Introduction to Accounting

Manual · General Accounting

Introduction to Accounting

Fundamental concepts, the balance sheet, inventory and Swiss accounting standards

1. Definition 2. Stakeholders 3. Areas 4. Standards 5. Inventory 6. The balance sheet 7. Opening balance sheet 8. Closing balance sheet 9. Classification 10. CO structure

Section 1

What is accounting?

Legal definition — Art. 957a CO

Accounting forms the basis for the preparation of financial statements. It records transactions (flows resulting from the company’s economic operations) and other facts necessary for the presentation of the company’s assets, financial position and results.

Accounting is much more than a mere legal obligation: it is a strategic tool to aid decision-making, both for the company’s internal managers and for the external economic stakeholders involved with it.

It can be compared to a regular financial snapshot of the company: at the end of each financial year, it captures the financial position and reveals the profit or loss generated during the period.

Key point: The financial year generally corresponds to the calendar year (1 January → 31 December). The accounts record all economic transactions during this period.

Section 2

Stakeholders in accounting

Accounting produces financial information that is of interest to many stakeholders, each with different motivations. There are two main categories.

Company managers

They use accounting information to make decisions over different time horizons:

Long term

Strategic decision

Commits the company over a long period

E.g.: expanding a production facility to cope with increased sales

Medium term (2–3 years)

Tactical decision

Medium-term planning

E.g.: securing a loan to finance the expansion of the production workshop

Short term (< 2 years)

Operational decision

Day-to-day management of the business

E.g.: changing raw material suppliers

External users

Many third parties need access to the company’s financial information for specific reasons:

Financial partners

Creditors

Suppliers, bankers, other creditors — interested in the company’s creditworthiness to ensure they are repaid.

Investors

Non-managing owners

Shareholders, limited partners — interested in the return on invested capital and the company’s profitability.

Legal obligations

Tax authorities

County and federal — the accounts serve as the basis for tax returns and VAT returns.

Employees

Staff

Interested in profitability and financial stability to safeguard jobs, and in the company’s ability to generate profits in the event of profit-sharing.

Section 3

Areas of accounting

Accounting is not a single field. It is divided into several complementary specialisms, two of which form the core of the accounting profession.

Main field

General accounting

Records the company’s transactions with its partners (suppliers, customers, investors, the government, staff). It prepares the balance sheet and the profit and loss account. This is the central focus of this manual.

Main area

Cost Accounting

Takes data from general accounting for analysis. Enables the calculation of cost prices and the determination of results by business sector and by product.

Complementary area

Financial analysis

Examines a company’s economic and financial position by comparing it with others. Uses ratio calculations in particular to identify potential problems.

Related field

Cash flow statement

Prepared on the basis of the annual accounts, this shows the amounts of cash received or paid out during a financial year. Cash management is of paramount importance to the company.

Related area

Budget management

Enables the company to make forecasts and then compare actual results with these forecasts in order to explain them and improve the company’s operations.

Section 4

Accounting standardisation

To enable reliable exchanges between the company and other economic actors involved in its activities, accounting is based on rules and conventions. This harmonisation of accounting practices is known as accounting standardisation.

Swiss accounting law

Legal basis

Swiss accounting law, comprising 29 articles, is enshrined in Articles 957 et seq. of the Swiss Code of Obligations (CO). It applies to all companies, associations and foundations, subject to specific provisions.

Swiss law is distinguished by an approach that is independent of legal form: all sole traders, partnerships and legal entities are, in principle, required to keep accounts.

Who is required to keep accounts?

The following must keep accounts and present financial statements in accordance with the CO (Art. 957):

Type of entity	Condition	Obligation
Sole traders and partnerships	Turnover > CHF 500,000	✔ Full accounting
Legal entities (Ltd, Ltd, cooperatives, etc.)	No turnover requirement	✔ Full accounting
Sole traders and partnerships	Turnover ≤ CHF 500,000	Simplified accounting (income/expenses)

Note: The law provides relief for SMEs regarding the presentation of accounts. However, depending on their size and significance, certain companies must meet additional requirements (regular audit, detailed annual report, etc.).

International standards

Switzerland has its own accounting standards. However, to take account of economic and financial globalisation, international accounting standards have emerged to harmonise rules and standardise accounting documents. These standards mainly apply to large listed companies.

Section 5

Inventory

Before drawing up a balance sheet, the company must compile an inventory, i.e. list and value all its assets.

Key definitions

Assets (capital employed): all the assets owned by the company — cash, receivables, stock, fixed assets.

Liabilities (borrowed capital): all the obligations arising from the provision of capital by third parties. Net asset

value: what would remain for the owner if the company sold all its assets to repay its debts.

Basic formula Assets (capital employed) − Liabilities (borrowed capital) = Net assets (equity)

Example of a balance sheet — D. Perroud, Mechanical Engineering (as at 31 December N)

Asset item	Details	Amount (CHF)
ASSETS (capital employed)
Cash	Cash on hand	20,000
Cash	Daily statement from La Poste	30,000
Receivables	Unpaid customer invoices	120,000
Stock	Stock of materials (steel, brass, silver)	100,000
Stock	Finished goods stock (milling machines, grinders)	70,000
Fixed assets	Production machinery and equipment	230,000
Fixed assets	IT equipment	20,000
Fixed assets	Vehicles	80,000
Fixed assets	Tools	10,000
Fixed assets	Operational building	800,000
Total assets		1,480,000
LIABILITIES (borrowed capital)
Current liabilities	Unpaid supplier invoices	140,000
Current liabilities	Overdraft at BCV	130,000
Current liabilities	VAT statement	10,000
Long-term liabilities	Mortgage loan from BCV	500,000
Total liabilities		780,000
= Net assets (equity)		700,000

Section 6

The balance sheet

The balance sheet is a table summarising the information obtained from the inventory. The components of the assets give rise to various items on the balance sheet. It can be compared to a snapshot reflecting the assets and financial position of the company at a given point in time.

By convention:

• The left-hand side is called ASSETS (composition of assets = uses)
• The right-hand side is called LIABILITIES (source of assets = resources)

Fundamental balance sheet equation ASSETS = LIABILITIES

Assets = Liabilities (borrowed capital) + Equity

The word ‘balance sheet’ derives from the Italian ‘bilancio’, meaning ‘balance’. The assets and liabilities comprising the balance sheet change in both nature and amount depending on the transactions carried out by the company during the financial year.

Reminder: Debt is a source of financing. Taking on debt means financing one’s assets with other people’s money.

Section 7

The opening balance sheet

1 January

Opening balance sheet

Shows the financial position at the start of the new financial year. ASSETS always equal LIABILITIES.

Financial year

Transactions in progress

The financial position changes: purchase of assets, changes in receivables, payables and equity, depreciation, etc.

31 December

Final balance sheet

Presents the new financial position and shows the result (profit or loss) for the financial year.

The opening balance sheet for a financial year corresponds to the closing balance sheet of the previous financial year. Thus, the financial position at the end of financial year N corresponds to that at the start of financial year N+1.

OPENING BALANCE SHEET

D. Perroud, Mechanical Engineering, as at 1 January N+1

ASSETS — Uses (composition)

Cash20,000

Post office 30,000

Trade receivables 120,000

Raw materials stock 100,000

Finished goods stock 70,000

Machinery and equipment230,000

IT equipment20,000

Vehicles80,000

Tools10,000

Operating premises800,000

TOTAL ASSETS 1,480,000

LIABILITIES — Resources (origin)

Suppliers 140,000

Bank130,000

VAT return10,000

Mortgage500,000

Initial capital700,000

TOTAL LIABILITIES 1,480,000

Fundamental rule: In an opening balance sheet, ASSETS always equal LIABILITIES. Assets describe the composition of capital employed (uses); liabilities describe their source (sources).

Section 8

The closing balance sheet

On 31 December, the company draws up its closing balance sheet. As a result of its activities during the financial year, the financial position has changed:

• On the assets side: cash and cash equivalents (cash on hand, post office accounts) have increased, as have trade receivables and inventories; conversely, fixed assets and buildings have decreased (depreciation).
• On the liabilities side: new debts have been incurred with suppliers and the bank; part of the VAT settlement and the mortgage loan has been repaid.

The final balance sheet before allocation of profit

There is a difference between total assets and total liabilities. This difference represents the profit for the financial year, which balances the balance sheet.

FINAL BALANCE SHEET — BEFORE APPROPRIATION OF PROFIT

D. Perroud, Mechanical Engineering, as at 31 December N+1

ASSETS

Cash40,000

Posts80,000

Trade receivables 170,000

Raw materials stock 120,000

Finished goods stock 150,000

Machinery and equipment200,000

IT equipment15,000

Vehicles70,000

Tools5,000

Operating premises800,000

TOTAL ASSETS 1,650,000

LIABILITIES

Suppliers—

Bank—

VAT statement—

Mortgage—

Initial capital700,000

Profit for the year 80,000

TOTAL LIABILITIES 1,650,000

Final balance sheet formula ASSETS − LIABILITIES = RESULT

If ASSETS > LIABILITIES → PROFIT | If ASSETS < LIABILITIES → LOSS

The final balance sheet after allocation of profit

The profit belongs to the owner. The owner may decide to leave it in the business (increase in equity) or to withdraw it from the cash flow. If the profit is left in the business, the final capital is:

Initial capital 700,000 + Profit 80,000 = Final capital 780,000

FINAL BALANCE SHEET — AFTER APPROPRIATION OF PROFIT

D. Perroud, Mechanical Engineering, as at 31 December N+1

ASSETS

Cash 40,000

Posts 80,000

Trade receivables 170,000

Raw materials stock 120,000

Finished goods stock 150,000

Machinery and equipment200,000

IT equipment15,000

Vehicles70,000

Tools5,000

Operating premises800,000

TOTAL ASSETS 1,650,000

LIABILITIES

Trade payables195,000

Bank180,000

VAT return5,000

Mortgage490,000

Final capital (700,000 + 80,000)780,000

TOTAL LIABILITIES 1,650,000

Fundamental rule: In a final balance sheet after allocation of profit, ASSETS always equal LIABILITIES. The profit has been included in equity.

Section 9

Classification of balance sheet items

Balance sheet items are not arranged in any particular order, but are subject to a specific classification for both assets and liabilities (Art. 959a CO):

• Assets are classified in descending order of liquidity: decreasing ability to be converted into cash.
• Liabilities are classified in descending order of maturity: decreasing urgency of settlement.

ASSETS — in descending order of liquidity

Cash and cash equivalents (cash, post office, bank) Highly liquid

Short-term receivables (customers) Short term

Inventories (raw materials, finished goods) Short-term

Prepaid expenses and accrued income Short-term

Financial assets Long-term

Tangible fixed assets (machinery, buildings, etc.) Long-term

Intangible assets (patents, trademarks, etc.) Long-term

LIABILITIES — in descending order of maturity

Short-term trade payables Due within one year

Short-term interest-bearing liabilities Due within one year

Other short-term liabilities (VAT, etc.) Due within one year

Accrued liabilities Due within one year

Long-term interest-bearing liabilities (mortgage) Due LT

Provisions Due in the long term

Equity / Shareholders’ equity Equity

Section 10

The minimum balance sheet structure under the CO

The Swiss Code of Obligations prescribes a minimum balance sheet structure. The balance sheet must include, in the prescribed order, at least the following headings and items:

ASSETS	LIABILITIES
Current assets vs. short-term liabilities
Current assets: – Cash and short-term assets at market value– Trade receivables– Other short-term receivables– Inventories and unbilled services– Prepayments and accrued income	Current liabilities: – Trade payables– Interest-bearing current liabilities– Other current liabilities– Accrued expenses
Fixed assets vs Long-term liabilities
Fixed assets: – Financial assets– Investments– Tangible assets– Intangible assets	Long-term liabilities: – Long-term interest-bearing liabilities– Other long-term liabilities– Provisions Equity: – Share capital– Statutory reserves– Profit/Loss for the financial year

List format: Offsetting assets and liabilities allows for the presentation of subtotals, e.g.: Current assets − Short-term liabilities = Net current assets + Fixed assets − Long-term liabilities = Equity.

Educational article · Introduction to accounting · Swiss law (CO) · Chapters 2 and 3