How to prepare company accounts for a small company
From legal requirements to what records to keep, we look at how to get your small business’ accounts in order with minimum hassle
Especially if it’s your first time, the end-of-year accounting process can seem onerous. You will have to draw upon several different sources of information to build up a complete picture, and you have a legal duty to ensure your accounts are complete and accurate.
In general, you should not attempt to complete your year-end accounts yourself – it is always best to involve the help of an accountant. However, you can cut down on the time they bill you by having a solid grounding in the basics, which this article aims to give.
Here we will address what you are legally required to do in order to satisfy HMRC and Companies House requirements, and how to keep records of specific information they will need. We cover how to plan the entire process and what to ask your accountant when the process is finished.
What are the legal requirements for end of year accounts?
The legal accounting requirements you have to deal with include submitting accounts to HMRC with your corporation tax return. These need to be submitted online at the same time as your tax return – within 12 months of the end of your company’s financial year. They are used as the basis of your tax calculations, so HMRC can ensure you have calculated the correct amount.
Other legal obligations include filing ‘statutory accounts’ with Companies House and keeping detailed accounting records. Statutory accounts must be submitted within nine months of the end of your company’s financial year. If you qualify as a ‘small’ company in the eyes of HMRC, you can submit abbreviated accounts.
What do I need to include in my statutory year end accounts?
Generally, your year-end accounts are known as ‘financial statements’, to distinguish them from the accounts you use in the everyday running of your business.
Your financial statement should generally contain a director’s report, which is a document written by the company directors, summarising the business’ performance throughout the year and their view of its current state and how it will perform in the future.
Other things to include are a balance sheet, which details the total sum of the company’s assets and liabilities at the end of the accounting period, and a profit and loss account giving a summary of income and expenses over the last accounting period. This should include factors like sales, expenses, tax matters and the total amount of profit or loss over the period.
Finally include explanatory notes explaining details about the profit and loss account and balance sheet.
If you qualify as a ‘small’ company (fulfill two of the following: under 50 employees, turnover is less than £10.2m or you have less than £5.1m on your balance sheet) then you only need to submit abbreviated accounts to Companies House and these will be no more than a balance sheet that’s signed by a named director.
It is worth noting that the abbreviated accounts exception doesn’t apply to HMRC or any shareholders you have, who will still require full financial statements. However, it can be useful if you don’t want to publicly reveal lots of information about your company at an early stage.
How do I plan my annual accounts?
Start by deciding how much work you will do yourself. You will almost inevitably have to involve an accountant in the process, but by using accounting software you can do a lot of the legwork yourself and cut down on fees.
Ask your accountant how you can reduce your tax bill before year end, they might recommend bringing forward certain expenditure so you can cut down on your total profit, and ask your accountant what further information they will need.
Finally, book a closing meeting with the accountants and use this meeting to identify areas for improvement in the coming year. In particular, think about whether or not you should buy or upgrade accounting software, how you can manage your creditors more effectively, and ways you can control costs, tax bill and manage your business’ cashflow more effectively.
What accounting records do I need to keep?
Legally, you need to keep a number of ongoing accounting records. As a small business, this should include the following:
Income and expenditure records
This should include receipts for all sales and purchases, cheque books, and up-to-date bank statements.
Unsold stock and uncompleted work at year end (‘floating’ assets)
If you are a service business, you may have a lot of work in progress that cannot be counted as a fixed asset.
A register of fixed assets
This will include information on the equipment and property your company owns.
A record of company liabilities
Any debt or investment you have taken on should be properly recorded.
Staff payroll information
HMRC keeps a particularly close eye on payroll and expenses matters.
How do I keep records of my business’ sales and purchases?
Use unique invoice numbers
Mark all sales and purchases with a unique identifying number, so you can quickly pull up all the instances a particular transaction appears in your records.
List your outstanding debtors at year end
If you have made sales that haven’t yet been paid for, create a list, referencing the unique invoice numbers for each transaction. If you are reasonably certain a particular invoice won’t be paid, mark it as a potential bad debt and explain why – your accountant may write it off as a ‘bad’ or ‘doubtful’ debt, which means it could count as an allowable business expense.
List your outstanding creditors at year end
Again, use unique invoice numbers, and include the payment due date, the name of the supplier, and the amount you owe. If you don’t expect to pay for a particular purchase (due to damaged goods, for example) then explain why.
List debtors and creditors by date
Order this list with the oldest debts first – this will help you analyse which debts are likely to go bad, and which creditors it is more important to pay.
How do I keep records of stock and uncompleted work?
Be aware of the cut-off. The line between a completed and uncompleted sale is one which causes confusion for many businesses. In general, the rules are that if a purchase has arrived but you have not been invoiced, you include the cost in your accounts. Also if you have invoiced but not delivered stock, exclude the items from your stocktake – the sale will already appear in your accounts.
Perform a stocktake, which is simply the process of physically counting all the stock your business holds in advance of valuing it. You should plan in advance for this process to minimise disruption – try and ensure no new stock comes in on stocktake day, and set aside stock of the same type so it is easier to count. Make sure you have a standard stocktaking procedure in writing, so employees are on the same page.
After you have performed a stocktake, the next step is calculating its total value of your stoke. Your goal for tax purposes will be to value this as low as possible, so either use the cost you paid to the supplier or the cost you expect to sell the stock for –whichever happens to be lower.
Match the descriptions of the goods to the ones used on the suppliers’ brochures or price lists, so everything easily tallies up. Old, damaged or unfinished goods should have a corresponding depreciation in recorded value (so if a piece of work is 25% unfinished, value it at 75% of its normal value).
Finally, use the percentage of completion method to calculate the value of unfinished projects, which essentially involves calculating how far along you are on a project and allocating a proportionate percentage as part of your cost at year end. So if a project is 50% complete, you would include 50% of the value of the project in your accounts as uncompleted work. You can use time records, costs or diaries to work out the percentage figure.
How do I keep records of fixed assets?
Fixed assets are concrete assets your business owns, like premises, vehicles, and IT equipment. In order to ensure your fixed assets records are current draw up a register of fixed assets. This should include lists of different categories of asset, dates these were purchased and their prices, descriptions and locations of items, a record of assets disposed of or sold during the previous year and other information (such as vendor contact details for IT equipment). Make sure to hold on to the proofs of purchase (keep receipts and invoices in a safe place).
Additionally, record depreciation of assets. Use an online calculator to calculate how much an asset has declined in value over the past year, and reduce its value to your business accordingly.
The depreciation cannot count as an expense against tax – rather expenditure on capital equipment is governed by your capital allowance, which will grant you a percentage of the value of the asset as an expense to compensate for depreciation in value.
How should I keep payroll and expenses records?
Get your accountant to check that calculations are correct. If you have been calculating PAYE and NI contributions wrong, you are held liable – not the employee. This is where up-to-date accounting software will really help. After you have a system in place, keep detailed records for every expense claim. If you draft a standard expenses claim form and require employees to attach receipts, this should be a fairly straightforward process.
Apply for a dispensation from HMRC. The P11D end-of-year expense reporting form is notoriously fiddly, but you may be able to get around filling it in. HMRC operates a dispensation scheme which removes the requirement for an employer to fill in this form, so long as they are satisfied that expenses claims are legitimate. Learn more here.
Though it may seem like a lot of work, keeping your accounts precise and up-to-date will save you a lot of headaches and potential legal trouble in the future, plus it will help you to manage your business’ cashflow more effectively.
For more information on how to keep track of your firm’s finances, check out our bookkeping and cashflow section here.