ACCOUNTING
Understanding your accounts All businesses need to prepare accounts, and whilst accountants exist to make this necessity easier for clients, all too often we hear the phrase “I’ll just sign them, I don’t understand what I’m reading anyway”.
Nikki Cairns Client Director There are some simple points, that when clarified, could help you to understand what you are signing. Business owners and managers should understand their financial picture in order that the information can be used to better plan for the future of the business through growth, succession, sale etc. These are as follows: � Profit and Loss Account. This is a
record of the income and expenses a business has incurred over a given time period, in the majority of cases this will be 12 months, and will show if there has been a profit or a loss made in that time. I n simple terms this is the revenue with the various costs subtracted, resulting in a net profit or loss. Most profit and loss accounts are initially compiled using the transactions that have gone through the business bank account.
Other items are then also brought into the accounts in order to be compliant with accounting legislation such as movements in prepayments or accruals. These are items that may have been either paid for within the accounting period but relate to another period or have been incurred but not yet invoiced. � Balance sheet. This is a snapshot
in time of the assets and liabilities of the business as at the end of the period that the profit and loss account covers. Assets are items that benefit a company economically, such as inventory, buildings, equipment and cash. They help a business manufacture goods or provide services, now and in the future. Liabilities are a company’s obligations—either money owed or services not yet performed. No matter your type of business entity, a set of accounts leads to a tax return and one of our most common questions is: “Why do my accounts show a loss but the tax computation shows a profit?”
The answer is differences between accounting and tax legislation and having to reconcile the two. Commonly this being depreciation and capital allowances. For accounts purposes assets are depreciated over a number of years which is determined by the accountant or the client and different rates are normally applied to different types of assets, and will have an adjusted year on year economic benefit on the balance sheet. However for tax, many assets qualify for allowances that mean they can be written off in full in their year of purchase or are subject to allowances that are at rates set by Government. Accountants have studied for years to gain the level of understanding that we have and, the learning never ends. We know that it is a complex area of your business so a good accountant would never mind you asking questions about anything in your accounts.
Contact Nikki for more information by emailing Nicola.cairns@randallpayne.co.uk or call 01242 776000. randall-payne.co.uk 15
