.png){kind=small}
Have you ever wondered about how to file your business’s accounts and what this information means? In many cases, understanding the different terminology can seem challenging since there’s so much to consider - however, these terms can have a great deal of weighting over your year-end accounts. In line with this thought, today, we’re looking at some of the main things you need to know about your year-end accounts to help.
The Main Terminology You Should Know for Year-End Accounts
When it comes to end-of-year accounts, there’s a lot you’ll need to know - and understanding the terminology is one of the most important first steps. In line with this, the following definitions could prove valuable to help inform your decision.
End-of-Year Accounts and Related Terminology
Before we go any further, defining clearly what end-of-year accounts are could be incredibly helpful. Simply put, end-of-year accounts are financial statements that need to be submitted annually at the end of the financial year. These accounts will naturally vary from business to business but must include information relating to cash flow and the business’s overall financial performance.
End-of-year accounts can provide a useful tool for business owners to understand the performance of their brand. However, these are also provided to other stakeholders to inform them of the business’s performance.
As an example, when purchasing a pharmacy business, you might want to consider the firm’s end-of-year accounts to help inform your investment decision.
Profit and Loss Statement
One of the most integral components of end-of-year accounts is the profit and loss statement. This statement, as you might have predicted from the name, provides an insight into the overall operating profit or loss made by the business, as well as the company’s revenues and expenses. Altogether, this makes the profit and loss account one of the most important components of end-of-year accounts, and for most people, it’s also the report that they will spend the most time focusing on.
Income Statement
A term you might sometimes hear when discussing end-of-year accounts is your income statement. Don’t panic; this term is simply used interchangeably to mean the “profit and loss statement.”
Balance Sheet
As a limited company, you will likely own a large amount of assets; however, you may have outstanding liabilities (debts) that need to be paid. In line with this thought, the balance sheet provides a summary of all of the business’s assets and liabilities, giving a clearer picture of the business’ performance than the profit and loss statement alone.
We should stress here that, for the balance sheet itself, capital is considered an asset; thus, the balance sheet provides a much clearer insight into how much the business owns versus what it owes.
The Importance of a Balance Sheet
For example, assume you have recently purchased a pharmacy business. In this case, your profit and loss statement might look good; however, by looking at the balance sheet, you may notice that there is a significant amount of outstanding liability to the initial investor for the business. Understanding this can be incredibly important for understanding the business’s financial position.
Another prime example of this is agricultural businesses. Many agricultural businesses may have poor profit and loss statements, due to the low income / high expenses nature of the business model. However, there may be a great deal of assets tied to the business that represent the majority of its value.
Cash Flow Statement
Not all end-of-year accounts will include a cash flow statement, as this is not a strict requirement; however, for businesses looking to provide additional insight and understanding into the business’s operations and profits/expenses, this may be valuable to include. The cash flow statements provide an outline of all business inflows and outflows; by this, it can provide much more clarity than the profit and loss account and the like.
Accounting Terminology
With the main components of your end-of-year accounts now broken down, it’s time to look a little more closely at some of the terms you’ll likely come across.
Assets
When considering your business’s end-of-year accounts, you need to accommodate not only for cash in the bank but also for what your business owns. These are referred to as assets and include any item of property that has value. Assets can include physical assets (such as business equipment and inventory items) as well as intangible assets (e.g., investments and software), cash, and even accounts receivable.
Break Even Point
The break-even point is an incredibly important concept in business, as it defines the point at which revenue and expenses are equal over the course of the total accounting period. Understanding this provides a goal point for your business to ensure it is not going into debt or losing money.
Capital
Capital is generally referred to as the total amount of money your business has as cash. However, some definitions of capital may also account for assets and the like. Be sure to discuss this with your accountant to ensure you are implementing a suitable definition of capital for your end-of-year accounts.
Cost of Sales
In the context of your business’s end-of-year accounts, the “cost of sales” refers to all expenses your business incurred for the production of its primary product or service. This can be a little tricky to understand since not all costs are factored directly into the cost of sales; for example, general, marketing, sales, and administrative expenses are not taken into account here.
Depreciation
The value of your business’s equipment will fall over time and with ongoing use. This is referred to as depreciation, which accounts for the loss of value of an item or piece of equipment over its working life.
For most people, the best-understood example of depreciation is vehicles, which tend to depreciate very quickly from new; however, the rate of depreciation will vary from year to year. In the case of vehicles, the highest rate of depreciation is usually seen in the first few years of the car’s life, following which point, depreciation often slows.
Turnover
When looking at your end-of-year accounts, one common term you will likely hear is turnover. Turnover refers to your business’s total income (think: the amount of money you have turned over during the course of that year).
Gross versus Net Profit
Another two common terms that can occasionally leave new entrepreneurs scratching their heads is gross versus net profit. Indeed, while these two terms can seem similar, they are not interchangeable and refer to very different calculations.
The gross profit refers to the difference between the sales price and the cost of production. For example, if your cost of production per product was £5 and you sold it for £8, your gross profit on that product would be £3.50. If you were to sell 100,000 products over the course of the year, this would take your gross overall profit to £350,000.
In contrast, the net profit goes a step further and takes into account all expenses incurred by the business. This means that, even in a situation when the gross profit is positive, it is possible to still make a net loss once other expenses are accounted for. However, if the net position (income minus expenses, including tax) is positive, the business will be in profit and can carry forward the profit as retained earnings.
Accounts Payable
The accounts payable for your business is the amount of money your firm owes to its creditors. Notably, this is specifically for items that have already been provided but for which you have not yet paid (for example, if you received a pallet of materials and received an invoice thereafter, the invoice amount would be part of the accounts payable if still outstanding at the end of the financial year). The accounts payable are included in the current liability of your balance sheet.
Accounts Receivable
Along a similar line of thought to the accounts payable, the accounts receivable are payments that your business is owed from other companies. For example, if you send a retailer a pallet of products that are not paid for until the time of sale, your accounts receivable would be the value of the products.
Individuals and Entities Involved in End-of-Year Accounts
At this point, we’ve considered some of the main terms you’ll need to know when submitting your end-of-year accounts. However, there are also many other definitions that you should ideally keep in mind, and these can include the following individuals (who can have a prominent role in the end-of-year accounts process).
Accountants
An accountant is a professional individual responsible for handling financial accounts, in this case, on behalf of a company. Accountants can be either in-house teams or external third-party companies.
There is no specific requirement to hire an accountant for a business; however, it is worth keeping in mind here that the complex nature of end-of-year accounts typically means that most limited companies will choose to submit their accounts through an accountant for accuracy and ease.
Auditor
For companies where the end-of-year accounts may have a significant public interest (for example, limited companies with a membership), getting the accounts checked by an independent auditor can be a common step. Independent auditors serve to verify your end-of-year accounts, providing an independent and objective analysis that helps ensure the accounts are a fair reflection of the company’s finances, assets, and performance to date.
As explained by the Audit Group, hiring an auditor “helps people trust the financial information that companies share. It also protects investors who rely on this information to make decisions.” As such, the importance of hiring an auditor for companies with significant stakeholder interest is clear to see.
It is worth noting here that hiring an auditor is not necessary when submitting end-of-year accounts. However, it is still integral that businesses are honest, open, and fair when compiling their accounts to give a true representation of the brand.
Companies House
All end-of-year accounts must be filed with Companies House. Companies House is a governmental organisation responsible for overseeing the operations of limited companies. The organisation typically holds responsibility for incorporating and dissolving LLCs; however, its responsibilities also include providing company information to the public and stakeholders, which is mainly done through the Companies House website.
Some of the main functions that can be achieved through Companies House include:
- Searching for company information
- Filing company end-of-year accounts
- Filing confirmation statements
- Updating the company’s information
- Closing the company
Final Thoughts
Submitting accounts for your business can be a complicated task, and it’s naturally something that most of us would rather forget about rather than focus on too much. However, regardless of the type of business you are operating - be it a corner shop, a pharmacy business, or even an online eCommerce store - submitting your accounts accurately is critical.
Failing to do so could leave you facing significant fines and the like; as a result, it’s well worth considering whether your business could benefit from hiring a professional accountant if you still feel unsure. Indeed, your local accountant should be able to help with managing and understanding your business’s finances and accounts, taking a great deal of pressure off your shoulders.
Comments