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Everything You Need To Know About Company Accounts

Wednesday 22nd May 2024




WHAT ARE THE COMPANY’S ANNUAL ACCOUNTS?

Company accounts are a summary of an organisation's financial activity over a 12-month period. They are prepared for Companies House and HM Revenue & Customs every year and consist of the Balance Sheet, the Profit and Loss Statement, and the Cash Flow Statement. 


THE BALANCE SHEET 

The Balance Sheet is a financial statement, which will give you a snapshot insight into your business's assets, liabilities, and the shareholder's equity, at a specific point in time. It’s an indication of the financial health of your company, at the time the accounts were generated being a comparison of what is owned versus what is owed.  


The balance sheet deals with two categories: Assets and Liabilities. 


ASSETS AND LIABILITIES

An Asset is something which is owned by your organisation, or that you get a benefit from. An asset will either be a:


Fixed Assets - These are things that will be kept long term such as land, factories, and vehicles.


Current Assets - which are things that have a shorter life span such as stock items, petty cash, and cash in the bank. 


A Liability is an obligation most likely a debt arising which will need to be repaid. A liability will be either a:


Long-Term Liability - money that is not due to be paid in the next year.


Current Liability - money that is due to be paid in a year. 



THE PROFIT AND LOSS STATEMENT

The Profit and Loss Statement differs from the Balance Sheet as it records performance over a period of time, not just a snapshot. In the Profit and Loss (P&L) Statement, you will see the total revenue and total expenses of the business throughout the financial year.


How to work out profit or loss?

Calculating your gross profit is straightforward. Gross Profit = Turnover - Cost of Sales


To gain a better understanding, compare your Gross Profit to previous years, to see which way your profits are heading. 


To work out your EBITDA, you will need to look at the administrative expenses. These include the rent of the building, the cost of utilities, and the salary of employees.


EBITDA = Gross Profit - Administrative Expenses


CASH FLOW STATEMENT 

The function of the Cash Flow Statement is to explain the cash movements in and out of the business, over the financial year. Cash Flow is the amount of money that actually comes in and goes out of a business during a period of time. 


This differs from the Profit and Loss Statement as profit is generally recorded when the sale is made, and Cash Flow is generally recorded when the money is received.


The Cash Flow Statement breaks cash up into three categories:


Operating Activities - how much cash comes from sales of the company’s goods and services, less the amount needed to make and sell the product/service.


Investing Activities - how much cash has been spent on capital expenditure, such as new equipment. 


Financing Activities - how much cash has been spent on outside financing activities, such as cash raised through selling stock. 

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