DRE VS Balance Sheet: differences and when to use each one

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Today we will look at another type of information that companies are obliged to provide to the government: the financial statement (DRE). We will look at the difference to the Balance Sheet and why it is also important

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What is a Balance Sheet?

The balance sheet (BS), also known as a financial statement or accounting balance sheet, is a report that shows the financial situation of a business.

Required by law and regulated by the CFC (Federal Accounting Council), it considers a specific period, usually one year, taking into account both quantitative and qualitative factors. This also applies to companies that opt for Simples Nacional.

In the S.A. (Corporations) business model, which involves trading shares on the stock exchange, the balance sheet must be presented every quarter.

And, contrary to what many believe, even MEIs (Microentrepreneurs) may have to present their balance sheet report. This is because the balance sheet is often a prerequisite for those who want to participate in tenders with government agencies.

Extremely important, the BS gathers data that serves to portray economic health and also which elements make up the company's assets and obligations. Through the document, stakeholders such as investors, auditors, and other interested parties can assess the corporation's economic situation and thus study the viability of relationships with the organization.

The balance sheet consists of assets (goods and rights), liabilities (obligations), and equity for a given period.

The document quantifies and qualifies a company's asset situation in the market and its value – what it has (qualitative) and how much of each it has (quantitative).

Importance of the Balance Sheet

The balance sheet is required by law, but more than that, it is the company's most important accounting statement.

The BS is not only used to meet legal requirements. It clearly demonstrates the exact financial reality of the business at that specific moment.

In addition, it is a document in summary format and easy to understand, even though it is an accounting report. This characteristic helps managers make better decisions, steer the company's direction more safely, and better project the future scenario.

It is also an important tool for reducing costs and managing risks. Through the balance sheet, it is possible to plan debt installment payments, avoid judicial and administrative proceedings, and seek to reduce the tax burden.

Therefore, the balance sheet will provide information to identify:

  • Operational or financial needs
  • The company's historical performance and its assets
  • Data and parameters for strategic and tax planning
  • Potential topics to present to investors and stakeholders

What is an Income Statement?

The Income Statement (DRE) is a tool through which it is possible to assess whether the company's operations are generating profit or loss in a given period, and it complements the balance sheet. The difference between them is that the latter presents only the balances of the asset and liability accounting accounts, while the DRE indicates the expenses and gains incurred in a given period.

It is an accounting statement intended to dynamically show the formation of net income in a period (usually the fiscal year), through the comparison of revenues earned and expenses incurred, determined according to the accounting principle of the accrual basis.

The DRE shows the entity's economic situation. It is presented in a deductive (vertical) format, that is, expenses are subtracted from revenues and then the result (profit or loss) is indicated.

The income statement is the accounting statement that presents the comparison between the entity's revenues and expenses. All changes in equity that do not result from transactions with partners must be recognized in two statements: the income statement and the statement of comprehensive income.

The DRE must always be prepared in accordance with the accrual basis principle, so that revenues and expenses are recorded in the period in which they occurred and not only when received or paid.

In other words, a DRE presents the financial summary of a company's operating and non-operating results.

For legal disclosure purposes, it covers the period established as the fiscal year, which usually runs from January to December (12 months) of each year. However, it can also be prepared monthly or quarterly, for better analysis and monitoring.

Structure of the DRE

  • gross revenue from sales or services provided: total revenues;
  • net revenue from sales or services: this is gross profit, the result of gross revenue minus deductions, such as canceled services or returned sales, and the costs of services or sales;
  • sum of sales or service, operating, general, and administrative expenses;
  • operating profit;
  • net profit before IRPJ and CSLL, if the company's tax regime taxes profit separately;
  • outflow amounts for participations, such as profit distribution to partners;
  • result for the period: the final net profit for the period.
Example 1 of DRE
Example 1 of DRE
Example 2 of DRE
Example 2 of DRE
Example 3 of DRE
Example 3 of DRE

What is the importance of the DRE and how can you apply it in your business?

As we explained above, the DRE reflects the business's capacity to generate wealth, giving management the information needed to know what must be changed or what can be maintained.

Because it is a very detailed report but, at the same time, very intuitive, the manager has good elements for the decision-making process, ranging from the company's tax planning to business strategy.

This happens because, with the DRE, it is possible to perform a horizontal and vertical analysis of the company's finances.

In the horizontal analysis, revenues and expenses are analyzed over time to identify how they evolved. The interesting point here is to understand the development of both earnings and expenses.

In the vertical analysis, account comparisons are made according to their groups. Thus, it is possible to understand how much an expense with telephone services, for example, impacts total expenses.

By combining these two, it is possible to visualize trends and make projections that can help the company.

For this reason, the DRE ends up being an element for simulating scenarios that facilitate the manager's future actions.

Differences between Balance Sheet and DRE

As we have seen, although similar at first glance, the Balance Sheet and Income Statement carry out different analyses of a company. Both are required by law and are extremely important within efficient management. Together, the two reports provide a very complete view of the company. In fact, the Income Statement can be prepared for shorter periods, allowing much more precise monitoring of a business’s financial history. Let’s look at the main differences between the two:

Balance SheetIncome Statement
Covers the entire business historyCovers a specific period
Reveals the shareholders’ equity situationShows the result
Prioritizes balance sheet accounts (future accounts and assets)Is structured by income statement accounts (revenue, costs, and expenses)

With this data in hand, a good manager is able to better plan their actions, whether in the search for new revenue, reductions in costs and expenses, or deciding to invest more in a specific sector of the company. In addition, through the data provided by the Balance Sheet and Income Statement, it is possible to develop some very important KPIs (Key Performance Indicators), such as, for example:

EBITDA

Return on assets (ROA)

Return on

Net margin

Exercises

1) (FUB/Accountant/CESPE - 2011) - With respect to the characteristics of financial statements, according to current legislation and regulations, judge the following items. The entity’s result in a given period is presented in the income statement, which is a deductive and dynamic statement. True or False?

Answer Key

1) True

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