What and how you will get information from your Chinese financial statements?russonxiao
As a leader, you may hear numerous times about financial terms and numbers from your accountant, but do you really know how to understand these numbers and what information are behind it and the relationship within them?
This short article will explain the most common ones.
Balance Sheet (BS), is a report recording all your assets and liabilities. You will see several accounts in this report and certainly more details are to be seen under each main account if you look deeper. Here are some of the main accounts to be checked :
- Cash and Bank. Is the ending balance correct, does your accountant reconcile the balance with cash/bank statement regularly? Of course, it should be done.
- Too many sub-bank accounts are set up, is it really necessary or not? This could lead to a lack of visibility and eventually lead to confusion.
- Review accrual account balance, provisional cost incurred in the current month should be reversed in next period.
- Customer Advance payment account, you should pay attention to long-aging balance to find out any unrecognized income. If there was no movement and balance is left for too long, amount will have to be recognized as revenues and taxes will apply.
- In the same customer account, if there are both accounts receivable and advance payment balances of same numbers, it should be reconciled and cleaned up.
- If there are both payable and prepaid account balances in the same supplier account, it should be reconciled and cleaned up.
- Accrued accounts should be reviewed and actual expenses should be write-off when they occur to avoid double accounting.
- Making periodical review of accounts payable balances is important to deal with long-aged balances. Accountant must give a reason if those long-aged balances have been outstanding for too long.
- If accounts receivable or accounts payable balance appears negative, there is something wrong. Ask your accountant to find out the reason.
- If find too large monthly variance of accounts receivable and payable, ask your accountant why. You should also pay attention to the variation in trade receivables and payables. If too large, you may ask your accountant what is the reason.
Profit and Loss (PL), is a report that indicates if your company is making profit or not during a certain period. There are several basic points and principles to verify:
- What is the revenue recognition standard? According to tax invoice issued? Is there any accrued revenues?
- It is important to keep a consistent approach to recognize Cost of Goods Sold. Accountant should tell you reasons if large fluctuation often happens.
- You should make sure your fixed costs such as office rent, salaries etc. are well registered during every period and costs do not fluctuate too much.
- Foreign currency assets such as US dollars, Euros, Hong Kong dollars etc. should be evaluated by using period-end exchange rates.
- The income tax expense of the year should be reconciled with the pre-tax profit of the PL.
Another element is that there are certain relations between the two BS and PL reports, such as:
- Current period depreciation expense (PL) of fixed assets is equal to the increase in accumulated depreciation (BS)
- Current change in undistributed profit shall be equal to the cumulative net profit of the PL, plus the adjustment of undistributed profit for the current period (if any)
These are only the main points, but you should always have professional support and advices to give you a clear vision of how is your company performing financially.
If you are interested in these financial statements’ topics, please feel free to contact us for further information.