How to Read a Romanian Balance Sheet: A Beginner's Guide

Every limited company in Romania must prepare annual financial statements, and the balance sheet is their centrepiece. It shows what a business owns and owes at a specific moment, usually 31 December. For owners and managers, reading it correctly turns a legal obligation into a practical tool.

The Two-Sided Structure

Romanian balance sheets follow a vertical format set out in accounting regulations. Think of it as a snapshot: on one side, the company's assets; on the other, the sources of funding — equity and liabilities. The two sides always balance, hence the name.

Small and micro-entities often use a simplified version with fewer line items, but the logic remains the same.

Understanding Assets

Assets are what the company controls. They appear in order of liquidity, starting with the least liquid.

• Fixed assets (imobilizări) include tangible items like buildings, machinery and vehicles, plus intangible assets such as licences and goodwill, and financial investments held for the long term.
• Current assets (active circulante) cover inventory, trade receivables, cash in bank and in hand, and short-term investments. These are expected to be turned into cash within a year.
• Prepayments (cheltuieli în avans) are expenses paid in advance, such as insurance or rent for future periods.

Understanding Equity and Liabilities

Equity represents the owners' stake. It includes share capital, reserves, retained earnings and the profit or loss for the year. A strong equity base means the business is less dependent on borrowed money.

Liabilities are what the company owes to others.

• Provisions (provizioane) are set aside for uncertain future costs, like legal claims or restructuring.
• Debts (datorii) include loans, trade payables, tax liabilities and amounts owed to employees. They are split between amounts due within one year and those due later.
• Deferred income (venituri în avans) is money received for goods or services not yet delivered, such as advance payments from customers.

Key Ratios and What to Check

Instead of just reading numbers, compare them with previous periods and with similar businesses.

• Liquidity: current assets divided by short-term debts. A ratio comfortably above 1 suggests the company can pay its near-term obligations.
• Debt-to-equity: total liabilities divided by equity. A lower ratio often means less financial risk, though some industries naturally carry more debt.
• Working capital: current assets minus short-term debts. Positive working capital indicates day-to-day operations are well funded.

Pay attention to large changes from one year to the next. A sudden drop in cash with a jump in receivables might signal collection problems. A sharp increase in inventory could mean overstocking or slowing sales.

Common Pitfalls

Many owners focus only on the profit and loss account, but the balance sheet reveals issues that profit can hide. For example, a profitable company can still face cash shortages if customers pay slowly.

Also be aware of off-balance-sheet items like operating leases or guarantees. While not always fully visible, they can affect future obligations. When in doubt, consult an accountant familiar with Romanian accounting standards.