Studholme-Bell Limited

In order to become a Chartered Accountant, it takes years of studying and producing numerous accounts and taxation computations for a wide variety of businesses.  Although we understand the financial information, similar to reading or analysing a jigsaw puzzle and making sense of them, it is hard to explain in detail how you should read you accounts.

The basics of understanding your accounts are as follows:

Profit and loss account/Income and expenditure account

This should be the first page that you read, for limited companies this is located on the last page or two of the full financial statements, sole traders and partnerships it is just before the balance sheet.

The information that is gleamed from this account includes:

i)        Has the business made any money or not? – Profit or loss

ii)      Did business activity improve during the year? – Sales value

iii)    Compared to last year, has as much money as a percentage of cost been made?

iv)    General overheads – mostly fixed. This is the amount of profit that you need to make in a year before you are making money properly.

v)      Where did the money come from and in which areas did we spend it?

Balance Sheet

The balance sheet is usually located in the middle pages of the financial statements this is a statement that basically says what would happen if the business ceased to trade on a particular date (normally the year end).  Such information includes:

i)        Fixed assets – An estimate of what your assets are worth at a particular point in time eg. computer equipment, office furniture, motor vehicles, property, development costs, computer software and website costs.

ii)      Current assets – Where can we get money from quickly if we needed to eg. the bank account, customers outstanding, VAT refund, stock and work in progress.

iii)    Current liabilities – Where will the money go to first? Eg. suppliers, PAYE liability, corporation tax, VAT liability, Wages outstanding, bank overdraft, bank loan within 1 year and any expenses that have been incurred but the invoice had not been received by the balance sheet date.

iv)    Solvency – A business is usually solvent if the current assets are more than the current liabilities, this would result in surplus cash being available for longer term requirements.

v)      Provisions for liabilities and charges – Normally only shows the value of deferred tax. The difference between the allowances that have been claimed from the fixed assets and the amount of depreciation that has been charged in the accounts.  A liability will arise when the tax allowances claimed are greater than the depreciation charged in the accounts, since the asset was acquired. Basically this is tax that is payable in the future.

vi)    Longterm liabilities – These include bank lending, loans and mortgages and substantial directors loan accounts, items that are felt will not be repaid within the twelve months following the balance sheet date.

vii)  Shareholders funds – The amount that is due to the shareholders via shares and the balance of the profit and loss account after tax and dividends have been extracted.  The remaining value can then be distributed to the shareholders as and when a dividend is declared.  As long as this value is positive, this provides more confirmation that the business is in a good position, a negative value on the other hand is not good.

Confused? Please contact the team at Studholme-Bell who will be happy to help.