Understanding Your Financial Statements: Annual Accounts

With Calathea Accounting

Your financial statements, often referred to as your annual accounts/end of year accounts can often cause confusion, however if we break them down and deal with each section in turn, then they needn’t be so overwhelming.

Financial statements aren’t just prepared at the end of a company’s accounting year, they can also be prepared at the end of each month or quarter and these will be referred to as monthly or quarterly management reports/accounts.

A set of management accounts can also be prepared at any point if they are needed to aid a decision within the business. I will talk about management accounts in further detail in a later blog post.

As a limited company registered at Companies House, it is a statutory, legal requirement to file a set of annual accounts every year. Ideally, your annual accounts should be prepared within a quick timeframe of the date of your accounting year end, within 6 weeks ideally. In reality, this is often not the case. Quite often, annual accounts are not submitted until close to the Companies House deadline.

When a Company’s annual accounts are finalised so long after the accounting year end date, the figures within them become almost worthless as the data is so historic that it cannot be relied upon. This is why it is important to have the annual accounts prepared, finalised and submitted within a 6-week deadline after the year end has passed.

Then monthly or quarterly management accounts can be prepared throughout the accounting year, to give a snapshot of the financial health of the company at any particular time.

Financial statements will usually consist of:

  • The Income Statement;
  • A Detailed Profit and Loss (P&L);
  • The Statement of Financial Position (Balance Sheet);
  • The Directors Report; and
  • The Notes to the Accounts

Income Statement and Detailed Profit and Loss

The Income Statement shows the profit or loss that the company made for the accounting year. The income statement will give a general overview by stating figures for turnover, cost of sales, gross profit and operating profit.

The Detailed Profit and Loss will then give a further breakdown of these figures so you can see exactly how they arose.

The figures in the Income Statement and Detailed P&L are for transactions over the entire accounting year in question. Unlike the Statement of Financial Position/Balance Sheet which will show cumulative figures from previous years.

I will be writing another blog post on the Income Statement/Profit and Loss to explain it in further detail, for now I am giving an overview on each section to show how they fit in to the Annual Accounts.

Statement of Financial Position/Balance Sheet

The Statement of Financial Position used to be referred to and is most commonly known as the Balance Sheet.

This statement shows a snapshot of the cumulative figures at the company’s accounting year end date based on its assets, liabilities, capital and reserves.

The Statement of Financial Position/Balance Sheet will be explored in more detail at a later date.

Directors Report

Large companies have a requirement to file a Directors Report. Small and micro companies are exempt from having to file one but can choose to do so if they wish.

A large company is one which meets two of the following criteria:

  • Turnover of more than £36m;
  • Balance sheet total of more than £18m; and
  • More than 250 employees

The Directors Report states any supporting information for the shareholders to understand areas around whether the company’s finances are in good health and how well the company is complying with financial regulations, accounting standards and social responsibility.

Notes to the Accounts

The Notes to the Accounts state further supporting information to detail the assumptions made by the Accountant preparing the Annual Accounts to ensure anyone reading them is able to fully understand them.

I will be publishing other blog posts to further explore Management Accounts, the Profit and Loss Statement and the Statement of Financial Position at a later date.

For now, this should give you a general overview of the Annual Accounts and what each section is made up of.