Company accounts can be difficult to understand, but as a director, it’s important to spend some time familiarising yourself with the various aspects. In this blog, we’re letting you know how to understand your company accounts.
Company accounts are very important, and they can really help to unlock the story behind a business. When it comes to accounts, there is often a lot of complex terminology – we’re here to explain these terms so your accounts are easier to understand.
How to understand your company accounts
Turnover means the total sales that your company has made that year before any expenses are taken out.
Cost of sales
The term ‘cost of sales’ refers to all of the costs directly associated with producing whatever it is that you sell. This can include things like labour, materials, expenses, manufacturing expenses and more.
The gross profit refers to the amount of money left when you subtract the cost of sales from the turnover.
Profit and loss
The profit and loss calculation means gross profit minus all the other operating expenses. This can include rent, utilities, salaries, bonuses, subcontractors and more. This all needs to come off your gross profit.
A fixed asset is a long-term asset that you probably won’t be converting into cash within a year. Some examples include buildings, machinery, vehicles and more. Find out more about fixed and floating charges.
Your current assets are things that can be converted into cash within a year. Cash itself is a good example of a current asset. Another example is money that you have due from other people or companies. These are called debtors.
Debtors are people or companies that owe your company money. Be aware that you may also be named as a debtor on your company accounts. This is the case for directors who owe the company money through an overdrawn directors’ loan account.
A creditor is someone that you or your business owes money to. This can occur when you’ve taken credit with suppliers or others. Another example of this is HMRC, as you may owe VAT bills, corporation tax or PAYE bills. A creditor is anyone or company to whom you owe money to.
Dividends refer to a portion of the company’s profits that can be distributed to shareholders.
When you start trading, your director’s loan account opens up. Every credit that you make into the business goes as a credit on your directors’ loan. This can include startup capital or money that you’ve lent the business to buy equipment. Every time you put money into the business, it goes as a credit into your director’s loan.
In contrast, whenever you take money out of your business, it goes as a debit on your loan account. At the end of the year, your accountant will look at your accounts and declare a dividend out of the profits you’ve made, which will hopefully wipe out your director’s loan if it’s in debt.
If your director’s loan is still in debt after they have completed the accounts, you have an overdrawn director’s loan account. If it’s under £10,000, it’s not such a problem, but if it’s over this amount, you’ll have to pay S455 tax, which is charged at 32.5% if you don’t pay the loan back within nine months.
Understanding your accounts
As a director, it’s really important to understand these sections of company accounts. It’s a basic way of looking at them, but it gives you an idea of how a business is doing. This information can all be found on Companies House, which is useful as you can see the financial history of lenders and borrowers.
Don’t forget that accounts can be out of date. You may have just submitted accounts for the last 12 months, but you’ll likely know yourself that a lot can change in that time. For your own business, it’s a good idea to have some management software that allows you to keep track of your profits and losses. Keeping on top of the information within the software means that you can see how your business is performing easily.
We hope you have found this useful, don’t hesitate to contact us for support.
I'm Chris Worden, Managing Director at 1st Business Rescue. With over 7 years of experience, I help UK directors navigate the complex world of UK corporate insolvency. We offer free and independent advice to UK directors and advise them about what options may be available to them if their limited company starts to struggle.
I am passionate about helping other directors overcome their business challenges and get back on their feet, as I was once in the same position as them. I had a business that became insolvent, and the advice out there was confusing and overwhelming. I am here to provide honest and valuable advice to UK directors.
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