- What are Financial Accounts?
- Managing your Accounts
- What is the best way to manage my Accounts?
- How often should I update my Accounts?
- What should I look for when buying accounting software?
- Filing your Financial Accounts
- Useful links
There are two types of accounting information:
- Financial Accounts - describe the performance of your business and have to be filed at Companies House.
- Management Accounts - help you to plan your business and make decisions about key areas such as sales, margins and stock.
This guide is concerned with managing your financial accounts.
What are Financial Accounts?
- are a historical record describing the past performance of your business over a given period, usually a year
- are produced for the benefit of external users such as shareholders, employees, suppliers, bankers and authorities
- must be filed at Companies House
- normally include a profit and loss account, balance sheet and cashflow statement.
Managing your Accounts
Managing your financial accounts really means organising and recording the day to day financial transactions. This includes preparing invoices for your customers, keeping track of the payments you receive from them, as well as paying the bills from your suppliers.
The way you handle and act upon information is a key factor in the long term success of the company. You must have a clear and manageable system for entering and retrieving financial data about your company. This will help you to complete your company tax return, file your accounts with Companies House and monitor your cash flow and available profits.
The financial transactions that take place in your business are essentially divided up into different accounts to allow you to see where the money is coming from and how it is being used in the business. By categorising information in this way, you can see the assets, liabilities, income and expenses for the company, from which you can generate financial statements such as the profit and loss account and the balance sheet.
Traditionally businesses used a paper book for each account, known as the ledgers. These days such information is maintained in a computerised ledger system, which is much easier to maintain. With the introduction of the HMRC scheme, Making Tax Digital (MTD), in the coming years, this will become a necessity for businesses too.
What is the best way to manage my Accounts?
Managing your accounts is a fundamental part of running your own limited company. If you have never dealt with accounts and financial statements, it can be a daunting prospect.
Many businesses choose to entrust an accountant with some or all of their accounting responsibilities. However for those who prefer to save money or do not yet have the finances to afford this service (which is very much the case for new companies) the alternative is to do it yourself. This is a valuable skill worth learning. As a business leader it will also put you in a strong position whenever you need to make future financial decisions about your company. A basic knowledge will help you control costs and make more informed decisions. However, you do need to remember why you went into business in the first place, so you must strike a balance between how much you do yourself and how much you outsource.
If you choose to manage your company accounts in-house, thanks to electronic wizardry, there is a wide range of computerised support available. This includes accounting software packages that have been specifically developed to meet the needs of most small businesses.
Well known packages include our sister company, QuickFile. QuickFile is free for small and medium accounts, and just £45 per year for large accounts. It also comes with many useful features that allow you to invoice customers, accept online payments, and stay on top of any outstanding bills. With things like this available with just a few clicks, or even automated, this can really give you an advantage and help you stay on top of your accounts and finances.
More details can be found on the QuickFile website.
How often should I update my Financial Accounts?
There is no definitive answer to this question although most individuals choose to update their accounts on a weekly or monthly basis.
The schedule you set aside for updating your accounts may be determined by the type, value and frequency of the transactions that your business is dealing with.
For example, if you are a shopkeeper and you are taking regular small payments throughout the day, it is not practical to input the transactions as you go along. You could record the total figure for each day and add this information into your accounting system at the end of the week.
On the other hand, if you are selling high value items on a less frequent basis and you need to produce invoices to give to your customers at the point of sale, you may want to log these transactions as and when they occur.
What should I look for when choosing accounting software?
Choosing the right accounting package for your business is important. Aside from ensuring that it meets the statutory requirements that apply to your business, you should consider what else you need from the software. For example:
- Will it be used by people without an accounting background?
- Does it need to cope with a significantly high number of transactions?
- How many people need to use the software at the same time?
- How important is compatibility with your existing systems?
- Does it need to highlight credit control issues?
- Do you want the ability to tailor the appearance of invoices and reports?
- Can you exchange accounts data electronically?
- Is industry accreditation important?
- Will you need ongoing support or maintenance to cope with any problems?
Most packages include the following features:
- Automatic double entry bookkeeping - As you learn how to use your accounting software you will become familiar with the method of double entry bookkeeping. Most accounting packages automate this procedure to ensure your accounts are always balanced.
- Invoicing - When you record a sale to your customers, your package should be able to automatically produce a sales invoice. This can be issued to the customer as a statement showing the amount payable (including VAT if applicable), the product or service they have paid for, and the available methods of payment. If the payment is not made at the point of sale, the invoice can also include a deadline and any early payment discount. Many packages also include the facility to send invoices and statements by email.
- Create and manipulate reports - One of the main benefits of having a computerised accounting system is the ability to instantly generate financial reports. These are particularly useful when completing your company tax return and submitting your accounts to Companies House.
- VAT calculations - Many accounting packages automatically track your VAT liability. This enables you to enter your sales and purchases and simultaneously adjust a special VAT control account. At the end of your VAT period you can then see your net liability which will assist you in completing your return. Some packages even include the option to submit your VAT return in the package itself.
- Monitor cash flow - It is important for any business to monitor their cash flow. This will enable you to ensure you have the required capital to carry out your day to day business.
- Additional Payroll modules - Most accounting software providers can supply an additional payroll module that can integrate with the main accounts package. This means that when you pay yourself or an employee, the software will automatically post payroll information to the relevant accounts, allowing you to track your payroll tax liabilities as well as how much you have spent on each employee.
Once you have identified all your business needs, you can match them against the different packages available.
Remember, if you are also using an accountant, its best to make sure your software package is compatible with theirs!
Filing your financial accounts
Limited companies, whether or not they are trading, are obliged by law to prepare a set of financial accounts each year and publish them by filing a copy with Companies House.
You must file accounts within 21 months of your business' formation, and thereafter within nine months of each financial year end. For accounting reference periods which begin on or after 6 April 2008 the period for filing accounts has been reduced from ten months to nine and the turnover and balance sheet totals included in the definitions of small and medium-sized companies has been raised.
You can find out more about Account Reference Dates and deadlines in our blog post - "Reference Dates and Accounting Periods"
Generally the accounts include:
- a profit and loss account (or income and expenditure account if the company is not trading for profit)
- a balance sheet signed by a director
- an auditor's report signed by the auditor (if appropriate)
- a directors' report signed by a director or the company secretary
- notes to the accounts
- group accounts (if appropriate)
For detailed information about what these documents must contain, please refer to the Companies Act 2006 which is available from Legislation.gov.uk.
Companies classed as a small company or micro-entity are allowed to prepare and file shorter, abbreviated accounts:
Micro-entity - a very small company that meets at least two of the following criteria:
- annual turnover must be £632,000 or less
- balance sheet must consist of no more than £316,000
- the average number of employees must not exceed 10
- a balance sheet that complies with a specified format given in relevant regulations (plus any footnotes)
- a directors' report
- a profit and loss report that complies with a specified format
- auditors report (unless the company is also claiming exemption from this)
- any notes to accompany the accounts
- annual turnover must be £10.2 million or less
- the balance sheet total - fixed and current assets - must be £5.1 million or less
- the average number of employees in the company must not be more than 50
- a profit and loss account
- a balance sheet, signed by a director on behalf of the board (including their printed name)
- any notes for the accounts
- where relevant, group accounts
- special auditors' report - unless the company has a small company audit exemption
- a directors' report that shows the signature of a director or secretary (plus their printed name)
- 12 Nov 2018 - VAT Cash Accounting vs Accrual Accounting
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- 02 Aug 2018 - Accelerated strike-off for Limited Companies
- 29 Jun 2018 - Is an Umbrella Company Right for Me?
Micro-entities are required to prepare accounts and submit them to Companies House, which include the following:
However, micro-entities do not have to file a copy of the directors' report, or the profit and loss to Companies House.Small companies - A small company is one which meets at least two of the following criteria (where accounting periods begin on or after 1st January 2016):
Small companies must deliver the following to Companies House:
As well as cutting costs and saving time, abbreviated accounts minimise the information available to others, especially your competitors. Whilst new businesses may not want full details of the money you earn and spend to be widely known, its worth remembering that your potential customers, suppliers, investors and lenders may check your accounts before doing business with you.
It's also worth remembering that there are statutory penalties for late or incorrect filing, for which the directors are liable.
You may find the following links useful in answering any further questions you may have about managing your accounts:
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