We explain the main aspects related to the accounting of the result of the year and its application.
- The result of the year is an essential part of each of the financial statements that form part of the annual accounts.
- The application of the result has both legal and accounting consequences
For a long time, making profits was considered the main objective of companies. Today there is much greater awareness that there may be many others, fundamentally linked to the personal aspirations of their managers and various social and environmental commitments. But this has not made the accounting of the result has lost an iota of its importance.
Every entrepreneur must be clear about some key aspects of the mechanics of profit accounting. In this way, you will not only have a better knowledge of the evolution of your company, but also of some legal obligations and the external projection that third parties will receive from your departure.
The accounting closing and the result of the year
Throughout the exercise, we will have been recording the operations in the journal of the company. This will have meant that the income accounts will grow with a credit balance and the expense accounts with a debit balance.
At the end of the year we must make a series of regularization and closing entries. Fortunately, modern management solutions allow us to automate the process.
Among all those seats, one of them will lead to the recasting all income and expense accounts into one. To do this, we will debit the accounts of groups 6 and 7 (normally the latter) that present a credit balance at the end of the year with credit to the account 129 (result of the year) and we will credit the accounts of groups 6 and 7 (normally group 6) that present a debit balance at the end of the year with a charge to account 129.
With this we will have achieved that, at closing, all income and expense accounts are at zero and the result is reflected in the corresponding account, in this case 129. A similar process will occur, in parallel, with the accounts of groups 8 and 9, but in this case they are credited or debited with a debit or credit to accounts of subgroup 13.
The result of the year in the annual accounts
When we prepare the annual accounts, The result of the exercise will be a key piece of the different financial statements. In fact, its reflection, together with that of the financial and equity situation of the company, is one of the main objectives pursued by the annual accounts.
On the balance sheet it will appear in the net equity and, within it, in the shareholders' equity. Of course, the item referring to the result of the year is located among those located lower than those referring to own funds. The reason is that, despite being part of the company's long-term financing, normally, during the year it will have to be applied to one destination or another.
Obviously, it is in the profit and loss account where the result of the year is the protagonist. It constitutes your balance and the information contained therein breaks down the categories of income and expenses that have contributed to forming it.
In it statement of changes in equity, the result is also very important. Of the two documents that make it up, the recognized income and expenses document is one of the items that are taken into account to calculate that amount. For its part, the total statement of changes in equity reports all changes in equity derived from various sources, including the results of the year and previous years.
For its part, one of the objectives of the report is to make expansions of information and comments aimed, among other aspects, at conveying a faithful image of the results of the company.
Finally, the Statement of cash flows also part of the result of the exercise. Subsequently, it makes a series of adjustments that allow us to understand the origin and use of monetary assets representing cash and other equivalent liquid assets.
Application of the result
A key aspect is what to do with the result. The answer to that question is application of the result, which is an action with both legal and accounting consequences.
From the legal point of viewDepending on the legal form that our company adopts, obligations may arise related to the application of the result. For example, in capital companies it is one of the points on which the ordinary general meeting of partners must resolve during the first six months of the year.
As for what the results can be applied to, the two main items are usually the distribution of active dividends to the partners (in short, the distribution of profits) and the provision of voluntary reserves. The latter are freely established by the company and contribute to increasing its own financing. They are the main way to retain profits within the company.
Furthermore, there may be other destinations to which the result can be applied; For example:
- The write-off of losses from previous years
- The provision of legal or statutory reserves
- The provision of other types of reserves
- The payment of founder bonuses and remuneration to managers or workers charged to the results
- Capital increase
On the other hand, if any part of the result remains unapplied, that figure will appear in an item called remainder.
In all these cases, what we will do is charge account 129 (in which we have reflected the result of the exercise) with credit to the accounts representing the item corresponding to the net assets or to treasury accounts if the application represents a payment to shareholders, workers, managers, founders, etc. In the event that payment does not materialize at that time, it will be charged with a credit to an account representative of the debt incurred.
A special case occurs when a payment has already been paid or recognized. active interim dividend of that exercise. Until the result is applied, it will appear in the net equity, reducing the own funds by the amount recognized or paid. At the time of application, the account that represents it will be credited for the amount of its balance charged to account 129.
Understand the accounting of the result It helps us learn how our business works and better meet our obligations.
Fountain: SAGE
