Preparing Annual Financial Statements – How to Do It Right

Most companies must prepare an annual statement of accounts at the end of the financial year. Extensive preparations must be made and many factors considered to prepare the annual close correctly. Our checklist will give you a good orientation so that the preparation process is successful.?

With the start of the new year, an important task comes into focus for companies: the preparation of the annual financial statements, with which they disclose their financial situation to the financial authorities. For many companies, this poses a challenge. Due to the immense amount of work involved, completing the annual closing sometimes takes months. If there is a lack of structure and traceability, errors and additional workload can occur, often leading to a delay in completion.?If the annual financial statements are not submitted properly and on time, this can have legal consequences.?Adequate preparation is therefore important to avoid problems.?

Who must prepare annual financial statements???

According to Section 242 (3) of the German Commercial Code (HGB), all companies that are obliged to keep double-entry accounts must prepare annual financial statements including a balance sheet. This includes AGs, GmbHs and UGs. Individual entrepreneurs must prepare annual financial statements if they have an annual turnover of more than 600,000 euros, a balance sheet total of more than 350,000 euros or employ more than ten people. Otherwise, an income statement (Einnahmen-überschussrechnung) is sufficient.?

What does an annual financial statement contain??

The balance sheet and the profit and loss account (GuV) are the main components of the annual financial statements. Depending on the legal form and size of the company, other parts such as the management report, notes or cash flow statement may also be required. While the annual financial statements of individual business owners and partnerships only consist of the two parts mentioned at the beginning, corporations must include an addendum and sometimes also a management report. ?

By when must the annual financial statements be prepared??

The deadline for preparing the annual financial statements also depends on the size and legal form of the company and is three to six months from the balance sheet date. According to Section 264 (1) HGB, the annual financial statements for corporations must be prepared in the first three months after the end of the financial year. If the financial year corresponds to the calendar year, the reporting date is March the 31st. For very small corporations, the deadline is six months, which corresponds to June the 30th of the following year. These deadlines should be strictly adhered to. If there is a risk of delay, an extension of the deadline should be requested from the relevant tax office.?

How to prepare the annual financial statements?

Annual financial statements must be thoroughly prepared. However, compiling the important documents takes a lot of time. Accordingly, the preparation of the financial statements should be started as early as possible, approximately two to three months before the actual closing.?

Companies that already keep proper accounts during the financial year do not run into difficulties when preparing the financial statements. If the receipts are filed in a way that is easy to follow and the accounts are posted accurately, deadlines can be met more easily and the finance team can successfully complete the annual financial statements in parallel with day-to-day business. In addition to time savings, costs can also be saved if you can hand over clear bookkeeping to the tax consultant, who will charge less for the follow-up work. In addition, thanks to thorough bookkeeping, companies can prepare interim financial statements if required, which can be requested by banks when applying for loans. As interim financial statements should also be viewed in the context of the preceding annual financial statements, they can always be used as an analytical tool to assess a company's financial performance.?

The benefits of good preparation are therefore far-reaching. The tasks that need to be performed by the company's internal accounting department are as follows:?

Sorting and recording accounting documents: The documents for all income and expenses must be organized in a comprehensible manner. Missing receipts in the bookkeeping must be replaced and invoice corrections requested in the event of errors.?

Record all contracts: Business documents such as contracts for insurance, loans and employment are an important basis for the annual financial statements. They not only provide legal protection, but are also an essential basis for the financial presentation of the company. Accordingly, they must be recorded during preparation.?

Recording current assets: Current assets are a company's inventory. These should be recorded and listed as part of an inventory. In addition to cash on hand and bank balances, current assets include items such as goods, operating materials and office supplies.?

Recording fixed assets: All tangible assets such as land or company buildings, financial assets such as shares and intangible assets such as software licenses must be recorded in fixed asset accounting so that they can be determined on the balance sheet date.?

Determination and posting of depreciation: Missing fixed assets must be written off in full, damaged assets can be partially written off. In some cases, outstanding receivables can also be written off.?

Processing of accruals and deferrals: All values from the profit and loss statement (GuV) and balance sheet must be clearly attributable to a specific accounting period such as the financial year. A distinction must be made between prepaid expenses and deferred income. While asset items are paid services that will only be redeemed in the following year, liability items are income that will only become revenue in the following financial year.?

Review of receivables and liabilities: All loans or personal loans with a term of more than one year must be disclosed by the accounting department. Liabilities that have existed for more than five years and cannot be settled in the following year must be listed.?

Consideration of provisions: Provisions are liabilities that are uncertain in amount and timing in the current financial year, but are highly likely to be claimed for the following year. They serve as a precaution and must be posted as an expense by the accounting department.?

Creation of statutory and voluntary reserves: To ensure that sufficient equity is available for possible future challenges, some companies must set aside statutory and voluntary reserves. In contrast to provisions, reserves do not count as liabilities but as equity.?

Review of the annual financial statements: A meeting should be held with the tax advisor to discuss the annual financial statements in order to identify potential for tax optimization and to ensure that tax regulations are complied with. After the meeting, all documents can be handed over to the tax advisor and the annual financial statements can be prepared.?

Preparation of annual financial statements – the steps you need to follow?

The preparatory measures mentioned above make it considerably easier to compile the annual financial statements. In detail, the following steps must be carried out during the creation:?

1. Closing of main and sub-accounts: At the end of the financial year, the balances of the sub-accounts, which have been posted to different sub-accounts for a better overview, must be merged into main accounts. These must then be closed and their balances drawn. Subsequently, they are transferred to the balance sheet or to the income statement (GuV) via the profit and loss account.?

2. Preparing the annual financial statement overview: As the tax office may ask for the annual financial statement overview in addition to the income statement (GuV) and balance sheet, this should also be prepared when preparing the balance sheet. All opening and closing balances are listed in the overview. This closing report is divided into balance sheet accounts and profit and loss accounts.?

3. Review of the annual financial statements: Once the financial statements have been prepared, the documents should be reviewed in detail. If the review is carried out by an auditor, the auditor is obliged to take part in the "adoption" negotiations.?

4 Approval (“Feststellen”) of the annual financial statements: In the final step, the annual financial statements are presented to the management board and supervisory board or sometimes to the general meeting for adoption. As part of this formal act, the financial statements are approved by signature. If there has been a change in management during the preparation of the annual financial statements, the time of adoption determines who must sign. If a new managing director is already in office at the time of adoption, he or she must sign the annual financial statements, even if he or she was not yet active in the company during the preparation phase.?

Once the annual financial statements have been completed and approved, companies that are required to prepare financial statements have had to submit them electronically to the relevant tax office since 2013. This is done via the ELSTER portal.?

Mistakes you should avoid when preparing the annual financial statements?

There are a few things to bear in mind when preparing the annual financial statements. The list of steps above provides you with a good guide. In addition, there are some potential mistakes that happen regularly. Besides inadequate preparation, these include the following in particular:?

Failure to comply with retention requirements: Once annual financial statements have been prepared, documents that are no longer required may be destroyed. However, there is a ten-year retention period for many accounting documents. This begins at the end of the calendar year in which the annual financial statements were prepared. The relevant documents may only be disposed after this period. If this is done too early, fines may be imposed.?

Incorrect assessment of company size: Depending on the size of a company, different obligations and legal requirements apply to accounting. If the size of the company is incorrectly assessed, those responsible are in breach of the principle of proper accounting (Grundsatz der ordnungsgem??en Buchführung). To avoid this, the size of the company should be continuously assessed.?

Forgetting to disclose the balance sheet: Depending on their size, companies must make their balance sheet available to the public. While small companies only have to submit their balance sheet to the Federal Gazette (Bundesanzeiger), larger companies are subject to a disclosure obligation. This also includes annexes, the completeness of which is checked by the Federal Gazette.?

Incorrect structure: The components of an annual financial statement must be arranged according to a specific structure. § Section 266 of the HGB, for example, regulates the structure of the balance sheet, in which, among other things, sequences for asset and liability items must be adhered to. If the sequence does not meet the requirements, the annual financial statements can be rejected by the tax office.?

Missing information: When compiling the information for the annual financial statements, it can happen that elements are overlooked or forgotten. Examples include missing information on provisions, securities or interest on borrowed capital. Signatures are also regularly forgotten. A checklist can help to prevent possible consequences.?

Conclusion?

Preparing the annual financial statements is a key task for companies. Good preparation and precise implementation are important in order to successfully prepare them. To make the process easier, companies should carry out the closing work in stages throughout the year. Programs that can be used to digitize accounting are also helpful. This can save time and prevent problems in the final phase of preparation. It also avoids work intensity peaks and companies are ready to close the accounts throughout the year.?