A company's annual financial statements are much more than a formal obligation - they are the financial figurehead of every company vis-à-vis investors, banks and other stakeholders. This essential document consists of the balance sheet, the income statement and, as a rule, the notes and a management report.
It not only reflects the economic health and performance of a company, but also forms the basis for strategic decisions and the assessment of creditworthiness. The annual financial statements provide precise information on the financial situation, enable the correct tax calculation and form the basis for the distribution of dividends. In addition, the annual financial statements provide complete documentation of all business activities, making them an indispensable tool for compliance and internal audits. But what exactly do annual financial statements need to contain in order to meet regulatory requirements?
Balance sheet: The core of the annual financial statements is the balance sheet. It compares a company's assets with its liabilities and equity and provides information on the source and use of funds. The information for the balance sheet is derived from the bookkeeping, where all business transactions are documented. At the end of the year, similar accounts (transactions belonging to a certain category, e.g. revenue, are systematically recorded in accounts) are summarized in the balance sheet in order to increase clarity and provide a quick overview of the financial situation.
Let's assume that a company has fixed assets (such as buildings and machinery) and current assets (such as raw materials and receivables) of EUR 500,000, which are offset by liabilities of EUR 300,000. The balance sheet would compare these items and thus show equity of 200,000 euros.
Profit and loss account (P&L): This provides information on the success or failure of business activities within the financial year. It summarizes all income and expenses and thus shows the profit or loss generated. This financial performance provides information about the development of the company.
For example, a company could record income of 200,000 euros and expenses of 150,000 euros, resulting in a profit of 50,000 euros.
Notes: The notes supplement the balance sheet and income statement with important detailed information and explanations that are essential for understanding the financial reports. Among other things, they contain information on accounting and valuation methods as well as additional explanations of individual items.
Here, for example, information can be found on the depreciation method or leasing obligations, which contribute significantly to understanding the financial situation.
Management report: The management report should not only inform the addressee about the current situation, but also provide an insight into future prospects. By presenting both past and future-oriented information, the management report supplements and explains the data in the balance sheet and income statement. This enables stakeholders to gain a more comprehensive overall economic picture of the company than would be possible with the annual balance sheet and income statement alone. This report is particularly important for larger and more complex business structures.
For example, it could explain how new market strategies have had a positive impact on sales or what challenges the company had to overcome in the reporting period.
Cash flow statement: Also known as the cash flow statement, the cash flow statement is an indispensable tool for analyzing a company's liquidity. It records incoming and outgoing payments within a specific period and provides information on how cash and cash equivalents have changed.
Example: In the past year, the company made investments of 100,000 euros, paid out dividends of 30,000 euros and took out loans of 50,000 euros. This shows that the company has spent more money overall than it has earned, which leads to a reduction in cash and cash equivalents of 80,000 euros.
Net change in cash flow = income - expenditure = 50,000 euros - 130,000 euros = -80,000 euros
Statement of changes in equity: This shows how equity has changed over the course of the year, which provides information on the financial stability of the company.
One example would be increasing equity by retaining profits or issuing new shares.
Segment reporting: Segment reporting provides detailed insights into the financial results of the individual segments, particularly for groups that operate in different business areas. This is important for a differentiated view of the risks and performance of the various divisions.
For example, a group could present its results from the automotive sector separately from those of the financial services sector in order to highlight specific risks and opportunities.
Annual financial statements are mandatory for many, but not all, entrepreneurs and freelancers. According to the German Commercial Code (HGB), the obligation to prepare annual financial statements applies to all ordinary merchants, which includes every company and all self-employed persons with an entry in the commercial register. The legal representatives of corporations, usually the board of directors or management, are responsible for the correct preparation and submission of the annual financial statements.
The process can be divided into three main steps:
1. preparation and reconciliation: The first step is to compile all relevant documents. This includes reviewing and organizing all receipts and documents that arise in the course of the financial year. At the same time, the bookkeeping must be checked and reconciled. This involves going through all main and sub-accounts to ensure that all postings have been recorded correctly and the balances are correct. This reconciliation is essential in order to identify and correct discrepancies at an early stage.
2. postings and transfers: Reconciliation is followed by the execution of transfers and the preparation of final entries* to reflect the actual financial status of the company. Transfers are necessary, for example, to convert provisional values into final values or to make accounting corrections. A financial statement overview is prepared, which is broken down into balance sheet accounts (such as assets and liabilities) and income statement accounts (such as expenses and income). All opening and closing balances are recorded here.
*Postings are entries in the accounting system that record each financial transaction of a company, such as income or expenses. Transfers are adjustments within these entries that are required to correct errors or change provisional figures to final values
3. preparation of the annual financial statements: Finally, the annual financial statements are formulated, which include the balance sheet and the income statement and, if necessary, are supplemented by notes and a management report. After preparation, the financial statements must be approved by the board of directors or a representative of the company. In smaller companies, this task is often the responsibility of the managing director, who signs the financial statements and forwards them to the supervisory board if necessary. In medium-sized and large companies, the financial statements are also often checked by an auditor before they are submitted to the shareholders.
4. review and approval: Once the annual financial statements have been completed, they must be audited by the authorized persons within the company. In smaller companies, this task is often performed by the managing director who signs the financial statements. In larger companies, an audit is carried out by the Management Board and possibly by an external auditor before the financial statements and the audit report are forwarded to the Supervisory Board.
5. supervisory board: Certain types of companies, such as stock corporations, are also obliged to set up a supervisory board. This also applies to cooperatives with more than 20 employees and limited liability companies with more than 500 employees.
Once the annual financial statements have been completed, they must be forwarded to the shareholders within one week. This regulation ensures swift and transparent communication within the company. Depending on the legal form of the company and its size, publication of the annual financial statements in the commercial register may be required to ensure public transparency.
The publication of the annual financial statements is a crucial step that allows a company's stakeholders, such as business partners and shareholders, to gain an insight into its economic situation. This transparency is not only a legal requirement, but also provides important guidance on the further development of the company. The regulations on disclosure requirements are set out in Section 325 of the German Commercial Code (HGB) and vary depending on the size of the corporation:
Medium-sized and large companies:
Small companies:
Micro-companies:
Failure to comply with these regulations can lead to administrative fine proceedings, with possible fines of between 2,500 and 25,000 euros. The company itself bears the costs of legal disputes, such as the threatening order. These clear guidelines are intended to ensure that all relevant information on the economic situation of a company is made available in a timely manner and in accordance with legal requirements.
Preparing financial statements correctly can be a challenge and can easily lead to costly errors without careful preparation. Here are some typical problems to avoid:
A reliable contract management system is essential to minimize these risks.
ContractHero helps companies overcome these challenges by automating and optimizing document management:
These points clearly demonstrate how a comprehensive contract management system can not only increase efficiency, but also contribute to the security and accuracy of the year-end closing process. Book a demo to learn more about the benefits of ContractHero and how we can help you optimize your year-end closing process. Take the opportunity to take your contract management to the next level while ensuring the quality of your financial reporting.
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