What is a Balance Sheet?The balance sheet (in Portuguese, Balanço Patrimonial or BP) is the financial statement that shows an entity's financial position on a specific date, usually the last day of the fiscal year (December 31 for most companies). It is a "snapshot": it shows the balances on that day, not what happened during the year. Do not confuse it with the "balanço financeiro", a different statement used in Brazilian public sector accounting (Law 4,320/64).The balance sheet is required by law: for corporations (sociedades anônimas), by Law 6,404/76 (art. 176); for other businesses and companies, by the Civil Code (arts. 1,179 and 1,188). The rules for preparing it are set out in the pronouncements of the CPC (Comitê de Pronunciamentos Contábeis, the Brazilian accounting standards committee), adopted by the CFC (Conselho Federal de Contabilidade, the Federal Accounting Council) as Brazilian Accounting Standards. The requirement also applies to companies under Simples Nacional (Brazil's simplified tax regime for small businesses), which may use the simplified standard for micro and small enterprises (ITG 1000).Publicly traded companies, whose shares trade on the stock exchange, also publish their balance sheet every quarter, as part of the Quarterly Information (ITR) filed with the CVM (Brazil's securities regulator).And, contrary to what many believe, even an MEI (microempreendedor individual, Brazil's individual micro-entrepreneur), which is exempt from keeping accounting records, may need a balance sheet: it may be required to prove economic and financial qualification in public tenders.The balance sheet brings together the items that make up the company's assets and obligations and helps portray its financial health. With it, investors, creditors, auditors and other stakeholders can assess the company's situation and decide whether it is worth doing business with it.The balance sheet is made up of assets (goods and rights), liabilities (obligations to third parties) and equity (the owners' funds), always on a given date. It shows what the company owns and owes (the qualitative aspect) and how much of each item (the quantitative aspect).Which statement about the balance sheet is correct?Answer: It shows the financial position on a date — it is a snapshot of the balances on that day. The statement that shows revenues and expenses over a period is the DRE, and the balanço financeiro is a different statement, used in public sector accounting.Why the Balance Sheet mattersBesides meeting a legal requirement, the balance sheet shows the company's financial position at that moment: how much cash it has, how much it is owed, how much it owes and when each debt falls due.It is also a concise and relatively easy-to-read document. This helps managers make decisions, set the company's direction with more confidence and plan for the future. For example, it makes it possible to schedule debt payments according to available cash, assess whether the company needs more capital and support tax planning.Therefore, the balance sheet provides information to identify:Operational or financial needsThe company's historical performance and its assetsData and parameters for strategic and tax planningPotential topics to present to investors and stakeholdersWhat is the DRE?The DRE (Demonstração do Resultado do Exercício, the Brazilian income statement) shows whether the company's operations generated a profit or a loss in a given period, and it complements the balance sheet. The difference between the two is that the balance sheet presents the balances of the asset, liability and equity accounts on a date, while the DRE shows the revenues, costs and expenses accumulated over a period.It is a statement that shows, dynamically, how the net result for a period (usually the fiscal year) was formed, matching realized revenues against incurred expenses according to the accrual basis.The DRE shows the entity's economic situation. It is presented in deductive (vertical) form: costs and expenses are subtracted from revenues and, at the end, the result (profit or loss) is shown.Under current standards (CPC 26, the Brazilian equivalent of IAS 1), all changes in equity that do not result from transactions with the owners must be recognized in two statements: the DRE and the Statement of Comprehensive Income (DRA, Demonstração do Resultado Abrangente).The accrual basis means that revenues and expenses are recorded in the period in which they occur, not when they are received or paid.In other words, the DRE summarizes the company's operating results as well as its financial results and other income and expenses (what used to be called "non-operating").For legal purposes, it covers the fiscal year, which normally runs from January to December. But it can also be prepared monthly or quarterly, for analysis and monitoring.Structure of the DRELaw 6,404/76 (art. 187) and CPC 26 set the order of the lines. In summary:Gross revenue from sales and services;(−) deductions from gross revenue: returns, allowances and taxes on sales (ICMS, ISS, PIS and Cofins; with Brazil's tax reform, CBS and IBS, in a test phase in 2026: CBS replaces PIS and Cofins from 2027, and IBS gradually replaces ICMS and ISS through 2033);= net revenue;(−) cost of goods sold, products sold or services rendered;= gross profit;(−) operating expenses: selling, general and administrative, and other operating income and expenses;(±) financial result (financial income minus financial expenses);= result before taxes on income;(−) IRPJ and CSLL (Brazil's corporate income tax and social contribution on net profit; for Simples Nacional companies, these taxes are included in the single monthly payment, the DAS);(−) profit sharing by debenture holders, employees, managers and holders of founders' shares;= net profit or loss for the year.Note: dividends and profit distributions to owners are not part of the DRE. They are an allocation of profit, shown in the DMPL (Demonstração das Mutações do Patrimônio Líquido, the statement of changes in equity), not an expense.DRE example 1The model in example 1 predates Law 11,941/2009: it still shows non-operating revenues and expenses, groups that no longer exist. The current order is the one in the list above.DRE example 2DRE example 3A company had gross revenue of R$ 100,000, deductions of R$ 15,000, cost of goods sold of R$ 40,000 and operating expenses of R$ 20,000. What is its gross profit?Answer: R$ 45,000 — net revenue of R$ 85,000 (100,000 − 15,000) minus the R$ 40,000 cost. Operating expenses only come in after gross profit; deducting them gives the R$ 25,000.Where do the dividends the company paid to its shareholders appear?Answer: In the DMPL, as an allocation of profit — a dividend is not an expense: it is the distribution of profit already determined in the DRE.Why the DRE matters and how to use it in your businessThe DRE shows the business's ability to generate profit, giving management what it needs to know what must change and what can stay.Because it is a detailed yet intuitive report, it supports decision-making, from tax planning to strategic planning.With the DRE, you can carry out horizontal and vertical analyses of the company's results.In horizontal analysis, each revenue and expense line is compared over time to see how it has evolved. The point here is to understand the behavior of both income and spending.In vertical analysis, each line is compared with a base, usually net revenue. This tells you, for example, how much the telephone expense represents of revenue, or how much of each real sold is left as profit.Combining the two makes it possible to spot trends and make projections, which also makes the DRE a tool for simulating scenarios and guiding the manager's actions.An example linking the two statementsImagine a newly opened company that, in its first month, provided services worth R$ 18,000, paid R$ 7,000 in rent and R$ 5,000 in salaries (for simplicity, no taxes). The DRE for the month looks like this:DRE for the monthR$Service revenue18,000(−) Rent expense(7,000)(−) Salary expense(5,000)= Net profit for the month6,000The DRE explains where the R$ 6,000 profit came from during the month. The balance sheet on the last day of the month shows its effect: the R$ 6,000 appears in equity, alongside share capital, and cash reflects what came in and went out. The two statements are linked: the profit in the DRE is what makes equity on the balance sheet grow (or, in the case of a loss, shrink).In the example above, equity at the start of the month was R$ 80,000 and there were no new contributions or profit distributions. What is equity on the last day of the month?Answer: R$ 86,000 — the R$ 6,000 profit in the DRE is added to the R$ 80,000 equity. That is how the two statements are linked.Differences between the Balance Sheet and the DRE, and when to use eachAlthough they look similar at first glance, the Balance Sheet and the DRE analyze the company in different ways. Both are required by law and important for efficient management, and together they give a very complete view of the company. The DRE, in fact, is widely used for shorter periods (month, quarter), which allows close monitoring of performance. Let's look at the main differences:Balance SheetDREShows the position on a date (balances accumulated since the company was set up)Shows performance over a period (month, quarter, year)Reveals the financial position: what the company owns, owes and the owners' capitalShows how the result was formed: profit or lossMade up of balance sheet accounts (assets, liabilities and equity)Made up of income statement accounts (revenues, costs and expenses)Use it to assess liquidity, debt and capital structureUse it to assess margins, costs and profitabilityIn practice: to know whether the company can pay its bills over the next year or whether it is too indebted, look at the balance sheet. To know whether it is making money, where its biggest expenses are and whether margins are improving, look at the DRE. And for return ratios, use both together.With this data, managers can better plan their actions, whether seeking new revenue, cutting costs and expenses or deciding to invest more in a particular area of the company. In addition, the Balance Sheet and the DRE make it possible to calculate some very important KPIs (Key Performance Indicators), such as:EBITDA (earnings before interest, taxes, depreciation and amortization), calculated from the DRE;Return on assets (ROA): net profit ÷ total assets;Return on equity (ROE): net profit ÷ equity;Net margin: net profit ÷ net revenue.Exercises1) (FUB/Accountant/CESPE - 2011) - With respect to the characteristics of financial statements, according to current legislation and standards, judge the following item. The entity's result in a given period is presented in the income statement (DRE), which is a deductive and dynamic statement. True or False?Answer Key1) True. The DRE is dynamic because it covers a period (not a date, like the balance sheet) and deductive because it starts from revenue and subtracts costs and expenses until it reaches the result.
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