The explanatory note to the balance sheet is an obligatory part of the financial statements. This is regulated by paragraph 5 of the Accounting Regulation No. 4/99 “Organization's financial statements”. This document discloses information about the accounting policies of the enterprise, necessary for the full analysis of all indicators of economic activity.
An explanatory note to the balance sheet may be absent only at small enterprises or in socially oriented non-profit organizations for which audits are not required.
The document contains:
• general information about the company;
• accounting policy data;
• complete information about assets and liabilities;
• balance sheet structure;
• assessment of the dynamics of profit;
• information on income and expenses;
• assessment of business activity;
• information about affiliates;
• information about events that occurred after reporting and much more.
The explanatory note to the balance sheet includes information about the organization: full name of the legal entity, legal form, management structure, actual and legal address, size of the authorized capital, information about the founders of the company and average annual number of employees. All these data are indicated at the very beginning, and followed by an item on accounting policies. This is a very important section, because 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 changes that have occurred and the reasons for their occurrence are indicated.
The third part contains all the information about fixed assets, stocks of the enterprise, as well as data on financial investments and loans. If the company has funds denominated in foreign currency, they are also indicated in this section. The fourth paragraph of the explanatory note includes analysis and assessment of the balance sheet structure: liquidity ratio, solvency, profitability, etc. Next is information disclosing all sources of income and expenses of the organization, including barter transactions.
According to the information of the Ministry of Finance of Russia No. -10/2012, an explanatory note to the balance sheet can be issued in free form, since it is not an element of strict accounting statements and is intended for the owners of the company. A sample explanatory note to the balance sheet can be found in the official appendices to the circular letters of the Ministry of Finance. At the same time, do not confuse the note with the official explanation of the balance sheet, which is carried out in a tabular form, determined independently by the organization. The purpose of the explanation is to give a breakdown of all lines of the financial statements.
The explanatory note is an example of information combined in one document that clearly demonstrates all aspects and aspects of the enterprise’s economic activity. A summary is provided of all the main data. This document is equally useful for the owners of the enterprise, as well as for existing and potential investors.