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Accounting
David Merz | Founding Partner
Zurich, April 30, 2023
Accounting is a crucial aspect of financial reporting and corporate governance. It enables companies, investors, and stakeholders to evaluate a company’s financial stability, performance, as well as its asset and capital structure. In this blog post, we will focus on the basics of accounting in Switzerland and explain the importance of assets and liabilities and their impact on a company’s financial position.
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In Switzerland, accounting is based on the Code of Obligations (CO), which contains the general legal regulations for the accounting of companies. The CO sets out the duties and requirements for the preparation of annual financial statements, balance sheets and income statements.
In addition to the legal regulations, there are recognised accounting standards that companies can apply. The two most important ones are Swiss GAAP FER and IFRS (InternationalFinancial Reporting Standards).
Swiss GAAP FER is a standard developed in Switzerland, while IFRS is applied internationally. The choice of accounting standard depends on various factors, such as theindustry, the size of the company, and whether it is listed on the stock exchange.
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The asset side is part of the left side of a company’s balance sheet that has regular inflows and outflows of cash. These include bank balances, cash in hand and business property. The items are arranged according to liquidity, with cash having the highest liquidity and real estate the lowest.
Accounting transactions, such as invoices for machine purchases or raw material deliveries, are documented physically or electronically to keep the accounts transparent. This enables the company to track receipts and payments and to estimate future developments.
Fixed assets comprise the long-term assets that a business uses to generate income.
Current assets consist of short-term assets that can be converted into cash within one year. These include:
The liabilities-side of a balance sheet consists of equity and debt. Debt is divided into long-term and short-term liabilities to represent a company’s financing structure in terms of time period.
Short-term debt includes items such as accounts payable, short-term bank debt, and deferred income, while long-term debt includes mortgage debt and long-term bank debt. These accounts can be used to analyse a company’s financing structure and risk. The financial basis of a company is its equity capital, which also includes legal reserves and profit carried forward. The sum of debt and equity is the total liabilities.
Debt capital refers to a company’s debts to third parties. It can be divided into short-term and long-term liabilities:
Equity represents the owners’ residual claim on the business assets after all debts have been paid. It includes:
The balance sheet provides information about a company’s financial stability and liquidity. A balance of current assets and current liabilities is critical to liquidity, as it shows that the company is able to meet its short-term obligations.
The balance sheet shows a company’s asset and capital structure, i.e., how it finances its assets. A high equity ratio may indicate that a company is financially sound, while a high debt ratio may indicate higher risk.
The leverage effect describes the ratio of debt to equity. A high level of debt can increase the risk for a company as it has to make interest payments and repayments. However, it can also lead to a higher return for equity investors if the company invests successfully.
Depreciation and amortization are impairments of assets that arise over time through use, wear and tear or technological change. They are recognized as an expense in the income statement and reduce the carrying amount of the assets in the balance sheet.
The valuation of assets and liabilities in the balance sheet is based on certain principles, such as the historical cost principle, the lower of cost or market rule (LCM), or the prudence concept. These principles ensure that the balance sheet reflects a realistic picture of the company’s financial situation.
Overall, assets and liabilities on the balance sheet provide valuable information about the financial situation and stability of a company in Switzerland. Understanding the different types of assets and liabilities, as well as the valuation principles, enables companies, investors, and other stakeholders to make informed decisions.
Compliance with legal regulations and accounting standards is essential for the transparency and comparability of balance sheets. It is crucial for business owners to manage their accounting carefully and to appropriately value their assets and liabilities to provide an accurate picture of their financial performance and stability.
At Nexova AG, we understand the importance and complexity of accounting and, therefore offer comprehensive support on all key accounting and bookkeeping issues.
Our team of experts is on hand to help you prepare, analyse, and optimise your financial statements and ensure that you make the best decisions for your business. You can always rely on our experience and expertise to guide your business on the path to success.
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