Tuesday, 21 June 2011

Financial and management accounts: the basics

Financial accounts are a historical record of your business' performance over a past period - usually one year - for the benefit of external users such as shareholders, employees, suppliers, bankers and authorities.
Financial accounts normally include the following elements.

Profit and loss account

This measures your business' performance over a given period of time, usually one year.
It compares the income of your business against the cost of goods or services and expenses incurred in earning that revenue.

Balance sheet

This is a snapshot of your business' assets (what you own or are owed) and your liabilities (what you owe) on a particular day - eg the last day of your financial year.

Cashflow statement
This shows how your business has generated and disposed of cash and liquid funds during the period under review. A cashflow statement is different from a cashflow forecast, which is used to predict the expected rises and falls in cashflow over the coming year.

Statement of recognised gains and losses
This records all gains and losses since the previous set of accounts. For example, changes caused by currency fluctuations, property revaluation, profits earned by associates and joint ventures not included in the normal accounts.

Unincorporated businesses

Unincorporated businesses such as sole traders and partnerships are required by IRB to maintain proper books and records to support annual income tax returns. These must be kept for a minimum of six years.

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