Accounts year end - what does it mean?
11th June 2018 by Jonathan Wingfield
As your business ‘year end’ approaches, especially if it’s your first, it can be confusing as to what this actually means, and what happens once your accountant has received your paperwork for the year. A business’ year end can be any date, and may depend on when your business started trading. Sole traders, partnerships and limited companies have differing rules around year end, which I won’t go into here but instead focus on the year end process itself.
Generally, a set of accounts will contain two key statements:
- A profit and loss account - this summarises the income and expenses for the year and calculates whether your business has generated a profit or a loss; and
- A balance sheet - which provides a summarised snapshot of the business’s financial position at a set point in time and consists of assets and liabilities. Assets represent money due to you and items which the business owns (for instance, computer equipment or a van). Liabilities are amounts owed by the business to others, so this could be amounts owed to suppliers or an outstanding loan balance for example.
As part of the process, your accountant will want to ensure that all income has been correctly declared in the year together with all expenses that have been incurred. This is easy when the sale (or income) was mid-year and all costs occurred to generate that sale follow quickly. Problems arise when you spend time, money and effort producing something in say year 1, but you don’t actually sell it until year 2. This is where the ‘matching principle’ is used. Costs incurred in this way are carried forward to year two by either including them in the closing valuation or prepayments. Then when the sale happens, these costs are charged to the profit and loss account to ‘match’ with the income. This is why your profit figure per your accounts differs to what you may have had in mind.
When getting close to your business year end date the timing of invoices and payments is also important. For example, you agree to have some repairs made on a machine you own before your year end, the bill then arrives two months later and you pay it, this all happens after the year end - so can it be included in your accounts now? The answer is yes - the work was completed before the year end and the cost is not directly linked to income, so it can be included as a creditor.
These adjustments are applied to all accounts and form the foundations of preparing good accounts. The more information you can provide your accountant to help with these aspects the better. So any notes on abnormal transactions, or even invoices you have received after the year end that may relate all help. Plus, don’t be afraid to ask, if you are unsure on what needs to be included, just ask - it is overall a much quicker (and therefore cheaper!) way of getting things right!
For more information please contact Jonathan direct.
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