Notes to the financial statements template in Excel

Notes to the financial statements template in Excel

A financial statement shows a figure and moves on. Inventory sits at 2,800,000, receivables at 3,200,000 and accumulated depreciation on a line with no story behind it. Whoever reads the balance sheet cannot tell whether that inventory was measured at weighted average cost or at the latest purchase price, whether receivables include a customer who stopped paying eight months ago, or what happened with the bank loan that matures next year. That explanation does not fit in the body of the statement, and often it no longer fits in the head of the person who built it three weeks earlier.

The notes are exactly that part: the detail of the figures and the decisions behind them. And that is where the problem starts. In most small and mid-sized businesses the notes live in loose Word files spread across folders, named things like «final notes v3 corrected», with no clear owner and hand-typed figures that stopped matching the statement after the second change. By the time the full set has to be signed, nobody knows how many notes exist, which ones are still drafts, or whether the note explaining inventory still quotes the old balance.

What a notes register is and what it replaces

A notes register is a working sheet with one row per note. It is not the final text that gets signed: it is the workshop where that text is drafted, reviewed and approved before it is written up clean. Each row holds the note number, the reference to the statement line it explains, the title, the full text, the status it is in, the owner and the review observations.

The sheet lives in Excel and not in a word processor for a practical reason: the counts at the bottom calculate themselves, and the note number cannot be duplicated without the register itself giving it away. The replacement is direct. Instead of five loose files with names only their author understands, there is a single ordered list. Instead of versions with no owner, every note has a named person behind it. And instead of hand-copied figures that go stale, the reference forces you to say which part of the statement the note belongs to.

The register does not try to write the notes for anyone: it does not suggest the wording, it does not edit the prose and it does not judge whether the note is thorough enough. What it does is make sure no note gets lost, every note has an owner, and it is obvious at a glance which ones are still unapproved.

What the notes actually document

The notes do not repeat the statement; they explain it. In a normal close they cover things like these:

• how inventory was measured and whether any of it is obsolete
• what makes up receivables and how the allowance was computed
• why machinery is reduced by accumulated depreciation and over how many years it is written off
• what terms the bank loan carries and how much matures next year
• how capital, reserves and retained earnings moved
• which revenues were recognised and on what basis
• which expenses are unusual or one-off
• which commitments or contingencies remain open

Of that whole list, the note that sparks the most discussion is inventory, because the balance sheet, the cost of sales and the result for the year all depend on it at once. An inventory note that does not state the measurement method leaves the financial statement half told, even when the figures add up.

The seven columns of the register

The register has seven columns. Five are typed in and two carry the control of the whole set.

The last two are not decoration. A named owner avoids the classic case of the note nobody claims, and the observations keep what was asked during the review: where a figure came from, what change is still pending, what was agreed with whoever prepared the statement.

The reference: which statement line each note belongs to

The reference column is picked from a list of eight options: assets, liabilities, equity, revenue, expenses, contingencies, related parties and other. Choosing one is not a filing nicety. It is how you know how many notes explain assets, how many explain liabilities, and whether some part of the statement is still unexplained. A balance sheet with large inventory, receivables and machinery and a single assets note usually means something is missing.

The list works for the other side of the problem too. When someone adjusts an account balance after the first version is closed, you search by reference and the notes that may have gone stale come up. Without that column, the adjustment goes into the statement and the note keeps telling the earlier story, which is the most common source of notes whose figures no longer match.

Contingencies, related parties and other exist because some notes do not hang off a single statement line: a dispute with a customer, a loan to a partner, a signed purchase commitment. Forcing them into assets or liabilities muddies the count. Better to leave them in their own reference.

The status of the note: draft, reviewed and approved

The second list has three values and they deserve to be taken seriously. A note in draft is a text somebody wrote that nobody has yet read with the statement in front of them. A reviewed note has been through a second reading and its figure has been tied back to the balance. An approved note is one that can go into the final folder.

The gap between reviewed and approved matters when the reviewer and the person accountable for the close are not the same: it is one thing for the text to be well written and another for the person signing off the close to have accepted it. That is why the summary does not call the set closed as soon as every note is reviewed, but only when every note is approved.

The summary: counts by reference and by status

Below the register there are two mini tables that calculate themselves. The first counts the notes recorded and groups them by reference: how many for assets, how many for liabilities, how many for equity, and so on through all eight options. The second groups them by status: draft, reviewed and approved.

The last line of the summary looks at the count by status and warns when at least one note is still unapproved. That warning is what keeps you from handing over an incomplete set of notes believing it is finished, and it is also what answers the question that always shows up at the last minute: how many notes are missing and who has them.

Example: twelve notes in an ordinary close

With twelve notes recorded, the count by reference comes out like this.

And the count by status comes out like this.

The count by status is what reveals that two notes are still unreviewed and, because of that, the check line in the summary warns instead of declaring the set closed. The warning does not say the figures are wrong: it says only that the set of notes is not approved. It is a process warning, not a signal of an accounting error.

The real problem: loose notes, ownerless versions and figures that do not match

It is worth looking separately at the three symptoms this register attacks, because they get confused with one another.

Loose notes. When the notes are independent documents, the full set exists only in the head of whoever wrote them. Nobody knows whether there are ten or fifteen, or whether one was left behind in an email. A single list turns that question into a number.

Ownerless versions. A file called «final notes v3 corrected» does not say who changed it or what changed. With an owner column and an observations column, every version has an author and a reason.

Figures that do not match the statement. This is the most expensive symptom. The note was written with the balance from the first version and the statement kept moving after the adjustments. The reference to the statement line does not prevent the drift, but it makes it visible: searching by reference shows which notes touch the accounts that moved.

How it fits with the rest of the close

The notes are written on figures that already exist. The balance sheet, the income statement, the statement of changes in equity and the cost of production and sales statement are the raw material; the reference to the statement line is the bridge between those formats and this sheet. That is why the order matters: first the adjusting entries, then the statements, and finally the notes are written and approved. If the notes are written before the adjustments are closed, they have to be redone.

It is a working register, not a legal text

It is worth saying plainly: this template is a working register, not a legal text. It is the sheet where the notes that explain the figures are ordered, reviewed and approved. It does not replace any official document and it does not stand in for a filing, and it is not the format used to present the information to a third party either. Its value is in internal control: knowing how many notes there are, what they explain, who is accountable for them and which ones are still unapproved.

How to use the template step by step

1. list the notes you need by reference: assets, liabilities, equity, revenue, expenses, contingencies, related parties and other
2. number the notes and write a short title for each one
3. draft the text and check that every figure quoted matches the already adjusted balance
4. set the status of each note and put a name on the owner
5. leave in the observations whatever the review left pending
6. look at the two mini tables and the last line of the summary
7. do not call the set finished while that line is still warning

Worked that way, the sheet turns a pile of loose texts into a set of notes that can be reviewed, approved and handed over without surprises. And it leaves a clear trail for next year's close: whoever picks the work up will know what was said about each account, who approved it and what was left open.