Accruals and deferred income
Some new developments worth highlighting are the following:
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Equity now includes, in addition to shareholders’ funds, adjustments for changes in value and grants, donations and legacies.
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Some new headings appear, such as:
- Other contributions from partners, whose legal nature is not clear. It could be equated to the item in the previous plan called “Contributions from partners to offset losses”.
- Deferred tax liabilities.
- Long- or short-term debts with special characteristics. Debts arising from finance lease operations.
- Both current and non-current liabilities have a lower level of itemisation, and they now also include short- and long-term provisions.
- Trade payables maturing in more than one year are broken out within current liabilities according to their term.
- Compound instruments are split into equity or liabilities, depending on their nature.