Explanatory note to the balance sheet and its role in reporting

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

The explanatory note to the balance sheet is a mandatory part of the financial statements. This is regulated by paragraph 5 of the Accounting Regulations No. 4/99 “Accounting statements of the organization”. This document discloses data on the accounting policy of the enterprise, necessary for a full analysis of all indicators of economic activity.

Missing an explanatory note to the balance sheet can only be in small businesses or in socially oriented non-profit organizations for which audits are not required.

The document contains:

• general information about the company;• accounting policy data;

• full details of assets and liabilities;

• balance sheet structure;• assessment of profit dynamics;

• income and expense details;

• business assessment;• affiliate information;

• post-reporting events and more.

The explanatory note to the balance sheet includes information about the organization: full name of the legal entity, legal form, management structure, actual and legal address, authorized capital, data of the company's founders and average annual number of employees. All these data are indicated at the very beginning, and they are followed by a paragraph on accounting policies. This is a very important section, because without it this note is incomplete and does not correspond to the required format. It reveals the accounting rules. If they were changed in the reporting period, then all the changes that have occurred and the reasons for their occurrence are indicated.

The third part contains all the information about fixed assets, stocks of the enterprise, as well as data on financial investments and loans. If the company has funds denominated in foreign currency, they are also indicated in this section. The fourth paragraph of the explanatory note includes an analysis and assessment of the balance sheet structure: liquidity ratio, solvency, profitability, etc. The following is information disclosing all sources of income and expenses of the organization, including barter transactions.

According to the information of the Ministry of Finance of Russia No. PZ-10/2012, an explanatory note to the balance sheet can be issued in free form, since it is not an element of strict accounting and is intended for company owners. A sample explanatory note to the balance sheet can be found in the official appendices tocircular letters from the Ministry of Finance. At the same time, one should not confuse a note with an official explanation of the balance sheet, which is performed in a tabular form, determined by the organization independently. The task of the explanations is to give a breakdown of all the lines of the financial statements.

Explanatory note - an example of information combined in one document, clearly demonstrating all aspects and aspects of the economic activity of the enterprise. All key data are summarized in a summary. This document is equally useful for the owners of the enterprise, as well as for existing and potential investors.