t: 0141 556 5348
e: mail@ngmaccountants.com

Statutory/final accounts

Understanding accounts series

Introduction

In one sense, this is what all the effort is about: getting a set of accounts produced that complies with the various legal and accounting rules so that, as a director, you can tick another box on your compliance checklist and then get on with your business. If you’re a shareholder, this may be the first opportunity you will have had to find out how your investment has done in the last year (usually). Let me be quite clear though, the accounts I’ll be talking about today are not in the same league as those produced by BP or Virgin. For one thing they are not usually glitzy, glamorous nor do they contain pictures.

Definitions and terminology

All of the accounting terminology has been covered in the factsheets covering profit and loss and balance sheet. If there are any jargon words in any of the text below there will be a link to explain more, so if you get stuck, just click.

Contents

There are three different kinds of filing of accounts that you can do at Companies House, and only one set of accounts you can produce for shareholders for a private limited company.
Full accounts Abbreviated accounts Balance sheet
Full accounts Full accounts contain a number of sections and pieces of information related to the accounts. In smaller private companies, there is also a page or two devoted to detailed operational accounts, which must never be submitted to Companies House. As we’re talking about accounts to be submitted to Companies House, we’ll assume these “secret” pages are excluded. The table below may be useful in getting help understanding each of the sections of the accounts.
Included in:
Full accountsAbbreviated accountsBalance sheet
Directors’ report
Statutory profit and loss account
Balance sheet
Directors’ statement of their legal responsibilities
Accounting policies
Operating profit
Taxation
Tangible and intangible assets
Debtors and creditors
Secured debts
Transactions with directors
Provision for liabilities
Reserves
Share capital

Directors’ report

The directors’ report is intended to be just that: a report given by the directors of the company to the shareholders. In very large companies, the report is potentially very large because it contains disclosure of eg credit policy and environmental policy. Many small private companies – maybe like you – are required to prepare one but not to file it at Companies House. The contents are brief and to the point. The report mentions: The company’s principal activity during the last trading year – this is not necessarily what the company was started to do; Who the directors are and whether they have held office for the whole year and if they offer themselves for re-election. The directors can, if they wish, include additional information. The things I have mentioned immediately above this are the minimum it should contain. There is no incentive for directors to expand on the minimum requirements as usually the report is for their own consumption only.

Statutory profit and loss account

The statutory profit and koss account will not help to run the business. There are no details here of income or expenditure – just sub-totals. It does give the business profitability in an at-a-glance format and the highly sensitive gross profit margin, and indirectly the amount of dividends paid and so is one of the main reasons that many small businesses opt for publishing only the abbreviated accounts which exclude this statement. More details are available in the profit and loss factsheet.

Balance sheet

This document is the minimum filing requirement for small companies and is explained in detail in its own factsheet.

Directors’ statement of their legal responsibilities

This statement basically confirms that the directors have considered the various options available to them for preparing the accounts and explains why they have chosen the one they have. They accept that they alone are responsible for the accounts.

Accounting Policies

Every set of accounts is prepared using a set of agreed rules. The rules affect how certain kinds of situations and categories of income and expenditure are reported on in the accounts. This section of the statutory and abbreviated accounts contains a shortened version of these rules but certainly doesn’t contain every possible rule. It is assumed that they have been complied with in arriving at the profit in the accounts. The convergence with International Accounting Standards from 2012 will have a significant impact on this portion of the accounts and the accounts themselves.

Operating Profit

On the assumption that a full set of accounts is being filed at Companies House, the Companies Act sets out certain minimum amounts of information contained in the profit and loss account, which must be disclosed to all users of the accounts. There are very few that must be shown and these include depreciation and directors’ remuneration. The larger the company, the more information needs to be shown.

Taxation

There are two different kinds of tax shown in companies’ accounts: corporation tax and deferred tax. This note sets out to explain the amount of tax shown in the statutory profit and loss account. It will usually show up to three separate numbers. Firstly it will show the expected corporation tax payable for the current year’s profits. This amount will not be actually paid until nine months after the year-end date. Secondly, it will show the amount of deferred tax. Thirdly it may show an adjustment, for example if the tax payable turned out higher or lower than was estimated in the previous year’s accounts.

Tangible and intangible assets

Intangible assets will mainly be goodwill. In some cases they may include costs paid for franchise areas or intellectual property costs. Tangible assets are everything else such as buildings, computers, vehicles, equipment and furniture. This note explains in broad outline only the original costs of the company’s investment in assets and shows separately the amounts added this year and disposed of this year. The total amounts of depreciation charged to date and for this year and ends up by showing the net value of the assets in the accounts. These numbers can be found in the balance sheet under the fixed assets heading. If any of the assets are being paid for using hire purchase or a particular form of leasing, then there is more information shown about these.

Debtors and creditors

The amounts shown in these two notes generally represent the amounts which the company is expected to receive or pay out inside the next 12 months only. Any debts or liabilities which are farther away than that (e.g. repayments due in year five of a loan) will be shown under long-term liabilities or amounts due after one year. The contents of these two sections will include: Debtors Trade debtors Prepayments VAT or other taxes owed to the company Other amounts owed to the company Creditors Trade creditors Bank overdrafts and loans and hire purchase due Taxation payable (PAYE, VAT, corporation tax) Credit card balances Accruals Other amounts owed by the company

Secured debts

A note is only shown here if either the company or the directors have guaranteed certain liabilities of the company.

Transactions with directors

A note is only shown here when there have been transactions or dealings between the company and the directors. An example might be where the directors personally own the building the company trades from and they charge a non-commercial rent for it. It might include amounts loaned to the directors by the company.

Provision for liabilities

99.9% of the time this section will only contain information about what has changed with deferred tax during the year. The deferred tax balance will have gone up or down or will have been shown for the first time.

Reserves

A company’s reserves can take two main forms – distributable and non-distributable reserves. Distributable reserves usually consist of profits made in past years (retained profits) which have not been issued as dividends. When the company makes losses, reserves are reduced. Non-distributable reserves are less common but can be created when a company revalues its property (revaluation reserve) or sells its shares for more than their face value (share premium account). These reserves are distributable only in very rare and exceptional circumstances and so for most normal situations, should be considered as untouchable for the purposes of calculating if sufficient retained profits exist. Reserves rarely represent cash in the bank and so should not be seen as a cash pot waiting to be spent.

Share capital

Share capital is the value of all of the equity that a company has issued. The most common kind of share capital is ordinary share capital, or ordinary shares. A share is a piece of ownership in a company that can entitle its owner or holder to vote at meetings and to receive dividends when the company makes profits. If there is one shareholder and he or she owns just one share, then he or she owns 100% of the company. This shareholder controls the company outright and can make any decision affecting the company. If there are two shareholders and each owns one share, each owns 50% of the company. Neither is technically in charge and so both need to agree any course of action for it to be valid. Holding 51% of the shares gives that person operational control of the company and in some larger companies you may need to gain the agreement of three or four shareholders to achieve operational control. Shares when issued have a value. Share can increase in value when the company is successful and makes profits.

Disclaimer

The information contained within this factsheet is factual but may contain opinion and express different ways of considering the topic. No responsibility is accepted by NGM Accountants for any losses or profits foregone by acting on or refraining from acting on any information contained within this factsheet or any factsheets to which this refers. Before making any decisions concerning the accounts of your business or enterprise, you should consult a professionally qualified accountant. Return to Advice page.