The reformation of the balance is a procedure that is carried out annually, especially in large companies and corporations, by decision of the board of directors. Its purpose is to establish the final financial result for the past year. This is done by comparing the indicators of revenue and profit and data on the use of funds.
The reformation of the balance is a process that can be carried out only if there is an appropriate permit or order of an authorized person. As a rule, a board of directors convened annually by a general vote approves a representative or investors resolve issues directly at a meeting.
Reformation Balance: Postings
So, first of all, you should familiarize yourself with the accounting entries compiled by an enterprise specialist. Of particular interest is the 80 account under the name “Profit and Loss”, since it reflects the sums reflecting the receipt of funds and their allocation to certain needs. Accordingly, on the credit side there is a loss of financial resources, and on the debit side, their inflow by sources. It becomes clear that the position of the company at the reporting date largely depends on the balance in this account.
After it was decided that the reformation of the balance sheet should be carried out, the accountant, based on the desires and requirements of the management team, distributes the profit. Most of it is intended for owners, it is divided into shares in proportion to the amount of investor deposits. If a surplus is formed as a result of this operation, it is credited to a special 88 account, which is given the speaking name "Retained earnings of past years." Further, this amount is partially sent to reserve accounts to cover unforeseen expenses.
At present, not all enterprises believe that the reformation of the balance sheet is an important and necessary element in accounting practice. However, this procedure does help the management team to clearly demonstrate to investors and owners how much money they receive from the functioning of the company and where other resources are allocated. In this regard, we can conclude that the reformation serves as a fairly effective mechanism that does not lose its relevance at all times.
There are also disadvantages and difficulties in this area. The procedure itself is not an extremely complex scheme requiring the investment of time and energy. Often problems arise due to illiterate bookkeeping. Often, the “stumbling block” is mistakes made at the time of closing accounts and summing up. In order to avoid such significant errors, companies should pay special attention to the audit of financial documentation. High-quality and timely verification will increase not only the productivity of the work, but also the degree of trust on the part of the inspection services.
First, it is necessary to finally approve the annual financial statements, then a balance sheet reformation can be carried out, during which the profit of the last reporting period is written off and other accounts are closed. The undistributed balance will go to cover losses from previous years. The economic meaning of this procedure is a slight improvement in the balance sheet. In the future, it will be easier to work with such a document, since all the necessary postings have been made, and the accounts are closed.
A legal entity has the right to independently choose a specific method of carrying out the reformation, having previously noted the method in the documents. In addition, this process requires no less accuracy and literacy from a specialist, as third-party audit organizations also carefully check the formatted balance.