What Are Financial Accounts?

If you are starting out in business, you are probably aware that you will need to produce accounts but do you know what they are all about? If your company is a limited company, PLC or LLP, then you will have to file statutory annual accounts at Companies House. Companies House is the organisation for the Executive Agency for the Government Department for Business Innovation and Skills (BIS) in the UK. Companies House deal with the Registration of companies and the filing of specific details and documents as required by the current Companies Act 2006.

So what are financial accounts and what do you need to know? Financial accounts are a record of a businesses performance during the last period which is usually the last year. The financial accounts are used to give shareholders information, bankers, suppliers and certain other authorities or regulatories. Financial accounts usually include a profit and loss account, a balance sheet, cashflow statement and a statement of recognised gains and losses, but what do all these factors in these accounts mean?

The profit and loss account measures the business performance by comparing the income against the expenses over a given time period. The expenses will be the cost of goods or services as well as all the expenses incurred in providing that income. The given time is period is usually a year as you have to file your accounts on a yearly basis however for many reasons, you can apply to Companies House and either reduce or extend your year end.

The balance sheet is a snapshot of your business' assets and liabilities on a particular day which is the date to which the accounts are made to is the last day of the accounting year. In making the balance sheet the assets are the items that you own or are owed to you and the liabilities are what you owe to others.

The cashflow statement shows how your business has used it's cash during the accounting period, showing how much cash has been generated or created and how how much has been spent. However do not confuse a cashflow statement with a cashflow forecast. The statement shows the cash aspect of your business but a cashflow forecast is used in management control and predicts the flow of cash available for your business ie when and what is due to come in and how much is due to go out to ensure you have enough cash.

The statement of recognised gains and losses records the businesses' gains and losses against the previous set of accounts. Property valuations, currency changes, associates income etc will be shown here.

From the production of these various documents, an outsider can evaluate how your business is progressing for their own purposes. For example, your bank may wish to evaluate the accounts in comparison to it's lending request for security or a supplier may want to check that your business is solvent and suitable to give an account to.