The balance sheet is a fundamental part of the financial reporting of every business that keeps accounting books (full accounting). It is a two-sided statement showing the entity's assets and financial position at a specific moment. Preparing it correctly requires knowledge of detailed regulations and accounting principles, which are meant to ensure that financial information is reliable and comparable. We prepare financial statements, balance sheet included, for businesses whose full accounting we keep at our accounting firm in Warsaw.
The importance of the balance sheet goes well beyond meeting formal reporting obligations. It is a key analytical tool for managers, investors, lenders and other stakeholders. A correctly prepared balance sheet makes it possible to assess financial stability, how efficiently resources are used and the business's prospects for growth.
Definition and characteristics of the balance sheet
The balance sheet is a mandatory part of the financial statements. It lists the company's assets and the sources from which they are financed. It is prepared as at a specific moment and consists of two sides that must balance: assets, representing the company's resources, and equity and liabilities, showing how those assets are financed.
The basic characteristic of the balance sheet is that both sides balance, which means that assets must always equal equity and liabilities. This fundamental balance sheet rule follows from economic logic: every asset of the business must have a clear source of financing. There can be no situation in which the value of assets exceeds the value of equity and liabilities, or vice versa.
The balance sheet is prepared as at a specific day on which the accounting books are closed, or as at another balance sheet date set by law (Article 45(1) of the Accounting Act). The days on which the books are closed are listed in Article 12(2) of the Act, and the deadline for preparing the annual financial statements – no later than 3 months after the balance sheet date – is set by Article 52(1)
The balance sheet differs from other financial statements in that it gives a static picture of the company's financial situation. While the profit and loss account shows how the business performed over a period, the balance sheet captures the state of assets and their sources of financing at a single moment. This makes the balance sheet a particularly valuable tool for assessing financial stability and the capital structure of the business. How it fits together with the other parts of the statements is shown in our guide on how to prepare financial statements step by step.
Preparing the balance sheet requires a stocktake (inventory) of assets and liabilities (Article 26 of the Accounting Act). Depending on the type of item, this means a physical count (checking that the item exists and what condition it is in), obtaining a balance confirmation, or comparing the accounting records with documents and verifying their value. Only in this way can you make sure that the balance sheet reflects the company's actual financial position.
Mandatory elements of the balance sheet
Balance sheet law sets out in detail which elements a correctly prepared balance sheet must contain. Each of them has an important information function and is needed to make the financial statements clear and comparable.
The financial statements, of which the balance sheet is a part, must allow the entity to be identified unambiguously – its business name, registered office and address, line of business and register number are given in the introduction to the financial statements (Annex No. 1 to the Accounting Act). The balance sheet itself has its own title and a layout of line items set out in the annex to the Act, which distinguishes it from the profit and loss account and the other parts of the financial statements. Micro-entities use a simplified layout, explained in our complete guide to micro-entity financial statements.
The balance sheet moment is the date as at which the assets and the equity and liabilities shown in the balance sheet were measured. This date must be clearly stated, because the values of individual assets can change over time, while the balance sheet shows the situation at a specific moment
A key element of the balance sheet is the names and content of the groups of assets and of equity and liabilities, which must be presented according to the applicable reporting format. This format is standardised, which makes balance sheets of different companies comparable and makes financial analysis easier.
Total assets and total equity and liabilities must be presented in balance. This fundamental requirement confirms that all assets are covered by sources of financing. Any difference between total assets and total equity and liabilities points to errors in the bookkeeping or in the preparation of the balance sheet.
The financial statements, including the balance sheet, are signed by the person entrusted with keeping the accounting books and by the head of the entity – where the management board has several members, by all of them or by at least one of them after the others have made statements (Article 52(2) and (2b) of the Accounting Act). The signature confirms that the financial statements meet the requirements of the Act (Article 52(2a)). The signatories give the date of signing, and the financial statements are prepared in electronic form and signed with a qualified electronic signature, a trusted signature or a personal signature (Article 45(1f)).
Deadlines for preparing the balance sheet
Balance sheet law sets out precisely the moments at which businesses must prepare a balance sheet. These dates are closely linked to important events in the entity's business life and to its reporting obligations.
- Preparing the balance sheet as at the end of the financial year (most often 31 December)
- Preparing the balance sheet when the business ends or is sold
- Preparing the balance sheet as at the day before a change of the company's legal form
- Preparing the balance sheet in the case of mergers and divisions of entities
- Preparing the balance sheet as at the day before the company is put into liquidation or declared bankrupt
The basic date for preparing the balance sheet is the last day of the financial year. For most companies the financial year is the same as the calendar year, which means preparing the balance sheet as at 31 December. However, some entities may use a different financial year, adapted to the specific nature of their industry or to management needs.
The books are closed no later than 3 months after the events that require them to be closed (Article 12(2)), and the financial statements with the balance sheet are prepared no later than 3 months after the balance sheet date (Article 52(1) and (3)). The annual financial statements are approved no later than 6 months after the balance sheet date (Article 53(1)), and companies entered in the KRS (National Court Register) file them with the register within 15 days of approval (Article 69(1)). Failing to prepare the financial statements, or preparing them in breach of the Act, is a criminal offence punishable by a fine or imprisonment of up to 2 years, or both (Article 77)
Special situations that require a balance sheet include the end of business activity, including its sale, and the completion of liquidation or bankruptcy proceedings. In such cases the balance sheet records the final state of the entity's assets and liabilities before it is dissolved.
As a rule, a change of legal form also requires a balance sheet to be prepared as at the day before the change. This balance sheet serves as a reference point for assessing how the change of legal form affects the entity's financial position, and for settlement purposes. The exception is the conversion of a partnership or civil-law partnership into another partnership, or of a capital company into another capital company – in that case the books do not have to be closed and reopened (Article 12(3)(1)).
Structure of assets in the balance sheet
Assets form the left-hand side of the balance sheet and represent all of the company's resources, regardless of how they are financed. The structure of assets is set out in detail in balance sheet law and covers several main categories, which differ in nature and in their role in the business.
| Asset category | Characteristics | Examples |
|---|---|---|
| Non-current assets | Long-term use in the business | Buildings, machinery, licences |
| Current assets | Short-term use or sale | Inventories, receivables, cash |
| Prepayments and accrued income | Expenses relating to future periods – in Annex No. 1 shown within non-current assets (A.V) or current assets (B.IV), not as a separate group | Insurance paid in advance |
Non-current assets are the first main category and cover assets intended for long-term use in the business. Within non-current assets, intangible assets are shown separately; they include licences, patents, computer software and other property rights.
Property, plant and equipment is another important group and covers fixed assets such as buildings, machinery, equipment, vehicles and other tangible assets. These assets are used in production or in providing services for more than one year.
Long-term receivables within non-current assets cover all receivables falling due more than 12 months after the balance sheet date. These may be, for example, receivables from the sale of fixed assets with deferred payment, from finance leases or from other long-term settlements. Trade receivables are shown in short-term receivables regardless of their due date, and loans granted are shown in investments (long-term or short-term financial assets)
Long-term prepayments represent expenses incurred in the current period that will bring economic benefits in future periods more than 12 months ahead. Examples may include costs of preparing the production of a new product or long-term advertising campaigns.
Current assets are the second main category and cover assets intended to be used up or sold in the normal course of business. The main components of current assets are:
- Inventories (materials, goods for resale, finished products)
- Short-term receivables (from customers, from taxes)
- Short-term investments (shares, bonds, fund units, and also cash and other monetary assets)
- Short-term prepayments
Structure of equity and liabilities in the balance sheet
Equity and liabilities form the right-hand side of the balance sheet and represent the sources from which the company's assets are financed. Their structure shows how the entity finances its assets and what obligations the company has towards its owners and creditors. The basics of how the whole statement is built are also explained in what a balance sheet is and how to prepare it.
Equity is the first main category and represents funds contributed by the owners and generated by the company in the course of its business. Share capital is the nominal value of the shares issued by the company and represents the owners' original capital commitment.
Supplementary capital comes from various sources, including issuing shares above their nominal value, profit distribution and other capital transactions. It is a financial reserve that can be used to cover losses or to finance the company's growth.
The revaluation reserve arises when assets are revalued. Most often this concerns the revaluation of fixed assets under separate regulations (Article 31(3)–(4) of the Accounting Act) and an increase in the value of long-term investments to market prices (Article 35(4))
Other reserve capital covers various forms of capital reserves created under the law or under the company's articles of association. These may be capital created under the articles of association (statute), capital for the purchase of own shares, or other forms of equity. Special funds, such as the company social benefits fund, are shown in liabilities instead (Article 46(4)).
Retained profit or loss from previous years represents accumulated profits or losses from earlier periods that have not been distributed or covered. The net result for the current year shows the profit or loss earned in the reporting period before it is distributed.
Liabilities and provisions for liabilities are the second main category and represent all of the company's obligations to third parties. Provisions are created for probable or certain liabilities whose amount or due date has not yet been precisely determined.
Balance sheet rules and financial analysis
Balance sheet analysis is based on fundamental balance sheet rules that describe the optimal relationships between individual categories of assets and of equity and liabilities. These rules are the basis for assessing the financial stability and safety of the business.
| Balance sheet rule | Assumption | Interpretation |
|---|---|---|
| Golden rule | Non-current assets ≤ Equity | Maximum financial stability |
| Silver rule | Non-current assets ≤ Long-term capital | Flexibility in financing |
| The golden balance sheet rule is the most important principle for analysing the financing structure. It assumes that the company's non-current assets should be 100% covered by equity. The rule follows from the long-term nature of non-current assets, which are slow to turn into cash and should therefore be financed with funds available for a long period. |
Applying the golden balance sheet rule gives the company maximum financial stability, because non-current assets are financed with funds that do not have to be repaid by a set date. Equity is the most stable source of financing and does not generate finance costs in the form of interest.
The silver balance sheet rule is an alternative to the golden rule and assumes that the company's long-term capital should be equal to or higher than its non-current assets. Long-term capital means equity plus long-term liabilities
The silver balance sheet rule is more flexible and allows non-current assets to be partly financed with long-term liabilities. This approach can be justified for companies with stable cash flows that allow them to service long-term liabilities.
Manufacturing company ABC applied the silver balance sheet rule, financing 60% of its non-current assets with equity and the remaining 40% with a long-term bank loan. Thanks to stable operating cash flows, the company was able to service the loan without difficulty, while keeping the option of faster growth through financial leverage.
Rules for preparing the balance sheet
Preparing a balance sheet in line with the law requires following a number of detailed accounting principles that ensure financial information is reliable, comparable and useful. These principles are the foundation of the whole accounting system and must be applied consistently.
- Applying the accrual principle to all business transactions
- Following the matching principle for revenue and expenses
- Applying the prudence principle when measuring assets and liabilities
- Applying the going concern principle
- Observing the ban on offsetting assets and liabilities
The accrual principle is the basis of bookkeeping. It requires all revenue earned and all related expenses incurred by the entity that relate to the given financial year to be recorded in the accounting books, regardless of when they are paid (Article 6(1) of the Accounting Act).
Applying the accrual principle means that the moment when revenue or an expense arises does not depend on when cash comes in or goes out. Revenue is recognised when it is earned and expenses when they are incurred, so that revenue and expenses are properly matched to the periods they relate to.
The matching principle requires the entity to include in the assets or liabilities of a given reporting period the expenses or revenue relating to future periods, as well as expenses attributable to that period that have not yet been incurred (Article 6(2)). This is done through accruals and deferrals
The prudence principle is fundamental to the reliability of the balance sheet. Assets and liabilities are measured at the prices (costs) actually incurred to acquire or produce them, while applying the prudence principle – the financial result takes into account, among other things, decreases in the value of assets, only certain other operating income, all other operating expenses incurred, and provisions for known risks and expected losses (Article 7(1)). This principle protects against overstating assets and understating liabilities.
The ban on offsetting is an important principle of preparing the balance sheet. It requires the value of individual assets and liabilities, of revenue and related expenses, and of extraordinary gains and losses to be determined separately (Article 7(3)). You may not offset assets and liabilities of different kinds, or revenue against expenses; one exception concerns financial assets and financial liabilities where the entity has an unconditional right of set-off and intends to settle them on a net basis (Article 46(2a)).
The going concern principle
The going concern principle is a fundamental assumption in preparing the balance sheet. It assumes that the entity will continue its business in the foreseeable future and on a scale that is not significantly reduced (Article 5(2)). This means that the company neither plans nor is forced to go into liquidation or bankruptcy.
Applying the going concern principle has a significant effect on how balance sheet items are measured. Assets are measured at purchase price or production cost, less depreciation and amortisation, on the assumption that they will be used in the normal course of business.
If there are reasonable grounds to believe that the entity will not continue its business, it must depart from the going concern principle. In that case the entity measures its assets at achievable net selling prices and creates a provision for the expected additional costs and losses caused by discontinuing the business (Article 29(1)).
Net selling prices used when the business is not a going concern may not exceed the purchase price or production cost less accumulated depreciation, amortisation and impairment write-downs
Assessing the ability to continue as a going concern requires analysing many factors, including the financial position, profitability, liquidity, debt and market prospects. The head of the entity must make this assessment when preparing every set of financial statements, covering a period of no less than one year from the balance sheet date (Article 5(2)), and adjust the measurement rules accordingly.
Types of balance sheets
Balance sheets can be classified according to various criteria, which allows them to be tailored to specific information needs and legal requirements. Dividing balance sheets by purpose and by the circumstances in which they are prepared helps to understand their role in the financial reporting system.
By purpose, there are published balance sheets, prepared to be published and made available to a wide range of users, including investors, lenders and supervisory authorities. Reporting balance sheets are prepared for reporting to specific institutions, such as the tax office (urząd skarbowy) or the statistical office.
Simplified balance sheets are a special category for small and micro entities, which may use simplifications in the structure and level of detail of the information presented. These simplifications are meant to reduce the administrative burden on small businesses while keeping the basic information function of the balance sheet.
Basic types of balance sheets by various criteria:
- Separate balance sheets present the financial position of a single entity
- Consolidated balance sheets combine the data of several related entities into one coherent picture
- Opening balance sheets record the state of assets at the beginning of the financial year
- Closing balance sheets show the financial position at the end of the financial year
- Annual balance sheets are prepared for a full financial year
- Interim balance sheets are prepared for periods shorter than a year
Short-period balance sheets are prepared for periods shorter than the financial year and are used to monitor the company's financial situation on an ongoing basis. They may be prepared monthly, quarterly or at other intervals
Liquidation balance sheets are a special category prepared when a company is liquidated. They take a different approach to measuring assets, which are measured at achievable net selling prices, but no higher than the purchase price or production cost less accumulated depreciation and write-downs (Article 29(1)).
Practical aspects of preparing the balance sheet
In practice, preparing a balance sheet requires suitable IT tools and control procedures that ensure accuracy and compliance with the law. Modern accounting systems offer advanced functions that support the preparation of financial statements.
The process of preparing the balance sheet includes the following stages:
- Preparing and checking the accounting data
- Carrying out a stocktake of assets
- Choosing the appropriate type and format of balance sheet
- Defining the balance sheet parameters (name, date, period)
- Checking correctness and that the balance sheet balances
- Signing of the financial statements by the responsible persons and their approval
The choice of balance sheet type depends on the nature and size of the entity. Micro entities may use the most simplified form of balance sheet (Annex No. 4 to the Act), while small entities have a somewhat more detailed format (Annex No. 5). Other entities use the full balance sheet format from Annex No. 1, while public benefit organisations and other non-governmental organisations (except capital companies) as a rule use Annex No. 6, with the option of choosing Annex No. 1 (Article 46(5)–(6)).
A growing trading company that moved from being a micro entity to a small entity had to adapt the structure of its balance sheet to the new requirements. This meant presenting information in more detail and adding balance sheet line items, which required changes to the accounting system and reporting procedures.
Defining the balance sheet parameters means specifying the name of the document, the type of financial statements (annual or interim), the date of preparation and the financial year. All these elements are important for the correctness and usefulness of the balance sheet.
Checking the balance sheet should include checking that it balances, verifying the classification of individual items and checking consistency with the accounting records. Pay particular attention to items that need detailed justification or additional explanations.
Before approval, the financial statements with the balance sheet are signed by the person keeping the books and by the head of the entity (Article 52(2)). These signatures confirm that the financial statements meet the requirements of the Act. The annual financial statements are then approved by the approving body – in an sp. z o.o. (limited liability company), the shareholders' meeting – no later than 6 months after the balance sheet date (Article 53(1)).
