Understanding Your Accounts

Every company should have a sound internal accounting system and a set of annual accounts. Directors and Shareholders need confidence that the company finances are being well managed and recorded accurately each month and need to measure their performance year-to-year.

The annual accounts are also used as the basis for tax returns and computations.

For internal purposes, there should be a system for recording all financial transactions. This may be manual book-keeping records or, more likely, computerised spreadsheets or specific accounting software.

The essential transactions to record are those passing through the company’s bank statements and whether further accounting transactions (debtors, creditors and accruals, depreciation and so on) are recorded internally is the choice of each business many leave such details to their external accountants at year-end.

However, it is essential that a bank reconciliation (matching payments into and out of the company account to credits and debits on bank statements) is prepared for each month.

  • Profit and loss account
  • This gives the ‘story of the year’ in terms of a summary of the major sources of income, together with a summary of expenditure under major headings. The final figure gives the profit for the year after deducting a provision for the corporation tax payable on any profits. A more detailed breakdown of the above can be found at the end of the accounts which enables comparisons between the current years and previous year’s figures, highlighting unusual items and enables director’s to query unusual entries or why costs have changed more than expected.
  • Balance sheet
  • The balance sheet is a summary of the company’s financial position on the last day of the year. It includes the ‘shareholders’ funds’, illustrating how much money is in the company although tied up perhaps in working capital or fixed assets. The assets and liabilities of the company at year-end are then listed, highlighting why the company needed to leave those funds invested.

Notes to the accounts will show further breakdown of items on the balances sheet along with other information to assist users and give a better understanding of the information shown in the accounts.