The annual accounts of any organisation provide information about financial performance. And, preparing the annual accounts is the director’s responsibility. However, this is not their only requisite – they must ensure that the final accounts give a true and fair view of the company. This gives information about 12 months’ performance and the period may decrease if the company has just started. If it needs to be extended, an application should be submitted to the registrar.
Annual accounts usually include a director’s report, an income statement, a statement of financial position (‘the balance sheet’), a statement of profit and loss (P&L), notes to the accounts, auditor’s report (if applicable), and a statement of cash flows and group accounts (if applicable).
Statement of Financial Position (SOFP)
A statement of financial position gives information about the company’s assets, liabilities, and equity at the end of its fiscal year. The assets include investments, tangible and non-tangible assets, and current and non-current assets owned by the company.
Similarly, the equity part of the financial position of a single company includes retained earnings, share capital, share premium, and certain things related to the capital and equity of the company. The liabilities have two parts, non-current liabilities (payable in more than 12 months) and current liabilities (payable in 12 months or less than 12 months). The statement of financial position tells us about the position of the company at the year’s end. It does not give an overview of the whole year’s movement. It shows the result of the whole year’s movement in the financial elements.
Statement of Profit and Loss and Comprehensive Income (SPL or SOCI)
A statement of profit and loss and comprehensive income shows the performance of the company. It usually has two parts. The first part shows the profit and loss of the company and the second part shows details about the other incomes that are not from the main course of business of the organisation. It gives information about the sales, expenses that occurred during the year, finance costs, and taxes paid for the year. The second part shows the other incomes of the companies and any paper gains or other gains that occurred.
Statement of Cash flows (SOCF)
A Statement of cash flows is prepared to show the inflow and outflow of cash and cash equivalents. It helps to find out the liquidity position of the company. It also helps to assess whether it will be a going concern or not. SOCF only includes the cash elements and ignored the non-cash items i.e. the depreciation of assets.
Group accounts are prepared when the subsidiaries of the company exist. To get an overview of the performance of the whole group these accounts are prepared. And the financial statements made for the groups are called consolidated financial statements which show all the assets, liabilities, equity, profits earned, expenses, etc. of the group companies as a whole and ignore the transactions that took place within the group to give an impression of one entity as a whole and get a fair view of the performance of the management.
Directors are required to prepare a director’s report under Section 415 of Companies Law. It is produced by the board of directors and tells about the financial state of the company. Minimum a director’s report should include the name of all Directors who served during the financial year, dividend recommendations of the year, future prospects (a summary), the financial year trading activities summary, any changes that significantly relate to fixed assets, company’s principle activities and if applicable the principle activities of its subsidiaries. All companies are not required to produce a director report like small companies. But large organisations must submit a director’s report with financial statements.
Notes to the Accounts
Notes to the accounts are also called footnotes and explanatory notes. It gives further information about the classes of transactions and account balances. It tells about the assumptions made while preparing financial statements and the accounting policies used. Moreover, it includes future activities information that is of significant importance, any changes that are unexpected from previous years, and most important disclosures. The contents of notes to the accounts change from company to company. Explanatory notes help the analysts and auditors. The analysts use notes to the accounts to get a better view of the financial state of the company. Most of the findings of the audit are based on these notes.
An auditor report gives an opinion on the validity and reliability of financial statements. For a public limited company, it is mandatory to have an audit of its financial statements every year. If the auditor report is not filed timely or not filed at all, there are certain penalties. When financial statements are prepared and before their finalization, these are evaluated. The evaluation is in the form of an auditor’s report (from a licensed auditor or accountant). The auditor report gives a reasonable assurance that the financial statement is free from errors and that adequate disclosures have been made. In the report, the auditor has to provide an accurate picture of the financial statements and the company. If the auditor doesn’t agree with anything in the statement, a reservation can arise. The auditor’s reports must be either unqualified or qualified opinions. Certain criteria must be met for an unqualified opinion.
For which parties are these prepared for?
A company is run by the directors on the behalf of its owners. The directors act as stewards of the company. The owners of the company need to know how the company is performing to judge the performance of management and whether the company is profitable for them or not. So the annual accounts are prepared to exhibit the financial performance of the company.
Similarly, potential shareholders may also want to check the figures to make decisions regarding investment in the company. Some other stakeholders may also like to go through it. Preparing annual accounts is also a compulsion imposed by the government.
Importance and Advantages of Annual/Final accounts
- Final accounts help to increase the accuracy of the accounts.
- The chances of detection of fraud and errors increase. And it enables the management to find their weak areas and strengthen the internal control system.
- Final accounts will also result in the reconciliation of different documents and will also result in the calculation and finalization of the different balances, i.e. of the bank loan at the end of the year.
- It provides information to evaluate the business and to see what the status of the company is.
- It gives all the information on the equity of the entity, the assets, the performance of management and the company, and to which way the company will be moving in the future.
- Final accounts help to calculate the different ratios and make comparisons to the other competitors and industries.
Limitations of Final Accounts
Where there are a lot of advantages, there are also some limitations of final accounts.
- Some of the information in final accounts are estimated and may vary from company to company. Similarly, some of the policies used by one company may differ from another company as there are different policies available to the companies to follow by ISA. It will make the final accounts incomparable.
- It is not guaranteed that the accounts will be free of all error or all misstatement as there is always inherent limitations present. Even if it is audited, the inherent risk will be still present.
Requirement of UK Government
In the UK, all of the companies should file their accounts to Companies House including the dormant and flat management companies. If the accounts are not filed, the registrar may think that the company is no longer carrying its business and may remove it from the register. Once it is removed, all the assets of the company will go under the crown. It is considered a criminal offence if the documents are not filed and the directors of the company may risk prosecution.
A financial year is considered as the 12 months period for which the accounts are prepared. The financial year starts right after the previous financial year ends. For a new company, it starts from the date of its incorporation. Accounts of the company may be filed online or annually.
If the accounts are prepared in another language than English, a translated copy in English should also be filed for the accounts. The translation should be certified. If the company is registered in Wales, there is no need to get the accounts copy translated into English, and can be submitted in the Welsh language.
If consolidated financial statements are being prepared for public companies, since 2005, IFRS (International Financial Reporting Standards) are used. For other companies, there is a choice. They can follow UK GAAP or IFRS Accounting Standards.
When preparing the company’s accounts, the companies are classified into three classes depending on their sizes which are Small, medium, and large. Small companies have also a sub-classification known as micro entities. To find out whether the company is small-sized, the company should meet two of the thresholds mentioned below:
- Total balance sheet not more than £5.1 million
- Average no. of employees must not be more than 50
- Annual Turnover not more than £10.2 million
If the company doesn’t meet certain requirements, the company is a large or medium-sized and has to submit and prepare a full account. Micro entities can give less information in their annual or final accounts of the year.
How to prepare Annual Accounts?
To prepare annual accounts, a company can hire an accountant or outsource it to accounting firms. Having an accountant will make it way easy as the accountant will have all the information about the company accounts and may update it regularly so that at year-end, the preparation of final accounts will not be difficult as the whole year’s data had been recorded from time to time and updated correctly.