If you’re a business owner you need business accounts (aka financial statements) for each year of trading. Your business accounts aren’t just a matter of compliance; they’re an essential tool for evaluating the health of your business.
The Three Primary Statements
Business accounts typically consist of three primary statements:
The balance sheet – this summarises the assets, liabilities, and equity of your business at the year end.
The profit & loss account – this summarises your trading activities for the year; income, expenses, gains and losses.
The cash flow statement – this tells you how much cash your business generated and how it was spent.
These documents enable you to determine which parts of your business are most successful and which areas require more attention They help you understand the financial implications of any decisions you may or may not make.
Seven good reasons for having business accounts –
1/ To understand how your business is doing.
When you’re buying and selling on credit, it can take 30 days or longer for transactions to be listed on your bank statement. So you can never know just by looking at the statement if your business is making a profit or a loss. You need to record your transactions separately and use this data to create a profit and loss statement.
2/ To raise capital for the business.
Most lenders will ask to see your latest set of accounts before deciding whether or not to offer you a loan. They’ll want reassurance that you’ve been trading successfully for a while and can afford the repayments.
3/ To apply for a mortgage.
If you need a mortgage to buy a home, the bank or building society will normally want to look at your accounts and assess your income before deciding whether or not to make you an offer.
4/ To make an insurance claim.
If you need to claim because your business has suffered loss or damage (from fire or flooding, for example), your insurers may want to examine the accounts to see if your claim is reasonable when compared against your sales and profits in previous years.
5/ To establish your share of a business partnership.
Most partnerships have a partnership agreement that sets out the various rights and responsibilities of the individual partners, and how the profits each year will be shared. The accounts record when partners lend money to the business and take money out to live on, enabling each partner to track their share of the business.
6/ To submit a tax return.
If you’re a Sole Trader, in an Ordinary Partnership or Limited Liability Partnership (LLP), you normally pay tax and national insurance on any profits the business makes. If you run a Limited Company you don’t pay tax and national insurance on any profits because they aren’t yours – they belong to the company and are subject to Corporation Tax. The accounts will show the taxable profit to be declared on your personal tax return or your company’s tax return.
7/ To sell the business.
A buyer needs to know if the price you’re asking is worth it, and will want to examine the accounts with their own accountant to see how the business has been doing.
Are you running your business blindfolded?
When starting up a business, bookkeeping and accounting is often the last thing to be thought of. Financial record-keeping and systems for managing sales, purchases and cash flow tend to evolve haphazardly.
But running a business without a solid financial foundation in place is like driving a car with a blindfold on.
The sooner you establish proper accounting procedures the better.
Only then will you understand how and where your business is making (or losing) money.
Only then will you be confident that what you’re doing is moving you closer to your business goals and complying with tax and accounting rules.
Need a little help?
My Accounting Emails are for business owners who want a better understanding of their financial position. They’ll help you manage your cash flow and stay in the black.
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“As a small business it is important to always have financial clarity and often it is difficult to try and do this yourself. Paul has worked with us for several years and has streamlined and organised all of our accounting systems. He provides us with a complete accountancy service and is very professional in his approach as well as being a likeable guy.” - D. Walsh, Director. DualTEC Services Limited, Keighley. (Google review)
“Paul has done a great job putting my accounts on to Sage Business Cloud, and also got a discount for me. I like that the software is MTD compatible and I can access it from anywhere. Paul sorts out all my invoices, does my bookkeeping and produces reports every quarter (or whenever I need them). He is friendly, reliable and easy to work with - it's good to have him on board." - C. Milne, Proprietor. CAM Properties, Carnforth. (Google review)