Understanding basics of financial statements and annual accounts

Financial statements and annual accounts – Accounting and producing reports related to the finances of a business can be a burdensome process requiring a lot of administrative attention. It can also present a challenge of understanding what all the details mean in all the associated financial reports. Below is a basic understanding of the accounting process and the purposes thereof, with an interpretation of what the reports produced means:

Importance of accounting

A business needs to account for its finances (preferably on a more regular basis) in order to establish whether it is making or losing money. Accounting makes this possible as it gives a detailed analysis of the business’s performance over a period of time. Without this, there is no way of knowing if the business is self-sustainable or if the owners are profitable or they keep injecting money into the business because of the losses it is making. There are other more important uses of accounting which will be discussed further below.

What type of financial reports are produced by the accounting process?

The main standard set of reports that are produced from accounting are “financial statements” or “annual accounts”. These are usually produced for a 12-month period, although the period can be longer or shorter in certain specified circumstances. These annual accounts are produced per generally acceptable accounting standards that are governed by various international accounting bodies therefore there is need for the producer of the accounts to be a knowledgeable or qualified accountant who would have taken regulated body exams.

The annual accounts are broken down into 2 main primary statements, which are then supported by a separate 3rd section with detailed notes supporting the figures in these 2 primary statements:

• Profit or loss account – this gives a summary of the sales and expenses of the company for the last 12 months and the resultant profit or loss.

• A balance sheet – this shows the value of the business at the year of the 12-month period specified. It shows how much cash the business holds, how much the customers owe the business, how much the business owes its suppliers, and a total accumulation of all the profits the company has made since inception of the business. This is an important statement which gives an indication of the whether the company is in positive position value-wise (i.e. it owns more than it owes), or it is in a negative position (i.e. it owes more than in owns)

A set of management accounts can also be produced from the accounting process. These are somewhat similar the annual accounts above, however they are more tailored towards a business’s management’s requirements for better decision-making of finances. They contained more details of figures, including breakdowns of sales by e.g. products or geographical area, trend analysis on movement of sales and expenses month by month, detailed breakdowns of the customers who owe the business and how long they have owed funds, etc.
Management accounts do not have to conform to the international accounting standards as required for the annual accounts, however they must match the figures in the accounts, or at least explanations for why the 2 types of accounts are differing.

Who are users financial reports?

• Lenders and creditors – these include banks and credit institutions and trading creditors. Their main concern is the ability of a business to repay their debts and would therefore be interest balance sheet position of the business, looking to see if it owes more than it is owed.

• Employees – workers need comfort that their jobs are secure and can get information on how the business is doing profit-wise to enable them to make that assessment. It can be a source of information on any performance-related benefits.

• Management – they use the reports for making day-to-day and long-term financial decisions, such as whether to add more capital funds to the business, whether to increase or decrease spending, making follow-up on various customers, making investments, etc. Finances are a crucial source for making decisions about a business’s profits, liquidity and cash flows.

• Tax authorities – as taxes are levied on profits made on the business, the tax offices often request annual accounts to be produced and submitted together with tax returns in order to verify the profits made.

• Others include:

 Various regulatory bodies
 Investors
 Competitors
 Owners and shareholders

What are the requirements relating to producing financial reports?

Basically, a registered company (whether in the UK or IOM) is required to produce annual accounts in the required statutory form (i.e. in compliance with the generally accepted accounting standards).

Sole trader and self-employed businesses are generally not required to produce financial statements, however they may be required to keep accounting records of the transactions in the business.

How can Invicta help?

Invicta has the expertise and the systems in place for easing the bookkeeping and accounting process which enables financial reports to be produced, compliant with the accounting standards. We provide in depth analysis of your business’s finances from financial information processed, and offer detailed explanations including of your figures’ movements, relationships and trend analysis. We make you use to online platforms such as QuickBooks which enable automatic financial reporting and analysis.

We will act on your behalf, removing the administrative burden associated with bookkeeping and accounting, ensuring that you get the most accurate and pertinent financial information and reports.

Call Invicta Accounting on 01624 672358 or email us at info@invicta-accounting.com for assistance.