Understanding Financial Statements and Business Taxes

Elements of Financial Statements

The elements of the balance sheet are assets, liabilities, and equity.

Assets

Assets are property and rights of the company, and other resources from which future economic benefits are expected to flow to the entity.

Liabilities

Liabilities are specific obligations that the company must pay in the future. These include long-term forecasts considering liabilities and long-term bonds where the exact payment amount and date are known.

Equity

Equity represents the difference between assets and liabilities. It includes the value of contributions from partners or owners, profits not distributed, and retained earnings for future investments.

The Annual Accounts

The annual accounts are a set of accounting documents that form a unified whole. They adhere to the Commercial Code and other commercial standards, presenting a true picture of the company's financial assets and results.

Documents in the Annual Accounts

• Balance Sheet: This account separates the elements of assets and liabilities. It is the document that reflects the true picture of the company's net worth and financial situation.
• Income Statement (Profit and Loss Account): This collects almost all revenues and expenditures for the year, showing the company's results. It excludes few items collected as fees that are charged directly to equity in the statement of changes in net worth.
• Notes: This document elaborates on and expands the information contained in other financial statements.

Auditing

Auditing is the activity of reviewing accounting records using specific techniques to issue a report on their reliability.

Tax Basics Elements

Tax law generally dictates how citizens contribute to a country's revenue. Tax laws classify contributions into three main classes:

• Direct Taxes: These are taxes paid as a consequence of receiving a public service or other activities that benefit the taxpayer. These are mandatory contributions.
• Indirect Taxes: These affect citizens regardless of their income, generally applying to consumption.

Taxes can be direct taxes on income or heritage, which are considered more equitable, or indirect taxes that affect consumption.

Main Taxes Affecting Businesses

Value Added Tax (VAT)

VAT is a consumption tax applied to everything bought and sold in a country. There are different tax rates:

• Super-reduced rate: 4% (e.g., drugs, plants)
• Reduced rate: 7% (e.g., medical supplies)
• General rate: 16% (for most goods and services)

Corporate Tax

Corporate tax is levied on the profits or other income of companies and other entities with legal personality.

Personal Income Tax

Personal income tax is the tax on income obtained by individuals, regardless of its nature.