The net profit is the annual result of various factors and calculations relating to the profitability of a company. It can be positive as well as negative.
Full definition
Roughly speaking, a balance sheet documents the economic success of a company. According to gradinmath.com, a special factor here is the balance sheet profit. This is the profit that is reported in the annual financial statements of corporations.
In a certain way, the economic success of a company can be derived from this; However, the net profit must not be confused with the net profit for the year. The annual surplus shows how much the company actually earned. The balance sheet profit is an important factor, especially for shareholders in a company. It represents the maximum amount that a shareholder can receive from the respective company.
Determination of the net profit part 1
If a stock corporation reports a balance sheet profit, this is initially positive for shareholders. However, a balance sheet profit does not necessarily reflect the company’s actual profit. It is only the item that remains at the end after some items have been subtracted or added from the annual surplus. Therefore, the net profit is only calculated when the following values have been taken into account:
- the loss and profit carried forward,
- Allocations to retained earnings,
- Withdrawals from retained earnings,
- Withdrawals from capital reserves.
What is a profit carried forward?
A profit carried forward can arise if there is residual profit from the last financial year . As part of the accounting, such residual profit is then carried forward to the balance sheet for the following financial year. However, this is only possible if all costs have been covered by the company and the profit has been allocated to all reserves and there is consequently a residual amount.
What are retained earnings?
Revenue reserves can be formed from the company’s profit after deduction of taxes. They are allocated to the equity capital of corporations. They appear on the liabilities side of a balance sheet .
What are capital reserves?
In essence, capital reserves are amounts that the company has received externally when it issues preference shares or shares.
Determination of the net profit part 2
If the balance sheet profit is higher than the annual profit, i.e. the actual profit of the company, the profits from the previous periods were used with the aim of creating the most respectable result possible for the shareholders. This allows shareholders to receive a higher dividend, while a stock corporation can gloss over possible weaknesses of a less successful financial year with a higher balance sheet profit. If, on the other hand, the net profit is lower than the net profit for the year, losses from previous periods have been covered or the stock corporation has used part of the profit to create necessary reserves.
Exemplary calculation for determining the balance sheet profit:
Take a fictional public company called ABC. This was able to generate an annual surplus of 30 million euros in the past business period, although a loss account from the previous period of five million euros had to be offset. It is important to the Aktiengesellschaft ABC that the shareholders do not feel this loss account through a lower dividend payment. The Management Board therefore decided to withdraw a further six million euros from capital reserves and four million euros from retained earnings.
The following balance sheet profit results from these figures:
30 million euros
– 5 million euros
+ 6 million euros
+ 4 million euros
= 35 million euros.
This means that ABC AG’s net profit is 35 million euros, well above the annual surplus of 30 million euros. It is now possible for the board of directors to announce a balance sheet profit of 35 million euros at the annual general meeting. At this meeting of shareholders, a decision is made on how the balance sheet profit is to be used. This generally flows directly to the shareholders in the form of a dividend.
Disclosure of the balance sheet profit (liability side of the balance sheet, Section 268 (1) HGB)
In this paragraph it says that a balance can be set up in profit also involving a partial or total profits. If a partial appropriation of the annual result is taken into account in the balance sheet, the items of the annual deficit or annual surplus as well as the profit or loss carried forward are replaced with the items retained earnings or retained earnings. Any profit or loss carried forward that already exists must be specified separately and included in the balance sheet loss or balance sheet profit item.
Use of the balance sheet profit
In principle, the planned use for the balance sheet profit is proposed by the management of the respective company. The ultimate decision on the use of profits is made by the owners. Two scenarios are conceivable here: a distribution and a so-called accumulation .
Distribution
This means that the balance sheet profit can be distributed to the owners of the company in the form of dividends.
Reinvestment
In the case of accumulation, the retained earnings are used for investment purposes. So the company puts the profit into various components of the company in order to keep optimizing profits. It is also conceivable, however, that the company would like to strengthen its equity base in order to be able to act economically more independently and to be less dependent on outside capital in the future .
Negative net profit or loss
If, after taking into account the factors already mentioned, the result is a negative amount, we speak of a balance sheet loss . In concrete terms, a balance sheet loss means a position on the assets side in a balance sheet. This is the result if an annual deficit cannot be compensated by a profit carried forward or a withdrawal from reserves.
Balance sheet profit: a blessing or a curse?
On the one hand, the balance sheet profit is important for shareholders because it is an important indicator of the amount of the dividend to be paid out. On the other hand, the balance sheet profit cannot make any statements about the strength of a company and thus dazzle shareholders in a certain way. A prominent example of this is Deutsche Telekom. This is known for paying high dividends to its shareholders year after year. However, this is not the case because the annual result would be outstanding, but because the company likes to use the group’s reserves to keep shareholders happy.
