Financial Statement of 2023

Veronika Žáčková
Simultaneously with the deadline for filing income tax returns, most companies are finalizing their financial statements. Before compiling the financial statement, it is essential to carry out and account various transactions specific to this phase. What needs to be checked in this final phase of business accounting management?

Every accounting entity that maintains accounting books is required to prepare a financial statement. However, the scope and format vary based on the size of the company. It is stated that a company can prepare either a full or abbreviated financial statement. Unless the Accounting Act specifies otherwise, only entities not required to have their financial statement audited can prepare an abbreviated financial statement.

Every financial statement is an integral whole and must minimally consist of a balance sheet, a profit and loss statement, and an annex that provides explanations and supplementary information related to the previous two statements. To fulfill the obligation of a full scope, it is necessary to compile the cash flow statement, the statement of changes in equity and annual report.

What is the purpose of the financial statement?

The financial statement is a crucial and comprehensive source of information about the company. Its purpose is to provide information not only about the financial performance for a given period but also about the state of the company's assets and liabilities. The information in the financial statement must be legally reliable, comparable, understandable, and shall be judged from the point of view of materiality.

Incorrect preparation of the financial statement or neglecting tasks related to it can lead to inaccuracies in determining the economic results and distorted information. Errors can be avoided by allowing sufficient time for the entire process. Successful completion of activities related to the financial statement requires periodic checks of balance sheet accounts – known as documentary inventory – throughout the accounting period, not just once but at least twice due to potential issues and unresolved matters that may arise later in the accounting period. Another prerequisite is to start addressing the physical inventory of assets and inventory in a timely manner, meaning four months before the end of the accounting period.

How to prepare financial statements correctly?

The first step in the financial statement is inventory. It involves determining the actual balances of assets and liabilities, recorded in inventory lists. All components of assets and liabilities are subject to inventory. Accounting units may initiate inventory no earlier than four months before the balance sheet date and must conclude it no later than two months after the balance sheet date. Accounting units are obliged to prove the inventory for a period of 5 years after the inventory has been carried out, according to § 29 paragraph 3 of Act No. 563/1991 Coll., the Accounting Act.

Inventory can by physical - determining the actual state of assets through counting, measuring, and weighing, such as in the case of inventory and cash. Based on the findings, a record of physical inventory is then made. The identified inventory differences, i.e., surpluses and shortages, are accounted for by entities in the results for the accounting period for which the inventory verifies the asset state.

Secondly, documentary inventory is used to determine the actual state of assets and liabilities for which physical inventory cannot be conducted, such as receivables and liabilities. The actual state is determined based on various documents such as invoices and compiling lists of individual components of assets and liabilities.

Accounting closure involves the final control of accounting and the accounting of specific cases on the balance sheet date. The most common closing operations include:

  • Depreciation of fixed assets – the value of assets is not reflected in expenses at the time of acquisition, and the cost is gradually reflected through depreciation.
  • Provisions – temporary reduction of the value of assets, especially uncollectible receivables, expressed through provisions based on the prudence principle. Provisions can also be created for expected credit losses.
  • Accruals, estimates, reserves – accounting for these items fulfills the accrual accounting principle. Costs and revenues are recognized in the period with which they are materially and temporally related. Consideration should be given to creating reserves for unfavorable contracts and company restructuring if insolvency is imminent.
  • Exchange rate differences – assets and liabilities denominated in foreign currency are recalculated into the local currency at the foreign exchange rate of the Czech National Bank on the balance sheet date.
  • Economic result under approval procedure – by the balance sheet date, the account must be settled into retained profits or unrelieved losses. The general meeting decides during the regular period of the year how to handle it.
  • Deferred tax – an accounting tool used to capture the faithful and fair representation of facts in accounting. Entities forming a consolidation group and entities preparing a full-scope accounting statement are obligated to account for deferred tax. Other entities disclose and account for it voluntarily.
  • Tax payable – entities account for the due tax payable as of the balance sheet date. The amount should correspond to the tax liability in the corporate income tax return. If the actual amount is not known at the time of preparing the accounting statement, the entity can account for a provision for income tax, which is included in the balance sheet similarly to the actual tax liability with paid income tax advances during the accounting period.

What are the most common mistakes?

Entrepreneurs often make the most significant mistake of not including all relevant information in the economic result – such as provisions for assets, expired inventory, or overdue receivables. Or they omit deferred items for services already provided but not yet invoiced as of the financial statement date.

Since the economic result is used as a basis for the tax result, if the financial statement does not contain all essential information, and the economic result of operations is calculated inaccurately, the tax result of operations will also be inaccurate.

If an entity manages to make a mistake in the accounting statement, all is not lost. The financial statement can be corrected within the legal deadline for filing income tax returns – within three months after the end of the accounting period. In case of using the services of a tax advisor or auditor, this period extends to six months after the end of the accounting period.

After these deadlines, the entity corrects errors from previous accounting periods by recording them in the current accounting period. In practice, it can be said that if it is a minor error, the correction can be made in the result accounts of the current accounting period. For significant errors from the previous period, a special account "Other Operating Income or Expense" is used. Both correction options must be detailed in the attachment to the financial statement.

From a tax perspective, error correction can be addressed through an amended tax return if the deadline for filing the regular tax return has not yet expired. If this period has elapsed, correction must be made by filing an additional tax return for corporate income tax for the period to which the error relates, provided that the standard deadline for assessing tax has not yet expired – typically three years from the deadline for filing the tax return.

What should not be forgotten in the annex to the financial statements

According to §39, the annex to the financial statements should provide additional information:

  • information about the reporting entity
  • details on the applied accounting policies, methods, and valuation techniques
  • additional information on receivables, liabilities, costs, and revenues
  • for small and micro entities without statutory audit, disclosure of information on the acquisition of own shares or own shareholdings
  • on long-term assets (opening and closing balances, additions and disposals, etc.)
  • explanation of the nature and business purpose of transactions not included in the balance sheet
  • information on transactions with related parties
  • additional disclosures related to issued shares
  • average number of employees
  • the amount of remuneration awarded to members of the administrative, management and supervisory boards for the financial year
  • information about proposed profit distribution or loss settlement
  • deferred tax information
  • breakdown of service revenues based on activity categories and geographical markets if significant differences exist in terms of the way in which the sale of goods and products and the provision of services included in the entity's ordinary activities are organized
  • disclosure of total fees in the annex to the financial statements charged by the auditor for statutory audit of annual financial statements, tax advisory, and other non-audit services. This requirement is not applicable if the entity is included in consolidated financial statements, and the specified information is presented in an annex to those consolidated financial statements.
  • considering the significance of the entity, summary statements of types of accounting events listed in paragraph 58(2) of the accounting policies for entrepreneurs. This includes items not considered as mutual offsetting in the financial statements, such as exchange rate differences, gains and losses from revaluation of assets and liabilities to fair value, reserves, and advances for income tax and other events after the balance sheet date
  • explanation of corrections from the previous period mentioned above
  • in the accounting of the current accounting period, events occurring between the balance sheet date and the moment of preparing the financial statements should be taken into account.
  • entities should present comparative data in the current financial statements, originating from previous financial statements, adjusting them if such changes contribute to the temporal comparability of current and comparative data. In case of adjustments to comparative data, leading to differences from the original values stated in previous financial statements, the entity shall provide a breakdown of all significant changes in the annex

The annex to the financial statements for the year 2023 should additionally reflect:

  • in subsequent events, the amendment to the Accounting Act and related Decree, particularly concerning the option to use the functional currency and disclosure in connection with new legislation on minimum corporate tax. Given that the provisions of the Decree regarding the use of the functional currency and requirements for disclosure of information on minimum corporate taxes are effective for financial statements prepared from January 1, 2024, we believe that this information should be disclosed in the annex to the financial statements for the year 2023 if relevant to the entity
  • in the calculation of deferred tax, the increase in the corporate income tax rate from 19% to 21% from January 1, 2024
  • commentary on the entity's activities in the given year and the expected development in the following years, explaining external factors influencing economic activity in 2023, such as a high inflation rate increasing costs for input purchases and subsequently costs for selling production, especially pressure on the growth of employees' real wages

We would like to remind you that small and micro entities not required to have their financial statements audited may not disclose the profit and loss statement and do so only if a special legal regulation imposes this obligation. If the entity presents selected data from its financial statements, it shall state that only selected data from the financial statements are presented and provide information on where the financial statements are stored. Other entities are obliged to publish the entire balance sheet, profit and loss statement, the annex, and, if audited, the annual report and auditor's report.

As described above, the compilation of financial statements and their annex is a complex process. In case of any uncertainties, do not hesitate to contact us; we will be happy to assist you with the preparation of financial statements.


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Jiri Sindelar
Jiří Šindelář
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