Assets & Liabilities in the Balance Sheet: A Look at Swiss Accounting Practice

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.

Legal basis and accounting standards in Switzerland

Legal regulations

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.

Accounting standards

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.

Assets: The different types of assets

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

Fixed assets comprise the long-term assets that a business uses to generate income.

• Tangible assets: Real estate, machinery, vehicles and other tangible assets used in operations.
• Intangible assets: Patents, licences, brand names and other intangible assets.
• Financial assets: Holding of participations in other companies, securities, and long-term loans.

Current assets

Current assets consist of short-term assets that can be converted into cash within one year. These include:

• Inventories: Goods and materials intended for production or sale.
• Receivables: Money owed to the business by customers, such as trade receivables.
• Cash and near-cash receivables: Cash, bank deposits and short-term securities.

Liabilities: The different types of debt and equity

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

Debt capital refers to a company’s debts to third parties. It can be divided into short-term and long-term liabilities:

• Current liabilities: Debts that are due within one year, such as supplier credits, short-term loans, and tax provisions.
• Long-term liabilities: Debts that will be repaid over a longer period of time, such as long-term loans, bonds, and pension obligations.

Equity

Equity represents the owners’ residual claim on the business assets after all debts have been paid. It includes:

• Subscribed capital: The nominal value of issued shares or ordinary shares.
• Capital reserves: Reserves created by issuing shares above par or by retaining profits.
• Retained earnings: Undistributed profits retained to finance investments or to hedge against losses.

The importance of assets and liabilities in the balance sheet

Financial stability and liquidity

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.

Asset and capital structure

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.

Leverage effect

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.

The role of depreciation and valuation principles

Depreciation

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.

Valuation principles

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.