Running your own business can be one of the most rewarding experiences, but it can also be quite stressful without the proper preparation. On top of ensuring that your business is a success, you need to comply with legislation and file your annual accounts correctly and on time.
All limited companies in the UK are legally required to prepare annual accounts every year alongside their tax return. But filing yearly accounts on time can be difficult, and in the last year, thousands of charities received late filing penalties from Companies House.
Keeping on top of your company’s annual accounts can be challenging, and many businesses choose to hire accountants to handle this process. If you have just started running your own business, you probably have many questions: What are annual accounts? When do I need to file accounts? Our guide will take you through everything you need to know about how to file company accounts and how to file them on time to avoid fines.
What Are Annual Accounts?
Annual accounts are a summary of an organisation’s financial activity throughout the financial year. They usually contain detailed information on:
- Company transactions
- Operating performance
- Financial positioning.
Annual accounts are also known as “financial accounts,” “company accounts” or “statutory accounts”. So if you come across any of these terms, they all mean annual accounts.
Limited companies are required to supply annual accounts to several places, such as:
- HM Revenue and Customs (HMRC)
- Companies House
- Company shareholders
- All holders of the company’s debentures
- Anyone who attends general meetings.
What’s Included in a Company’s Annual Accounts?
Your annual accounts provide detailed financial data about your company’s income, expenses, liabilities, assets and equity. Annual accounts usually include:
- A profit and loss account
- A balance sheet
- Notes and details about the accounts
- A report from the company director
- A report from an auditor.
To complete your company’s annual accounts, you will need to keep detailed financial and account records throughout the financial year. Companies House require you to keep certain records, such as:
- All income received
- All outgoing expenses
- Information on all goods and services bought and sold
- Details of all company assets and liabilities
- Mortgage and loan agreements
- Lease agreements
- Bank statements
- Details of any money owed to your business.
Profit and Loss Account
Your company’s profit and loss statement will include every transaction that took place over the financial year. It shows whether your business made a profit or loss over that accounting period and will consist of your company’s income with the cost of sales and expenses deducted. Business expenses can include:
- Mortgage or rental fees
- Utilities
- Interest
- Wages
- Pensions
- Tax and VAT.
Once outgoings are deducted from turnover, the remaining figure shows your profit or loss. At this stage, your shareholders will receive dividends. Any remaining profits after dividends are then available for reinvestment in your business.
Balance Sheet
Your company’s balance sheet is a financial statement that provides an overview of your business’s assets, liabilities and equity at the end of the financial year. It breaks down how much your company owns, is owed and how much you owe. This overview indicates the financial health of your business.
Assets include:
- Land, buildings and vehicles
- Petty cash, bank balances and receivables
- Machinery, equipment and furniture.
Liabilities include:
- Mortgages and loans
- Accounts payable
- Tax, payroll and pension payments.
Note to the Accounts
Notes to the accounts are supplementary information to support your business’s accounts. While some notes are legally required, others help to:
- Give a broader understanding of the company’s financial situation
- Clarify entries in the balance sheet or profit and loss account
- Give evidence on future performance estimates.
Directors’ Report
If you are the director or on the board of directors of a large business, you will need to produce a directors’ report. The report is detailed and includes a variety of summaries and analyses, such as:
- Name of all directors in that financial year
- Company performance analysis
- Financial positioning summary
- Description of principal business activities.
Larger companies generally use directors’ reports. Small companies and micro-entities are usually exempt from this section of annual accounts.
Auditor’s Report
An external auditor or chartered account carries out the auditor’s report. This report provides an independent evaluation of the company’s annual accounts. It will usually state:
- The responsibilities of company directors and the auditor
- That standard account practices were followed
- Whether the accounts have been prepared in accordance with generally accepted practice and with the Companies Act 2006
- A statement on whether or not the financial statements give an accurate view of the company.
Annual Accounts for Small Companies and Micro-Entities
In general, Companies House requires small businesses to file much simpler accounts. This means that small companies and micro-entities must provide less detailed financial information than larger businesses.
Annual Accounts for Small Businesses
Small businesses supply Companies House with abridged accounts. To qualify as a small company, companies must fit two of the following:
- Annual turnover is not more than £10.2 million
- The balance sheet total is not more than £5.1 million
- The number of employers is not more than 50
The abridged accounts contain:
- A simplified profit and loss account
- A simplified balance sheet
- Notes to the accounts
- A statement on the balance confirming that members have agreed to the preparation of the accounts
- An auditor’s report.
Small businesses are not required to send a directors’ report or the profit and loss account to Companies House.
Annual Accounts for Micro-Entities
Like small companies, a micro-entity is not required to send their annual accounts in the same detail as larger companies. To qualify as a micro-entity, businesses must fit two of the following:
- Annual turnover is not more than £632,000
- The balance sheet total is not more than £316,000
- The number of employers is not more than 10.
Micro-entity abbreviated accounts include the same documents as a small company without the statement of agreement from the members.
When Are My Annual Accounts Due?
All companies have to file their accounts at Companies House every year. There is no set date for annual accounts to be filed, as they are dependent on your company’s accounting reference date (ARD). Your ARD is also known as your company’s year end.
When you form a limited company, your financial year begins on the date of incorporation, and your ARD will be on the last day of the month you incorporated a year later. Your ARD will be the same every year.
For example, if you registered your company on the 15th of July, your ARD will be the 31st of July. Companies House allow businesses to change their ARD for the current financial year or the one previous.
Your first accounts will be due 21 months after registration with Companies House. Following the first year, you are expected to file annual accounts nine months after the end of your business’s financial year.
Failing to file your annual accounts by your company’s accounts filing deadline will result in late filing penalties. If you file less than a month after your deadline, the fine is £150. If your accounts are more than six months late, you can be fined £1,500.
How Do I File My Company Accounts?
Almost all businesses file their annual accounts online. While you can file your accounts in paper form, HMRC takes longer to process them physically. You will need to submit your annual accounts to Companies House and your yearly tax return to HMRC. You must file your tax return online unless you have a reasonable excuse.
Small companies and micro-entities may be able to use the Company Accounts and Tax Online (CATO) service, where you can submit your accounts data to both HMRC and Companies House at once. If you are filing your accounts yourself, this can make the process much simpler.
It is your choice whether you prepare your company’s annual accounts or hire an accountant to handle them. While many businesses prepare and file their accounts, most companies hire an accountant to manage their finances and provide professional advice.
There are several benefits to hiring an accountant to handle your accounts. An accountant will:
- Take away the stress of preparation
- Reduce the risk of any penalties
- Ensure you meet all legal requirements.
If you decide to hire an accountant, it’s essential to be aware that company directors are still legally responsible for making sure that the accounts are accurate.
Do you need advice on filing your annual accounts? Book a free consultation with an accountant to find out everything you need to know and how an accountant can help your business.
