Explanatory note to the balance sheet and its role in reporting

An explanatory note to the balance sheet is an obligatory part of the financial statements. This is regulated by clause 5 of Accounting Regulation No. 4/99 "Accounting statements of the organization". This document discloses data on the accounting policies of the enterprise, which are necessary to carry out a full-fledged analysis of all indicators of economic activity.

There can be no explanatory note to the balance sheet only at small enterprises or in socially-oriented non-profit organizations for which audit checks are not required.

The document contains:

• general information about the company;

• accounting policy data;

• full information about assets and liabilities;

• balance structure;

• an estimation of dynamics of profit;

• Information on incomes and expenses;

• evaluation of business activity;

• information about affiliated persons;

• Information on events that occurred after the preparation of the accounts and much more.

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

The third part contains all the information on fixed assets, enterprise inventories, as well as data on financial investments and loans. If the company has funds denominated in foreign currency, they are also specified in this section. The fourth paragraph of the explanatory note includes analysis and assessment of the structure of the balance sheet: liquidity ratio, solvency, profitability, etc. Then comes the information revealing 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, as it is not an element of strict accounting reporting and is intended for the owners of the company. A sample explanatory note to the balance sheet can be found in the official annexes to the circular letters of the Ministry of Finance. In this case, it is not necessary to confuse the note with an official explanation to the balance sheet, which is carried out in a tabular form determined by the organization itself. The task of the explanations is to give a transcript of all the lines of the financial statements.

Explanatory note is an example of information combined in one document, clearly demonstrating all aspects and aspects of the economic activity of the enterprise. A summary of all the main data. This document is equally useful both for the owners of the enterprise, and for existing and potential investors.