Are you a businessman who is into setting up a new start-up or someone who is not from a financial background, such cases find it really daunting to comprehend the accounts of a company. This is because of the fact that there are multiple sections involved in the accounts of the business and then you have to understand the accounts terminology that is used professionally. The notes that are often given by the end of accounts are also a part that a professional will have to understand. There are several examples of beginners who often enquire about how to read company accounts. Sometimes beginners find it a very complicated task.
This takes a lot of time to manage the sales and handle the payment from the customers in that process. In simple words, we can say that account details work like a window to peep into the financial position and business performance for a certain period of time. This blog post is designed to cover the basics of the accounts and an explanation of how to read accounts. This involves the discussion of what refers to a company’s annual accounts and how to read the accounts of a company. Let us get delved further into the discussion to gather more information.
What Refers to Annual Company Accounts in the UK?
The accounts of a company work as making a kind of summary that is based on the financial activity of the business that the company is carrying out. This is usually done for a specific period of time which is 12 months normally. This is to be submitted to HMRC as well as the company’s house. This required the business to complete every tax year.
The cash flow statement, the profit and loss statements of the business, and the balance sheet are also part of these annual accounts. For a better understanding, a beginner must have a good understanding of what is profit and loss statements, cash flow, and the balance sheet.
How to Read Company Accounts in the UK?
To read the accounts of a company, you must be able to know the business terminologies used in the details. As the company accounts consist of a balance sheet, profit and loss statement, and cash flow. Here is an explanation of how are these parts defined.
1- What is the Balance Sheet?
The balance sheet refers to the kind of statement that has the financial details of a business. This will help you to have an insight into your equity with shareholders, liabilities, and assets of the business. This is possible to do at any given specific time of the year if the record is maintained.
This is the kind of report that tells you about what is the financial health of your company and what you are required to do about it in the future. This explains a good comparison between what the business owns and what the business owes to others. The two main categories of the balance sheet are assets and liabilities.
Moreover, asset refers to the kind of possessions that a business owns. Assets are of two types. These are known as fixed assets and current assets. Whereas liability refers to a kind of obligation just like the case of a loan that is needed to be returned. The liability is either long-term or there is a current liability in a business.
2- What is the Profit and Loss Statement?
This kind of profit and loss statement is not similar to the balance sheet part in the annual accounts of a company. It plays the role of maintaining the business performance record. This is why it is different from being just a snapshot. The main details you will witness in profit and loss statements are the total revenue and the total expenses associated with a business. This is normally a depiction of the whole financial year.
3- What is the Cash Flow Statement?
When it comes to the cash flow statement of the business, its major function is to make a display that depicts the cash movements of the business. The financial year of a business and what are the financial in and outs throughout this period. Cash flow makes the record of the money that is coming into the business accounts and going out in a true manner over a period of the whole financial year.
However, several people confuse it with the profit and loss statement. This is nothing similar to that. This is because the profits and losses are all about the same and money activity in that specific period. Both statements are different because of the role they play in business activity throughout the financial year.
The Bottom Line
Now that we have gathered a fair amount of information about how to read company accounts, we can bring the discussion towards wrapping up. Learning how to read the accounts of a business is really important and one of the basics that must be focused on by beginners. A clear understanding of the cash flow and profit loss statement will help to give you an insight into where your business stands and what business decisions you can make based on these details. This will support you to make professional decisions. We hope these few minutes of reading will help you to develop a better understanding of how to read company accounts in the UK.
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Disclaimer: All the information provided in this article on how to read company accounts in the UK, including all the texts and graphics, is general in nature. It does not intend to disregard any of the professional advice.