The term “accounts” refers to the financial records that document business performance of an organisation over a past period
– usually a year. Every business is required by law to disclose a ‘true and fair view’ of their financial affairs. Accounts need to include several core elements, such as a balance sheet and a profit and loss account.
The information in accounts represents the basis of future business planning, but in order to do so, it needs to be carefully collated and organised. By pinpointing losses and determining how they can be solved, accounts help the business grow while being particularly beneficial to the external users of a business, including authorities, employees, bankers, suppliers and shareholders.
Different types of accounts exist, with the most common of them being sole trader accounts and company account. Below you will find an in-depth analysis of the crucial records required for each, whilst looking briefly into the role of TWC in helping to ensure accurate organisation of accounts.
Why are accounts needed?
As a rule of thumb, businesses will be reprimanded if they fail to keep correct, up-to-date records of their finances for the periods of time required by the authorities. However, account keeping has numerous internal benefits for a company
– offering a beneficial level of transparency that can assist with the analysis of a business, at the same time as ensuring effective tax returns and the deterrence of theft or fraud. A company that maintains an efficient record-keeping system will also be able to:
- pay tax accurately and on time
- efficiently track debtors, creditors, and expenses
- apply for extra funding, such as an overdraft facility or business loan
- report on profit or loss quickly and easily when required to do so
Due to the time consuming nature of account keeping, many businesses choose to hire TWC to effectively organise all financial information into meaningful sets of data. New businesses may find TWC particularly beneficial for setting the foundations of a proper record keeping system.
What are the basic elements of accounts?
There are generally four key elements of accounts: a profit and loss account, a cash flow statement, a balance sheet and a statement of recognised gains and losses. Some examples of information required to compile accounts include invoices, paying-in books, receipts, bank statements, rent books, wages records, and copy sales invoices.
What is a profit and loss account?
A profit and loss account is a summary of all business transactions over a given period, which include documentation on sales and takings as well as an accurate record of all purchases and expenses. Produced essentially for business purposes, a profit and loss account serves as an indication of business performance to potential investors, owners, and shareholders. Moreover, it provides HMRC with a way to check a business’s tax calculations.
The law requires limited companies to produce a profit and loss account, while self-employed sole traders and the vast majority of partnerships do not need to do so. The former two are required, however, to keep comparable records in order to be able to complete their self-assessment tax return accurately.
What is a balance sheet?
A balance sheet is a basic guide to an organisation’s assets and liabilities at a given date. A balance sheet also shows how a businesses’ source of funds and being utilised. The main two uses of a balance sheet are:
- to improve the management of a business via a business analysis tool
- to help owners, shareholder, and investors assess the worth of the business at a particular time.
What is a cash flow statement?
A cash flow statement shows how liquid funds and cash are generated or disposed of over a given period. Efficient management of cash flow is fundamental for business growth – and any costs need to be carefully timed with sources of incoming funds for business survival.
What is a statement of recognised gains and losses?
A statement of recognised gains and losses refers to the records of gains and losses that took place since the previous set of accounts without being included in the normal accounts. Examples include changes caused by property revaluation, currency fluctuations, profits earned by associates and joint ventures and more.
Types of accounts
Below we have provided a list of the financial records specific businesses should keep that TWC can compile.
All self-employed workers are required to keep precisely organised accounts to assist them with the completion of a self-assessment tax returns correctly. The accounts may also help self-employed individuals answer any questions from HMRC if investigated. Account keeping can be time consuming for many self-employed workers, particularly if they have numerous different sources of income or are required to be registered for VAT.
As a result, TWC can systematize your financial records to ensure HMRC requirements are adhered to. This service may be particularly beneficial for individuals who may feel uncomfortable handling percentages and transactions. TWC are reliable and can offer in-depth advice on all working practices and are knowledgeable of the UK’s tax and legal system.
There are several ways to define a partnership but the term typically refers to a business arrangement that involves two or more individuals. A partnership means that ownership rights are divided between the partners, so each partner will be entitled to distinct capital account for investments, a separate withdrawal account, known as drawings and their share of net income or loss.
TWC can prepare partnership accounts per HMRC and your requirements.
There are strict criteria regarding the type of information that must be collated for company accounts. More often than not, these include records about the company itself as well as financial accounting records.
The essential details that are compulsory when it comes to providing information about the company itself include:
- information on directors, company secretaries, and shareholders
- promises made by the company for expenditures if there is a mistake due to a fault of the company (‘indemnities’)
- promises to reimburse loans at an exact date in the future (‘debentures’), and the name of the person or company the money is owed to
- transactions documenting when shares are bought in the company
- the consequences of any shareholder votes and resolutions
- information of any loans, mortgages, etc., that are protected against the company’s assets.
For general accounting records, all companies need to collate documents on the following:
- details of any assets owned by the company
- information about money received and spent by the company
- all goods bought and sold
- debts the company owes, or is owed
- details of who bought and sold goods
- all stocktaking used to calculate the stock figure
Companies are required to keep all of these records for at least six years from the end of the company’s last financial year.
Please contact TWC for a bespoke accounting service specific to your and HMRC requirements.