At the end of a financial year , the company draws up annual financial statements , and the company’s earnings are determined. This result can be positive or negative, a positive result is a profit, which is called net income. There is an annual surplus when the income is higher than the expenditure.
Definition of net income
The annual surplus is the positive difference between income and expenses within a financial year . It is a term used in the income statement and balance sheet. The profit or loss carried forward as well as withdrawals and transfers from or to open reserves are not yet taken into account when determining the annual surplus. The annual surplus is also referred to as net profit and is the starting point for the use of the profit. It is shown in the balance sheet as part of equity. If, on the other hand, it is a negative result, we are talking about a net loss for the year.
Determination of the annual surplus
The annual surplus is determined by summarizing all income and all expenses within a financial year, whereby the expenses are subtracted from the income. All income and expenses within a financial year flow into the annual surplus. Content of the annual surplus
- Result of ordinary business activity in the form of operating and financial results
- Extraordinary income and expenses
- Effects of taxes on income and earnings.
The annual surplus does not yet include profit or loss carryforwards from previous periods, withdrawals from reserves for the appropriation of profits and transfers to open reserves. They are only included in the balance sheet profit or balance sheet loss when they are carried forward included. The net profit or net loss is determined by increasing or reducing the net profit for the year by the profit or loss carried forward from the previous year, adding withdrawals from the capital reserve and withdrawals from the retained earnings and deducting transfers to the retained earnings. When preparing the balance sheet before the appropriation of profits, the annual surplus is shown as part of equity; the value of this item is identical to the balance in the profit and loss account. However, this disclosure does not apply if the profit is partially appropriated; the annual surplus then appears as retained earnings. If the result is used in full, the resulting profit is allocated to the items capital reserves, retained earnings and liabilities to shareholders.
Use of the annual surplus
The annual surplus can be retained for reinvestment, but it can also be distributed to the shareholders or partners. Stock corporations are obliged to allocate part of the annual surplus to the legal reserves. The surplus that remains afterwards can be transferred to voluntary reserves, it can also be carried over into the subsequent period as profit carried forward or distributed to the partners or shareholders. The board of directors and the supervisory board of a stock corporation may transfer up to 50 percent of the annual surplus to other revenue reserves without the approval of the general meeting being required. A profit for the year in the appropriate amount characterizes a healthy, successful company.
Evaluation of the annual surplus
The annual result of a corporation can be influenced, because the annual surplus contains extraordinary earnings effects. If the annual surplus is only small, it can be increased through the sale of assets or through the release of hidden reserves . The adjusted annual surplus can be determined in the balance sheet analysis to avoid such special effects. Taxation, interest and depreciation can be deducted for analysis purposes .
The annual surplus in the income statement
The annual surplus is shown in the income statement and shown in the balance sheet if the use of the annual result is excluded from the annual financial statements. In this case, the annual financial statements are prepared without taking into account the appropriation of the annual surplus. The success of the financial year is shown with the annual surplus, it is the basis for the use of the business success. Depending on the type and use of the annual surplus, capital and revenue reserves are changed. In the income statement, changes in capital and revenue reserves may only be indicated after the item “Net income / net loss”. The use of the annual surplus can also be shown separately in an appendix to the annual financial statements or in the case of a GmbH in a document outside the annual financial statements.
