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How New Company Owners Should Prepare Financial Statements

So you’ve just registered a new company in the UK, and business has been thriving with customers. Now at this point, you may want to start thinking about your company’s finances such as monthly income, expenses and taxes.

Every year, UK companies are required to submit their company’s annual accounts to Companies House. In this case, financial statements are part of the annual accounts, but you might not know where to start or how to prepare proper financial statements. This comprehensive guide will provide an overview of a financial statement, the required financial reporting framework, and most importantly, the steps in preparing financial statements.

Definition of Financial Statements

A financial statement is a report that shows your business’s financial activities and performance. There are three types of financial statements:

  1. Income statement
  2. Cash flow statement
  3. Balance sheet

Income statement

Also known as Profit & Loss statement, an income statement shows the business revenue, costs and expenses that incur during the company’s financial year such as, 1 April 2019 to 31 March 2020.

Cash flow statement

A cash flow statement shows the money that flows in and out of your business over a period of time. Do note that you will only record the cash, and not income. The purpose of having a cash flow statement is to check if you have sufficient cash to cover short-term expenses, such as bills and payroll.

Balance sheet

A balance sheet displays your business’s assets, liabilities and owner’s equity at a specific point in time. The purpose of a balance sheet is to give your shareholders an idea about the business’s financial position. It also shows you what you’ve owned and owed to other parties. If you are operating a small business, having a balance sheet helps you to understand your business’s financial health and future business planning.

What Should Be Included in the Financial Statements?

The financial statements should include the following:

Assets

Any item that your company owns is considered as an asset. There are four types of assets – financial, current, fixed and intangible assets.

Cash, stocks, bonds, mutual funds and bank deposits are examples of a financial asset. If you have plants and machinery in your business, that will be your fixed assets. These are considered long-term resources that help you to generate income for your business.

Liabilities

In contrast to assets, liabilities refer to something that your company owes to the other party. Examples of liabilities are rent, loans, mortgages, payroll and accrued expenses. They are usually recorded on the right column of the balance sheet.

John runs a diner in London. Every month, his food supplier delivers £2,000 worth of raw materials, such as flour, canned meat, cheese, etc. to his diner. His supplier does not demand payment from him at that point. Instead, the supplier will invoice the diner £2,000, which John will settle at the end of the month. This outstanding amount owed to the supplier is considered a liability.

Equity

Earlier on in the article, we mentioned equity. So equity equals the assets that are left over after the debts are paid.

You bought an office vehicle for £100,000, and you’re left with a loan of £20,000, it means your equity is £80,000 as this is what you had paid so far.

Income and Expenses

A common feature in a profit and loss statement, it shows what the company had received and spent over a certain period. For most businesses, the source of income is usually derived from the sale of goods and services. But sometimes, businesses might have other sources of income. It may come from commission receivable, interest receivable and profits from sale of non-current assets.

On the other hand, expenses refer to the things you spent while running a business. Usually they are considered outgoing financial activities. The purpose of expenses is to generate revenue. Examples of expenses can be the cost of goods sold, payroll, repairs and maintenance, commission payable, interest payable and loss on sale of non-current assets.

Contributions by and distribution to owners

Although these two business terms carry different meanings, they are crucial in a balance sheet. Contributions by owners, also known as contributed capital, refer to the amount contributed by the shareholders to the company in exchange of stock. This item is usually listed under stockholders’ equity in a balance sheet. This only applies to public listed companies.

But distribution to owners, on the other hand, refers to a payment of retained earnings of a business to its owners. It means if your business is made through the sale of stock or sale of business, you will receive earnings through these sales. This comes in the form of a dividend.

Cash flows

This refers to the movements of the money flowing in and out of the business. They are also categorised into four types of cash flows: operating, investing, financing and free cash flow. Each of these cash flows plays a different function in your business.

What Financial Reporting Framework Should My  Company Follow?

All UK companies are required to prepare their financial statements in accordance with either the International Financial Reporting Standards (IFRS) or New UK Generally Accepted Accounting Practice (GAAP).

Still confused by the standards that you need to submit your financial report? Come and speak to our experienced tax accountants to find out more!

What Are the Steps in Preparing Financial Statements for Small Companies?

As a small company, you might be able to send simple accounts to Companies House and need not to be audited.

To prepare your financial statements, here are some of the important steps:

Step 1: Determine your financial year

The duration of a standard financial year is a 12-month period, in which you will prepare the accounts. For existing companies, your financial year starts on the day after the previous financial year ended. For new companies, your financial year starts on the day of your incorporation.

Step 2: Keep your accounting records

Your company’s accounting records must be kept at a registered office address or a place that the directors think it’s suitable. The authorities may require you to produce the records for inspection should the occasion arise.

Step 3: Prepare Balance Sheet

Do note that the balance sheet must have the name of the director printed on it and must be signed by the director. You may include certain omitted items on the balance sheet.

Step 4:  Prepare Profit and Loss statement

You don’t have to prepare a comprehensive one, but rather a simpler version of a profit and loss to the Companies House.

Step 5: Prepare a Director’s Report

You must include the printed name of the director or the company secretary who signed the report.

Step 6: Send annual accounts to Companies House

Once you are done preparing your financial statements, you will need to compile them into annual accounts and send a copy of it to Companies House.

Step 7: Know the deadlines

For a private company, your financial statement will be due 9 months from the accounting reference date. For a public company, it will be 6 months from the accounting reference date.

Step 8: File your account with Companies House

You may use online services to file your company’s annual accounts. There are available software providers, which allow you to prepare and file accounts. If you prefer to submit a hardcopy of the annual accounts, you may do so.

Is There Any Penalty for Failing To File Annual Accounts?

Yes.

We know, there are a lot of things to be on top of when running and growing your business. It is really common for business owners to miss out on filing deadlines due to their busy schedules. However, once you miss out on deadlines, there is a fee to pay. Look at it this way, the role of Her Majesty's Revenue and Customs (HMRC) is to collect the money that pays for the UK’s public services. They need to be fair and efficient in their administration. By paying your fees on time, you’re effectively helping the larger society.

Here’s a rundown of the deadline:

Time after the deadline Penalty
Up to 1 month £150
1 to 3 months £375
3 to 6 months £750
More than 6 months £1,500

Aside from paying the penalty, it is likely that your company may get struck off the register if you do not send Companies House your annual accounts.

Conclusion

There are three types of financial statements: Income Statement, Balance Sheet and Cash Flow statements. These will also be presented as your company’s annual accounts.

As a compliant company in the UK, you need to file your annual accounts with Companies House every year. You must prepare your financial reports according to either the International Financial Reporting Standards (IFRS) or New UK Generally Accepted Accounting Practice (GAAP).
We understand that preparing your first financial statements can be quite daunting, but you don’t have to do it alone. If you are still confused or worried about the preparation, our experienced accountants in the UK can help you go through that.  You don’t have to do it all alone.

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