ELI5 – What is the purpose of the “završni račun” and financial statement?

With exceptions for those who wrap up this topic within the first month of the year, and therefore remain at ease afterward, most companies finalize and submit their financial reports during the last week or even on the last day of the deadline in the current year. Typically, they make changes that affect the profit and loss statement until the last moment.

In our industry, the entire process is usually managed by accountants, with owners only getting involved to review the profit and loss statement at the end of the year and electronically sign off on what’s needed. For most owners, this level of involvement is more than enough, primarily because the signing process isn’t always smoothly executed.

Despite being a regular item in business operations, there’s often a certain level of confusion among the majority of small and medium-sized teams in our industry regarding the meaning of this diverse terminology I intentionally and liberally included in the first two paragraphs.

Accordingly, the aim of this writing is to attempt to help clarify this topic so that teams are more informed about what exactly happens behind the scenes of accounting software and the Business Registers Agency (APR) portals where reports are submitted. Although I don’t believe it’s necessary, or even possible, for every member of every team to perfectly grasp the terminology related to this topic, I think it’s useful for there to be at least a basic understanding of common terminology.

• What is a”završni račun”?

Strictly legally and formally, I would say it’s nothing. “Završni račun” (balance sheet) is now an outdated term that seems to have been used in slightly older versions of regulations and literature dealing with financial reporting. The currently applicable Accounting Act exclusively refers to financial statements, probably because this term is more in line with international terminology and sounds less socialist (similar to how the word “preduzeće” is still used, even though the applicable law refers to business entities. The term “firma,” on the other hand, is indestructible). So, for the purposes of this consideration, we can equate “završni račun” with “finansijski izveštaj” (financial statement) and use only that newer term to be totally modern.

• What is financial statement?

The legal definition, like most such definitions, is somewhat cumbersome, but it can be boiled down to the fact that a financial statement is an overview of the financial position and performance of a company for one fiscal year.

This report is typically prepared once a year, for the previous year, during the current year, and the deadline for its submission is the end of March (for companies whose fiscal year corresponds to the calendar year, which is the majority of firms in our industry). So, all transactions, purchases, sales, inflows, outflows, etc., from one year, which accountants have recorded (“booked”) in their accounting software based on the data provided by the owners and team members, are collected and packaged into a prescribed format.

For most companies in our industry, the financial statement consists of two elements: the balance sheet and the profit & loss statement. Some companies also submit additional documents such as notes and a statistical report, but we won’t discuss them here. This package of documents is typically referred to in English as a financial report, annual financial statement, statutory financial report/statement, or something similar. The essence is that once this package is submitted in accordance with the appropriate procedure, it is considered the official financial report of the company and is publicly available on the Business Registers Agency (APR) website.

So, if someone asks you for your financial statements for any purpose (potential investor, publisher, applying for a fund, etc.), you can send them these documents, downloaded from the Business Registers Agency (APR) website (though they are only available in Serbian). From this document, interested parties can see how your company operates, the approximate value of the company’s assets (albeit based on how the company values them), the revenue and expenses, whether there is a profit, and so on.

• What is the profit and loss statement?

For this, we don’t need to resort to the legal definition, as it’s a document that will typically be understandable to anyone who reviews its contents. In short, the profit and loss statement (“bilans uspeha” or BU, as it’s sometimes called) contains information about revenues, expenses, and the so-called business result – the profit or loss. For most companies in our industry, this is the most interesting part of the financial statement because it shows, at least in principle, how the company is doing, whether it’s making money or losing money. That’s why owners are most concerned with this report, especially because the data in it also determines the corporate income tax the company will pay (we’ll talk more about that in a few months).

However, in the broader context of financial reporting, the income statement is just part of the story, and not necessarily even the most important part, as it doesn’t say anything about the assets the company owns, the cash it has on hand, and it may not even provide enough information about the true profitability of the company.

When it comes to assets, information about the value of assets can be seen in the balance sheet (“bilans stanja” or BS), which represents the second fundamental part of the financial statement, as well as basic data about the cash the company has on the last day of the year. Like the profit and loss statement, the balance sheet doesn’t provide enough data for all purposes, which is why companies often maintain parallel records for management and founders’ purposes, known as “management reporting,” which brings us to the last item we’ll discuss.

• What is P&L?

Simply put, P&L or profit & loss is the profit and loss statement, in other words, it’s just the common English term for the “bilans uspeha” or BU, while the “bilans stanja” or BS translates as the balance sheet. However, the term P&L is often used for internal, parallel records kept within the company for management purposes, i.e., the previously mentioned “management reporting” that provides more details than reports made for compliance with legal requirements (such as the BS). Management reporting can contain various information, from an overview of current profitability at the project or product level, to weekly cash flow reports, and even anything else necessary for management to have the appropriate insight into the company’s financial position (on a monthly, quarterly, or annual basis), often also in English or another foreign language.

We’ve covered more or less all the basic terms people throw around in the first three months of each year. Below are a couple of suggestions on what can be done with this newly acquired knowledge:

1. Considering the introduction of some structured form of “management reporting” alongside accounting tracking is worth exploring. Whether it will be just a “cash flow statement,” a P&L overview of profitability by projects, or a larger package of reporting (such as a comprehensive operational P&L, cash flow statement, budget, and revenue forecast) depends on the needs, but each of these reports provides insight into the company’s operations that is not visible or less visible in the annual financial statement reporting.
2. Considering the creation of periodic “mini” financial statements (e.g., on a semi-annual or quarterly basis) in the form of a trial balance with calculated period results based on accounting data is worth exploring. These reports, even alongside the reports from the previous point, provide valuable insight into current operations and can prevent surprises that may arise when financial statements are only reviewed once, and that’s at the end of the year. You can discuss this and the previous point with your friendly neighborhood financial advisor or accountant.
3. Opening the discussion about the annual result of the company in a timely manner, ideally before the end of the calendar year, because it’s not in anyone’s interest to leave it until the end of March. 🙂

When June approaches, we’ll talk in more detail about the method of determining corporate income tax, the relationship between tax and financial results, the effective tax rate, and some tax incentives.