02: Financial accounts

By law, a limited company or a limited liability partnership (LLP) must prepare a set of financial accounts for each financial year in order to make information about the business publicly available. Accountants will usually help you to prepare and file the necessary documents.

The accounts must first be signed by the company’s board of directors and then published by filing a copy with Companies House by a specific date. For a private company, if the first set of accounts covers a period of more than 12 months then it must be filed within 22 months of a business being incorporated and, from then onwards, annual accounts must be filed within 10 months of each financial year end.

Financial accounts are produced for the benefit of external parties, including shareholders, employees, tax authorities, bankers and, for larger companies, for consumer groups.

Self-employed sole traders and most partnerships do not need to create formal financial accounts. In practice, however, if a company is looking to grow and needs to raise finance, most institutions will ask to see three years’ worth of well prepared accounts, whatever its trading structure.

Financial accounts normally include the following:

A profit and loss account compares the income of the business against the cost of goods, services and expenses in accruing the income.

A balance sheet provides a snapshot of a company’s business assets (including what it owns or is owed) and its liabilities.

A cash flow statement shows the cash inflows (eg payment for services) and outflows (eg salaries and tax) of the business.

A statement of recognised gains and loses records all gains and losses since the previous set of accounts, eg changes caused by property revaluation and currency fluctuations, etc.