How to construct the managerial balance sheet

Management Accounting, Reporting automation, balance, how to implement, IFRS, implementation, management accounting 1 Comment

Main financial
statement showing the management accounting system and financial position of
the enterprise for the accounting period

Balance
sheet has three functions:

Verifying.
Informative.
Analytical.

Now, let’s have a closer look:

1. Verifying.

If your accounts are balanced (that is assets equal to liabilities), it means that all the operations had been posted correctly and there are no mistakes in calculations or those
made through lack of attention (i.e. the goods have been shipped, but the debt has not been increased). So, the given balance sheet guarantees that there are no mistakes in posting the data, but it cannot guarantee that the posted data is correct.

In other words, if you use the incorrect information while posting the data (for example, according to the documents100 tons have been shipped, but actually 105 tons have been shipped), you will not notice the mistake at the end of the reporting period. It will become obvious while drawing up the inventory (it rarely happens when the Buyer reports about the extra goods), but this mistake is not connected with the accounting, it is the fault of the warehouse workers who will reimburse the losses.

2. Informative

If balance sheet is drawn up correctly, it contains the information about the assets of your company as well as its debts. There are a lot of forms of balance sheet, but they have almost the similar structure as it is hardly possible to invent something new.

That’s why I will describe two forms:

1) vertical,
2) horizontal.

Vertical balance sheet:

	*Assets*	Month Year		*Liabilities*	Month Year
	*Section 1* «*Non-current assets*»			*Section 1«Owner’s equity*
1.1	Fixed assets (original cost)	120 000	1.1	Investments (at the beginning of the year)	2 835 197
1.2	Depreciation	12 000	1.2	Additional investments
1.3	Fixed assets (net assets value)	108 000	1.3	Income statement (from the beginning of the year)	12 000
1.4	Capital construction		1.4	including accounting period	12 000
1.5	*Total non-current assets*	108 000	1.5	Total owner’s equity	2 847 197
	*Section* *2 «Current assets***»			*Section* *2 «Long-term liabilities***»
2.1	Work-in-process inventory	23 500	2.1	Credits and loans
2.2	Merchandise	2 559 198	2.2	Other long-term liabilities
2.3	Accounts receivable	3 164 609	2.3	Total long-term liabilities	–
2.4	Accounts receivable (buyers)	2 888 400		*Section* 3«*Current liabilities*»
2.5	Accounts receivable (suppliers)	97 125	3.1	Accounts payable	3 824 478,89
2.6	Accounts receivable (other)	179 084	3.2	Accounts payable (buyers)	254 612
2.7			3.3	Accounts payable (suppliers)	3 288 694
2.8	Petty cash	933 925	3.4	Accounts payable (other)	281 173
2.9	Cash assets	59 876	3.5
2.10	Settlement account	1 106	3.6	Taxes payable	25 000
2.11	Cash	58 770	3.7	Wages pay	152 431
2.12	*Total current assets*	6 741 107	3.8	Total current liabilities	4 001 910
	*Total assets*	6 849 107		*Total liabilities*	6 849 107
	Verification				–

So, it has a typical form with 5 sections:

· 2 sections in Assets:

Non-current assets;
Current assets.

· 3 sections in Liabilities:

Owner’s equity;
Long-term liabilities;
Current liabilities.

Sections are given in accordance with the increased liquidity, from top to bottom. The lines in orange color include the detailed interpretation of the line given. It is necessary to give more information about the line 1.4 in Liabilities. «Income statement from the beginning of the year is the accumulated sum of money which is calculated by means of adding the given line from the previous month with the income received in the accounting month (line 1.5).

The bottom red line is verifying, if there are some figures it means that the assets do not equal to the liabilities.

Horizontal balance sheet:

		January 11	February 11	March 11
1.1	Fixed assets (original cost)	120 000	120 000	120 000
1.2	Depreciation	12 000	13 000	14 000
1.3	Fixed assets (net assets value)	108 000	107 000	106 000
1.4	Capital construction
1.5	*Total non-current assets*	108 000	107 000	106 000
2.1	Work-in-process inventory	23 500	22 385	25 120
2.2	Merchandise	2 559 198	2 852 000	2 700 123
2.3	Accounts receivable	3 164 609	4 165 720	4 166 831
2.4	Accounts receivable (buyers)	2 888 400	3 888 932	3 889 464
2.5	Accounts receivable (suppliers)	97 125	97 808	98 491
2.6	Accounts receivable (other)	179 084	178 980	178 876
2.7
2.8	Petty cash	933 925	928 061	922 197
2.9	Cash assets	59 876	77 325	53 279
2.10	Settlement account	1 106	15 001	14 856
2.11	Cash	58 770	62 324	38 423
2.12	*Total current assets*	6 741 107	7 117 460	6 945 353
	*Total assets*	6 849 107	7 224 430	7 051 353
1.1	Investments (at the beginning of the year)	2 835 197	2 835 197	2 835 197
1.2	Additional investments
1.3	Income statement (from the beginning of the year)	12 000	61 397	149 072
1.4	including accounting period	12 000	49 397	87 675
1.5	Total owner’s equity	2 847 197	2 896 594	2 984 269
2.1	Credits and loans
2.2	Other long-term liabilities
2.3	Total long-term liabilities	–	–	–
3.1	Accounts payable	3 824 478,89	4 126 009	3 887 539
3.2	Accounts payable (buyers)	254 612	257 148	259 684
3.3	Accounts payable (suppliers)	3 288 694	3 587 126	3 325 558
3.4	Accounts payable (other)	281 173	281 735	302 297
3.5
3.6	Taxes payable	25 000	48 523	25 368
3.7	Wages pay	152 431	153 304	154 177
3.8	Total current liabilities	4 001 910	4 327 836	4 067 084
	*Total liabilities*	6 849 107	7 224 430	7 051 353
	Verification	–	–	–

It fact, this type of balance sheet contains the same sections if compare with the previous one (they cannot differ!), but it has another structure. Advantages: dynamic changes within the year are clearly seen. Disadvantages: general balance sheet structure as well as assets and liabilities correlation are not properly demonstrated. But this opinion is mine. So, while choosing the forms you can take the second option. But if the first type is used, the second one will be necessary to show the dynamics. To conclude, it is impossible to construct statements without the second (horizontal) type, but possible without the first (vertical) type.

3. Analytical

Economists can use all possible analytical tools only due to the balance sheet.
As a rule, there are two ways how to make analysis:

Analysis of item changing dynamics.
Analysis of financial performance.

It seems to me that analysis of item changing dynamics is easy to understand, you choose the line and observe the changes within the accounting period (3, 6, 12 months and etc.). So, while consideration you have to take into account not only the balance sheet, but also profit and loss account (we will study it later). For example, the dynamics of the accounts receivable and the merchandise output.

Analysis of financial performance has been described here.

If you need the above balance sheet in Excel, do not hesitate to contact me. I will send it to you.

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How to construct the managerial balance sheet