Every year, the director receives from the accountant a stack of pages titled balance sheet. They sign it, file it, and forget it in a folder. A pity: this document is the most concentrated X-ray of the company you will ever read. It shows not only what happened, but also how resilient the company is today and what risks lie ahead tomorrow.
The good news is that the balance sheet is not reserved for accountants. Its basic logic can be learned in a few minutes, and once you understand the mechanism, you will view every decision differently — a new loan, an investment, an unpaid invoice, or a dividend. This article is written for the director: without unnecessary jargon, but technically correct.
We start with a simple image: the balance sheet is the snapshot of the company at a fixed date (usually 31 December). Alongside it, the profit and loss account is the film showing how you got there over the year. Together, the two tell almost the whole story.
What the balance sheet actually is
The balance sheet presents, at a given moment, everything the company owns and everything it owes. It rests on an equation that is never broken: Assets = Liabilities, or in modern terms, Assets = Equity + Liabilities. This is not an accounting coincidence but an economic law: every unit of value the company owns comes from somewhere — from shareholders, from reinvested profit, or from creditors.
Picture a company car bought for 100,000, of which 30,000 is own money and 70,000 is a loan. On the asset side sits the car (100,000). On the liability side sit the sources: equity (30,000) and the bank debt (70,000). The two sides balance automatically. That is why the document is called a “balance” sheet.
Assets: what the company owns
The asset side answers “what does the company have?” and is generally ordered from items hardest to turn into cash toward the most liquid.
- Fixed (non-current) assets — long-term goods: buildings, equipment, vehicles, plus intangibles (licenses, software, patents) and financial assets (holdings in other companies). These wear out over time through depreciation.
- Current assets — items that rotate quickly in day-to-day activity: inventory (goods, raw materials, finished products), receivables (money customers owe you), and cash and bank accounts.
- Prepaid expenses — amounts paid now for services received later (for example, an insurance policy paid in full for 12 months).
For the director, the most instructive parts of the asset side are receivables and inventory. A company can report profit on paper, but if that profit is locked in unpaid invoices and unsold stock, there is no money in the accounts. This is where most liquidity crises are born.
Liabilities: where the money comes from
The liability side answers “who financed the assets?” and splits into two large groups: the owners’ money and other people’s money.
- Equity — the shareholders’ share: subscribed and paid-up share capital, reserves, premiums, plus retained earnings and the result for the year (profit or loss). This is the company’s net worth.
- Provisions — amounts set aside for probable risks and charges that are uncertain in amount or timing (litigation, customer warranties).
- Debts (liabilities) — obligations to third parties: bank loans, supplier debts, wages payable, taxes and contributions owed to the state. They split into short-term (under one year) and long-term.
An important signal: if accumulated losses erode share capital below half, Romanian law obliges shareholders to decide on recapitalization or dissolution. This is exactly the kind of alarm the balance sheet raises in good time.
How to read the company’s health in a few minutes
You do not need dozens of indicators. Three or four simple ratios tell you almost everything. Here they are, with an indicative interpretation (ideal values vary by industry):
| Indicator | Formula | What it tells you |
|---|---|---|
| Current ratio | Current assets / Short-term liabilities | Above 1 means the company can cover its short-term debts. |
| Debt-to-equity | Total liabilities / Equity | The higher it is, the more the company depends on borrowed money. |
| Days sales outstanding | (Receivables / Turnover) × 365 | Average days to collect invoices. Fewer days is better. |
| Return on equity | Net profit / Equity | What the company produces relative to shareholders’ money. |
Note that three of these ratios are read directly from the balance sheet, while one also needs the profit and loss account. You do not have to calculate them by hand — ask your accountant to provide a simple quarterly dashboard. If you need an interpretation tailored to your company, our team handles exactly this through our accounting and advisory services.
Warning signs you must not miss
The balance sheet warns before problems become visible in the P&L. Watch for:
- Steadily rising receivables — you sell but do not collect. Profit exists only on paper.
- Short-term liabilities larger than current assets — the classic sign of cash-flow tension.
- Negative equity — the company has fully consumed the shareholders’ contribution.
- Inflated inventory — stock that does not rotate ties up money and may hide unsellable goods.
- Near-zero cash despite reported profit — a sign the money is locked in receivables or inventory.
Balance sheet and P&L — the inseparable pair
The balance sheet shows the position at a date. The profit and loss account shows the performance over the year: revenue minus expenses down to the net result. The link is direct — the profit from the P&L flows into equity on the balance sheet.
That is why you cannot judge a company by a single document. A profitable company may have a fragile balance sheet (high debt, weak liquidity), while a company with modest profit may stand on a solid one. The wise director reads them together.
Deadlines and obligations to remember
In Romania, annual financial statements are filed with the tax authority (ANAF) and, where applicable, with the Trade Registry, within deadlines set each year (for companies, generally within 150 days of the financial year-end — check the deadline in force for the reporting year). The scope of reporting (abridged or full balance sheet, notes, cash-flow statement) depends on company size, determined by thresholds for total assets, net turnover, and average number of employees. These thresholds can be updated, so it is wise to confirm your classification each year with your accountant.
For companies with foreign capital, the balance sheet plays an extra role: it underpins reporting to the parent company and double-taxation analysis. See how we help in practice.
Conclusion
The balance sheet is not a bureaucratic formality but your command instrument. Once you read it correctly, you make better decisions about investments, loans, dividends, and collections. You do not need to become an accountant — you just need to ask the right questions of the person who keeps your books.
If you would like someone to explain your company’s balance sheet, point by point, and build you a clear financial dashboard, get in touch with the Conta Fiscal team. We have been CECCAR members since 2004 and work daily with Romanian companies and foreign investors.
Frequently asked questions
What is the difference between the balance sheet and the profit and loss account?
The balance sheet shows the company’s position at a fixed date (what it owns and owes), while the profit and loss account shows performance over the year (revenue minus expenses). The profit from the P&L appears within equity on the balance sheet.
Why are assets always equal to liabilities plus equity?
Because every asset the company holds was financed from somewhere: from shareholders’ money and reinvested profit, or from debt. The equation Assets = Equity + Liabilities is a fundamental accounting law, not a coincidence.
What does negative equity mean?
It means accumulated losses have exceeded shareholders’ contributions and reserves. This is a serious signal: Romanian law requires recapitalization and, in certain cases, can lead to dissolution.
Can I report profit yet have no money in the bank?
Yes, very often. If the profit is locked in uncollected receivables or unsold inventory, the company reports a gain on paper but has no liquidity. That is why liquidity ratios are monitored, not just profit.
Who must file a balance sheet and by when?
All companies file annual financial statements with ANAF, within deadlines set each year (generally within 150 days of the financial year-end). Confirm the current deadline and reporting form with your accountant.
Why does the balance sheet matter for a company with foreign capital?
Because it underpins reporting to the parent company, group consolidation, and analysis of double-taxation treaties. A correctly prepared balance sheet greatly eases dialogue with the group and the authorities in both countries.