As well as completing the necessary financial statements required for end of year accounting records, interim or half-year statements also need to be produced.
All financial statements need to be calculated in accordance with GAAP – known as Generally Accepted Accounting Practice.
The two primary statements required are the profit and loss account and the balance sheet.
Profit and loss
The profit and loss account is used to present all of the costs of the business against the turnover.
This provides the cost of sales figure and whether the business has made a profit or loss over the trading period.
The profit and loss statement shows how much money the business will make after all expenses are accounted for.
The balance sheet is the most difficult statement to produce as it involves assessing all costs and assets in the business.
A balance sheet is a snapshot of the business at a point in time and is forever changing.
The first step is to work out your assets and liabilities
Assets are split into two – current assets are assets that mature in less than one year. Fixed assets are assets that have been purchased and have an expected life of more than one year. Fixed assets include land and property.
An asset is anything that is owned or owed to the business. This includes creditor balances, cash at the bank and plant and machinery.
Fixed assets added to current assets will give the total assets figure required for the balance sheet.
These are also split into two – current liabilities and non-current liabilities.
Current liabilities are costs that need to be settled within 12 months. These include payments to suppliers and accrued expenses.
Non-current liabilities are expenses, debts or loans that are repayable over a longer period than a year. In the accounts a firm calculates the proportion of a debt that is due in more than one year’s time and uses that figure.
These two figures will give the total liabilities of the business.
The aim of a balance sheet is to show how much the business is worth by working out the equity in the business.
This is done by taking total liabilities from total assets to provide the equity figure.
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