What Are Statutory Accounts and How Do They Work? A Quick Overview
Although it is a legal requirement, preparing annual statutory accounts for your limited company can be a daunting task. We’ve gone back to the basics in this article to help you better understand why, even though this can be a pain, getting your statutory accounts right is also a must.
Statutory Accounts Basics
You have a choice in how you file your accounts as a small or medium business. You can submit a full set of accounts, also known as statutory or annual accounts, or an abridged set, which contains less detail but still meets Companies House and HMRC compliance requirements.
This article discusses the information that must be included in statutory accounts as well as the key numbers to keep an eye on.
Statutory accounts are necessary for your shareholders to understand how your company is performing and to keep your records up to date with Companies House.
A balance sheet, profit and loss account, cashflow statement, notes to the accounts, and a directors’ report, as well as a cover, contents, and company information pages, must be included in statutory accounts.
You must include a number of key figures, and if you know what to look for, you can even (sneakily but legally) check up on how your competitors are doing.
Statutory Accounts Breakdown
Company Information Page
Your company name and registered number, the address of your registered office, and the names of your directors and accountant should all be listed on this page. As simple as this sounds, double and triple check it before submission, as mistakes can cause problems you don’t need.
Your Directors’ Report (If Needed)
The directors’ report outlines your company’s main activities, as well as its performance and prospects, as well as any dividends that may be paid to shareholders.
The report includes a list of the directors who served during the reporting year, as well as a summary of their responsibilities.
You can use this section to reflect on the previous year and explain business conditions and financial performance, as well as any events that may have impacted the balance sheet. This can be followed by a look at the next 12 months’ prospects.
A director should sign the report, along with a statement that it has been approved by the board.
Smaller businesses with a turnover of £10.2 million or less, a balance sheet of £5.1 million or less, and 50 employees or fewer are exempt from filing a Directors’ Report in the Statutory Accounts.
Your Company Balance Sheet
A company balance sheet depicts the value of everything your company owns as well as what it owes, as well as what is due to be paid up until the end of the financial year covered by this set of accounts.
It includes figures for the current and previous years, as well as a numbered reference to any explanatory notes in the Notes page.
The following are usually the most important items to include:
- Current assets
- Tangible assets
- Fixed Assets
- Current Debtors
- Cash (both in the back and in hand)
- Creditors within the last year
- Total assets less current liabilities
- Net assets
- Capital and reserves
- Profit and loss account
- Any shareholders’ funds
A director should sign the balance sheet, along with a statement that it has been approved by the board.
The main numbers to watch when you or your shareholders review your accounts are those that show how much cash is available in the business.
Keep an eye out for trade debtors, or the money owed to you by your customers, as well as trade creditors, or the money owed to you by your suppliers.
If your customers owe you a lot of money, it will hurt your cash flow, so you should try to impose stricter payment terms. Similarly, you should try to negotiate the best terms with your suppliers.
Examine your short- and long-term debt, as well as the value and status of any loans. Debt is divided on the balance sheet between current creditors, who are owed money within the next 12 months, and longer-term borrowings, which, at the time of writing this, may include commercial loans and any repayable government grants or loans taken out during the pandemic.
Profit and Loss Statement
The profit and loss account calculates your profits by subtracting your costs from your sales. This section should include all the following:
- Cost of sales
- Operating profit
- Gross Profit
- Employee Turnover
- Profit on ‘ordinary activities’ before tax
- Tax paid on ‘ordinary activities’
The pre-tax profit, also known as EBITDA (earnings before interest, taxes, depreciation, and amortization), is one of the most important figures in this section.
In the notes to the accounts, you can – and should – explain depreciation, tax, interest, the value of fixed assets and amortisation, and intangible assets.
A Cashflow Statement
Larger companies must include a cashflow statement in their statutory accounts, but smaller businesses are exempt.
It can, however, be a useful tool for any business to use, regardless of size, because cash profit isn’t always the best indicator of a company’s health, as there are often other costs to consider.
The cashflow statement shows how much money comes in and goes out of a business. Money from operating activities, investment returns, tax charges, capital spending, and dividends paid are typically included.
It is a useful tool for determining how frugal a company is because it demonstrates in black and white just how money is spent. You must, however, also carefully consider information from the balance sheet to get a better idea of funds due in the future.
Notes to the Accounts
Notes to the accounts allow you to give the balance sheet or profit and loss account more context and detail. The notes must include a statement of the accounting principles you use, as well as the basis for preparation and how turnover and depreciation are represented.
You can show whether money is owed to a bank, a company, or the taxman by adding numbers to specific figures in the balance sheet or profit and loss account. You might also need to include more information under taxable fixed assets, such as the cost of a new asset, as well as depreciation and net book value.
You can categorize creditors into trade creditors, deferred income, taxes, and other creditors.
When to File Your Statutory Accounts
After registering with Companies House, you must file your first accounts 21 months later.
After that, you must file nine months after the end of your company’s fiscal year. Depending on how long you wait to file, you could be fined up to £1,500.
If you run a small business, you don’t have to file a full set of statutory accounts with Companies House. You can file an abridged version instead, but a full version must still be sent to shareholders and HMRC along with your company tax return.
Statutory accounts can be complicated and time-consuming, and making a mistake, even a small one can result in fines or worse. That’s why when in doubt, consult an expert rather than just hoping you’ve done it all right!