Accounts

Every business needs a set of accounts to show the owners how well they have performed over a period of time – usually a year.

The accounts have several pages, and the complexity of these varies depending on the type and size of the business. For example, a sole trader turning over £50,000 per year will have much simpler accounts than a multi director Limited Company with lots of employees that turns over £5m.

The three key pages on a set of accounts are:

Balance Sheet

Arguably the starting point for reading a set of accounts. This is like a photograph of your business at a specific point in time, usually the end of the last day of your financial year. It will show the value of the business at that moment and give a indication of how healthy the business is.

The balance sheet is broadly split into thirds:

  • The first third is the assets. These are things that the business owns, for example buildings, vehicles, money in the bank and debtors (and accounting word for people who owe the business money).

  • The second third is the liabilities. These are monies that the business owes, for example loans, credit cards, suppliers and other creditors (the opposite of debtors). Any tax you owe to HMRC will be shown here, as it’s money that the business owes at a later date.

    We take away the liabilities from the assets to give you a net figure. This is the value of your business at this moment in time.

  • The final third is the equity section which shows how this figure is funded. It varies depending on the entity, but typically shows the value of your shares, any brought forward balances, and the profit for the year. Which brings us to…

Profit & Loss

(or Income Statement)

If the Balance Sheet is like a photograph of a moment in time, then the Profit and Loss (P&L) is like a video over a period of time showing a summary of all the transactions of the business. This is typically for a year.

At the top will be your turnover (the total of all sales you made) and then there will be a list of all  the expenses you incurred, summarised by category.

Most people naturally understand the P&L as it tells the story of how well the business performed over the year. A useful exercise is to compare the figures in each category to the previous year and see whether there is much difference. The final figure at the bottom (profit if positive, loss if negative) will also be shown at the bottom of your balance sheet.

Notes

Your accounts will also have some notes – especially for a Limited Company.  These add more details to the numbers and explain certain policies that the business has used (eg the rate and method of depreciation).

Whilst it’s important to have a grasp on the finances of your business, it’s not essential to understand every single note and disclosure on your accounts. That’s what your accountant is for!

A good accountant will help to explain the important numbers to you so that you can use this information to make correct decisions in your business.

Contact Abacus Accountancy

If you need someone to look over your accounts and explain anything to you, please give us a shout.

Click here for a free guide on how to read your accounts and spot common problem areas.