Understanding Your Accounts – PaperRocket’s Top Tips

For most limited company directors, hiring an accountant to help them with the accounting side of their business is a must. After all, as a business owner, you are going to want to spend your time focussing on running and growing your business, rather than trying to understand the intricacies of VAT rates and depreciation policies! However, whilst it is indeed always recommended that you have an accountant prepare your company year end accounts for you to ensure that no mistakes are made, at the end of the day, it is you, the company director, who is required to sign off on the accounts and confirm they are accurate.

But of course, unless you’re an accountant, there is a high chance that when it comes to signing off on accounts that have been prepared for you, then you may not know where to start when it comes to checking them. Much of the wording in accounts is technical jargon that is required as part of accounting standards, but below, we breakdown for you the main sections of limited company accounts and how you can check these yourself.

Balance Sheet

The Balance Sheet in a set of accounts will provide a snapshot of what the company owns (its assets) and what it owes (its liabilities) as of the accounting period end date.

The assets will be split into ‘fixed assets’ and ‘current assets’.

Fixed assets detail the ‘net book value’ (current value after depreciation) of any assets that the company holds- so this may include ‘tangible’ assets such as computers, plants and machinery, vehicles etc, and ‘intangible’ assets which are usually non physical assets such as goodwill, franchises and trademarks.

Current assets detail more readily cash converted assets such as money in the bank and money owed to the company by debtors.

The liabilities will then be deducted from the assets. Liabilities include short term creditors such as taxes owed, or unpaid salaries, and long term creditors such as bank loans.

The top half of the balance sheet will finish with the ‘total assets less current liabilities’ figure.

The bottom of the balance sheet will then detail the ‘capital and reserves’ of the company. This will show the share capital in the company, and the ‘retained profit’, which, when added together, will equal the ‘total assets less current liabilities’ figure from the top half of the balance sheet. This figure is then what is available as profit for shareholders to withdraw as dividends. If this figure is a negative figure though, then this means that at this point, the company doesn’t have enough in the form of assets to cover the liabilities that it owes.

Depending on the accounting standard that the accounts have been prepared under, the different sections in the balance sheet may have associated notes breaking down the figures into more details later in the accounts.

Profit and Loss Account

The Profit and Loss account (P&L) shows the business’ income less its day to day running costs over the period that the accounts cover.

At the very top of the P&L will be the company’s ‘sales’ or ‘turnover’. This will be the net (i.e. not inclusive of VAT) total of the business’ sales for the period.

If there are any direct costs involved (for example, the purchase of materials to make goods to sell, or delivery costs to clients), these will be detailed next under ’cost of sales’. These deducted from the turnover will leave you with your ‘gross profit’ from which, admin expenses will be deducted.

These ‘admin expenses’ are usually broken down into relevant categories such as travel, computer costs, salaries, accountancy, depreciation etc. These are figures that you should fairly easily be able to check against your own records for the period. ‘Finance costs’ are usually split out separately after this as well.

After deducting the admin expenses from the gross profit, there will then be your ‘net profit’ figure for the period.

It is also worth pointing out that, unless this is your first set of accounts, there will usually be two columns for all of these figures in the Balance Sheet and P&L showing a comparative between this period and the last period’s figures. This is also an important comparative for you as the director to keep an eye on, so that you can check that the company is progressing as hoped/anticipated.

Of course, this is a very general guide to accounts. If you have a set of accounts prepared for you and there is anything that you are unsure of, then there is no harm in checking with the accountant who prepared them before you put your name to them.

PaperRocket Accounting provide accounting and tax services to professional contractors, freelancers, and small businesses working in the UK.

We offer our clients a flexible choice of fixed fee monthly packages which cover all of their accounting and tax needs (so no hidden costs or surprise bills!). All of our accounting packages include a monthly subscription for a cloud accounting software subscription provided by the awarding winning FreeAgent.

Each of our clients is given their own dedicated qualified accountant with unlimited access in person, telephone, or by email.

We pride ourselves on our client satisfaction and customer service and were awarded ‘Best Contractor Accountancy’ firm 2020 in The Contracting Awards and ‘Welwyn Hatfield Business of the Year 2019’ in the SME Hertfordshire awards.

To find out how we can help you please get in touch now.

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