Financial accounts are a historical record of your business' performance over a past period - usually one year - for the benefit of external users such as shareholders, employees, suppliers, bankers and authorities.

Financial accounts normally include the following elements.

Profit and loss account

This measures your business' performance over a given period of time, usually one year.

It compares the income of your business against the cost of goods or services and expenses incurred in earning that revenue - see set up a profit and loss account for your business.

Balance sheet

This is a snapshot of your business' assets (what you own or are owed) and your liabilities (what you owe) on a particular day - eg the last day of your financial year - see balance sheets.

Cashflow statement

This shows how your business has generated and disposed of cash and liquid funds during the period under review. A cashflow statement is different from a cashflow forecast, which is used to predict the expected rises and falls in cashflow over the coming year - see cashflow management.

Statement of recognised gains and losses

This records all gains and losses since the previous set of accounts. For example, changes caused by currency fluctuations, property revaluation, profits earned by associates and joint ventures not included in the normal accounts.

Unincorporated businesses

Unincorporated businesses such as sole traders and partnerships are required by HM Revenue & Customs (HMRC) to maintain proper books and records to support annual income tax returns. These must be kept for a minimum of six years - see set up a basic record-keeping system.

For more information on what to include in a company's annual accounts, see Companies House annual returns and accounts.

Limited companies are obliged by law to prepare a set of financial accounts each year and to file a copy with Companies House:

• private companies must file accounts within 21 months of the business' formation, and within nine months of the end of each financial year thereafter
• public companies must file accounts within 18 months of the business' formation, and within six months of the end of each financial year thereafter

Read Companies House guidance on preparing and filing accounts.

There are statutory penalties for late or incorrect filing, for which the directors are liable. 

For more information, see Companies House annual returns and accounts.

Small companies

For micro-entity accounts, a company must meet at least two of the following criteria:

• turnover is no more than £1 million
• balance sheet total is no more than £500,000
• average number of employees is no more than ten

If your company is a micro-entity, you can:

• prepare simpler accounts that meet statutory minimum requirements
• send only your balance sheet with less information to Companies House
• benefit from the same exemptions available to small companies

Small companies must meet at least two of the following criteria:

• turnover is no more than £15 million
• balance sheet total is no more than £7.5 million
• average number of employees is no more than 50

If your company is small, you can:

• use the exemption so your company’s accounts do not need to be audited
• choose whether or not to send a copy of the director’s report and profit and loss account to Companies House
• send abridged accounts to Companies House

Medium-sized companies

A medium-sized company must meet at least two of the following criteria:

• annual turnover must not exceed £54 million
• the balance sheet total must not exceed £27 million
• the average number of employees must not exceed 250

Medium-sized accounts must include:

• a profit and loss account
• a balance sheet, showing the printed name and signature of a director
• notes to the accounts
• group accounts (if appropriate)

The accounts should be accompanied by:

• a directors’ report, showing the printed name of the approving secretary or director
• a strategic report
• an auditor’s report that includes the name of the registered auditor (unless the company is exempt from audit)

A medium-sized company must deliver all of the component parts of their accounts to Companies House.

Management accounts can help you make timely and meaningful management decisions about your business.

Different businesses will have different management accounting needs, depending on the business areas that are important to them. These can include:

• the sales process - such as pricing, distribution and debtors
• the purchasing process - such as stock records and creditors
• a fixed asset register - details of all fixed assets, including identification numbers, cost and date of purchase, etc
• employee records

There is no legal requirement to prepare management accounts, but it is hard to run a business effectively without them. Most companies produce them regularly - eg monthly or quarterly.

Management accounts analyse recent historical performance and usually include forward-looking elements such as sales, cashflow and profit forecasts. The analysis is usually performed against forecasts and budgets that have been produced at the start of the year - see budgets and business planning.

The information in management accounts is usually broken down so that the performance of different elements of the business can be measured. For example if a business has more than one sales outlet, there might be a separate report for each. There may also be a report produced to show how well a particular product has done across different outlets.

For businesses selling more than one product, it is advisable to provide a financial breakdown for each product category. This will allow you to ensure that profitable products are not subsidising those that are selling poorly, unless you intentionally promote loss leaders to attract further custom.

Uses of management accounting includes enabling you to:

• compare your accounts with original budgets or forecasts
• manage your resources better
• identify trends in your business
• highlight variations in your income or spending which may require attention

They should be used for the following:

Record keeping

• recording business transactions
• measuring results of financial changes
• projecting financial effects of future transactions
• preparing internal reports in a user-friendly format

Planning and control

• collecting cash
• controlling stocks
• controlling expenses
• co-ordination and monitoring of strategy/performance
• monitoring gross margins

Decision making

• using cost information for pricing, capital investment and marketing
• evaluating market and product profitability
• evaluating the financial effect of strategies and plans

It's important that your accounts are accurate and up-to-date. Your accounts should be backed up with full and detailed records of all business income and expenditure, such as receipts, invoices and purchase orders, payments in and out, etc. 

Why you should keep records and documents

Following careful record keeping procedures can also help you with tax returns and prevent fraud or theft. Using a good record keeping system will help you to:

• track expenses, debts and creditors
• apply for additional funding
• save time and accountancy costs
• pay tax, accurately and on time, avoiding penalties
• apply for and receive the correct amount of benefits or credits

If you are starting a new business it is essential that you get a proper record keeping system in place immediately.

You can use various storage methods to keep records as long as they:

• show all information contained within a document
• allow information to be presented in a readable format

You should try to keep all original documents, and must keep any which show that tax has been deducted - eg your end of year certificate for PAYE (form P60).

See set up a basic record-keeping system.

Detailed and up-to-date records will help you comply with tax legislation as you can be penalised for:

• not keeping adequate records
• failing to keep records for required periods of time
• inaccurate tax returns

Analytical accounting tools

Analysing your financial accounts enables you to compare your performance against previous years and with its competitors.

Ratios enable you to quickly compare relative values - eg two items on the balance sheet.

Ratios are often split into the following areas of common control:

• liquidity ratios - measure solvency and short-term survival prospects
• capital structure ratios - measure the adequacy of owners' funding in relation to long-term debt
• activity and efficiency ratios - measure the operating efficiency of the business in non-financial terms
• profitability ratios - measure overall profitability and how well the business is using its assets and covering overhead costs

See balance sheets.

False accounting is fraudulent and usually occurs when a business or employee:

• deliberately records false financial information
• changes, defaces or destroys records
• exaggerates the business' assets or understates its liabilities

In this way, an employee who adds only a few pounds to an expenses claim could constitute false accounting, even though it might not seriously affect your finances. More serious fraud could mean that your business suffers major financial losses, or that it has been trading while insolvent.

What to do if you think an employee has been falsifying accounts

You should immediately report false accounting to Report Fraud, who may then pass it to the police to investigate. Your business can also take action to recover any losses if an employee was involved.

To work out how much your business has lost and how the fraud occurred, you might need to use an accountant or auditor. 

You may suspend an employee while the investigations are carried out, but only if their contract of employment allows it - see disciplinary procedures, hearings and appeals.

Reduce the risk of false accounting

Common sense and sound business practices will help you to protect your business against the risks of theft and fraud. For example, you should:

• maintain thorough recruitment procedures and carry out pre-employment checks
• put in place a whistle-blowing policy and try to encourage a culture of fraud awareness across the business
• have a 'zero tolerance' approach to employee theft and fraud and clearly state this in employees' terms and conditions
• restrict access to financial information and divide duties so that no single person is responsible for all accounts
• check bank statements and other accounts - look into any unusual transactions or discrepancies, and audit processes and procedures regularly
• commission a registered auditor to conduct an external audit to examine the business' financial report to check that they show a true and fair view of the business' financial performance
• undertake an assurance report to review the entire business' accounts, but with specific aspects checked where necessary

Financial accounts are a historical record of your business' performance over a past period - usually one year - for the benefit of external users such as shareholders, employees, suppliers, bankers and authorities.

Financial accounts normally include the following elements.

Profit and loss account

This measures your business' performance over a given period of time, usually one year.

It compares the income of your business against the cost of goods or services and expenses incurred in earning that revenue - see set up a profit and loss account for your business.

Balance sheet

This is a snapshot of your business' assets (what you own or are owed) and your liabilities (what you owe) on a particular day - eg the last day of your financial year - see balance sheets.

Cashflow statement

This shows how your business has generated and disposed of cash and liquid funds during the period under review. A cashflow statement is different from a cashflow forecast, which is used to predict the expected rises and falls in cashflow over the coming year - see cashflow management.

Statement of recognised gains and losses

This records all gains and losses since the previous set of accounts. For example, changes caused by currency fluctuations, property revaluation, profits earned by associates and joint ventures not included in the normal accounts.

Unincorporated businesses

Unincorporated businesses such as sole traders and partnerships are required by HM Revenue & Customs (HMRC) to maintain proper books and records to support annual income tax returns. These must be kept for a minimum of six years - see set up a basic record-keeping system.

For more information on what to include in a company's annual accounts, see Companies House annual returns and accounts.

Limited companies are obliged by law to prepare a set of financial accounts each year and to file a copy with Companies House:

• private companies must file accounts within 21 months of the business' formation, and within nine months of the end of each financial year thereafter
• public companies must file accounts within 18 months of the business' formation, and within six months of the end of each financial year thereafter

Read Companies House guidance on preparing and filing accounts.

There are statutory penalties for late or incorrect filing, for which the directors are liable. 

For more information, see Companies House annual returns and accounts.

Small companies

For micro-entity accounts, a company must meet at least two of the following criteria:

• turnover is no more than £1 million
• balance sheet total is no more than £500,000
• average number of employees is no more than ten

If your company is a micro-entity, you can:

• prepare simpler accounts that meet statutory minimum requirements
• send only your balance sheet with less information to Companies House
• benefit from the same exemptions available to small companies

Small companies must meet at least two of the following criteria:

• turnover is no more than £15 million
• balance sheet total is no more than £7.5 million
• average number of employees is no more than 50

If your company is small, you can:

• use the exemption so your company’s accounts do not need to be audited
• choose whether or not to send a copy of the director’s report and profit and loss account to Companies House
• send abridged accounts to Companies House

Medium-sized companies

A medium-sized company must meet at least two of the following criteria:

• annual turnover must not exceed £54 million
• the balance sheet total must not exceed £27 million
• the average number of employees must not exceed 250

Medium-sized accounts must include:

• a profit and loss account
• a balance sheet, showing the printed name and signature of a director
• notes to the accounts
• group accounts (if appropriate)

The accounts should be accompanied by:

• a directors’ report, showing the printed name of the approving secretary or director
• a strategic report
• an auditor’s report that includes the name of the registered auditor (unless the company is exempt from audit)

A medium-sized company must deliver all of the component parts of their accounts to Companies House.

Management accounts can help you make timely and meaningful management decisions about your business.

Different businesses will have different management accounting needs, depending on the business areas that are important to them. These can include:

• the sales process - such as pricing, distribution and debtors
• the purchasing process - such as stock records and creditors
• a fixed asset register - details of all fixed assets, including identification numbers, cost and date of purchase, etc
• employee records

There is no legal requirement to prepare management accounts, but it is hard to run a business effectively without them. Most companies produce them regularly - eg monthly or quarterly.

Management accounts analyse recent historical performance and usually include forward-looking elements such as sales, cashflow and profit forecasts. The analysis is usually performed against forecasts and budgets that have been produced at the start of the year - see budgets and business planning.

The information in management accounts is usually broken down so that the performance of different elements of the business can be measured. For example if a business has more than one sales outlet, there might be a separate report for each. There may also be a report produced to show how well a particular product has done across different outlets.

For businesses selling more than one product, it is advisable to provide a financial breakdown for each product category. This will allow you to ensure that profitable products are not subsidising those that are selling poorly, unless you intentionally promote loss leaders to attract further custom.

Uses of management accounting includes enabling you to:

• compare your accounts with original budgets or forecasts
• manage your resources better
• identify trends in your business
• highlight variations in your income or spending which may require attention

They should be used for the following:

Record keeping

• recording business transactions
• measuring results of financial changes
• projecting financial effects of future transactions
• preparing internal reports in a user-friendly format

Planning and control

• collecting cash
• controlling stocks
• controlling expenses
• co-ordination and monitoring of strategy/performance
• monitoring gross margins

Decision making

• using cost information for pricing, capital investment and marketing
• evaluating market and product profitability
• evaluating the financial effect of strategies and plans

It's important that your accounts are accurate and up-to-date. Your accounts should be backed up with full and detailed records of all business income and expenditure, such as receipts, invoices and purchase orders, payments in and out, etc. 

Why you should keep records and documents

Following careful record keeping procedures can also help you with tax returns and prevent fraud or theft. Using a good record keeping system will help you to:

• track expenses, debts and creditors
• apply for additional funding
• save time and accountancy costs
• pay tax, accurately and on time, avoiding penalties
• apply for and receive the correct amount of benefits or credits

If you are starting a new business it is essential that you get a proper record keeping system in place immediately.

You can use various storage methods to keep records as long as they:

• show all information contained within a document
• allow information to be presented in a readable format

You should try to keep all original documents, and must keep any which show that tax has been deducted - eg your end of year certificate for PAYE (form P60).

See set up a basic record-keeping system.

Detailed and up-to-date records will help you comply with tax legislation as you can be penalised for:

• not keeping adequate records
• failing to keep records for required periods of time
• inaccurate tax returns

Analytical accounting tools

Analysing your financial accounts enables you to compare your performance against previous years and with its competitors.

Ratios enable you to quickly compare relative values - eg two items on the balance sheet.

Ratios are often split into the following areas of common control:

• liquidity ratios - measure solvency and short-term survival prospects
• capital structure ratios - measure the adequacy of owners' funding in relation to long-term debt
• activity and efficiency ratios - measure the operating efficiency of the business in non-financial terms
• profitability ratios - measure overall profitability and how well the business is using its assets and covering overhead costs

See balance sheets.

False accounting is fraudulent and usually occurs when a business or employee:

• deliberately records false financial information
• changes, defaces or destroys records
• exaggerates the business' assets or understates its liabilities

In this way, an employee who adds only a few pounds to an expenses claim could constitute false accounting, even though it might not seriously affect your finances. More serious fraud could mean that your business suffers major financial losses, or that it has been trading while insolvent.

What to do if you think an employee has been falsifying accounts

You should immediately report false accounting to Report Fraud, who may then pass it to the police to investigate. Your business can also take action to recover any losses if an employee was involved.

To work out how much your business has lost and how the fraud occurred, you might need to use an accountant or auditor. 

You may suspend an employee while the investigations are carried out, but only if their contract of employment allows it - see disciplinary procedures, hearings and appeals.

Reduce the risk of false accounting

Common sense and sound business practices will help you to protect your business against the risks of theft and fraud. For example, you should:

• maintain thorough recruitment procedures and carry out pre-employment checks
• put in place a whistle-blowing policy and try to encourage a culture of fraud awareness across the business
• have a 'zero tolerance' approach to employee theft and fraud and clearly state this in employees' terms and conditions
• restrict access to financial information and divide duties so that no single person is responsible for all accounts
• check bank statements and other accounts - look into any unusual transactions or discrepancies, and audit processes and procedures regularly
• commission a registered auditor to conduct an external audit to examine the business' financial report to check that they show a true and fair view of the business' financial performance
• undertake an assurance report to review the entire business' accounts, but with specific aspects checked where necessary

Financial accounts are a historical record of your business' performance over a past period - usually one year - for the benefit of external users such as shareholders, employees, suppliers, bankers and authorities.

Financial accounts normally include the following elements.

Profit and loss account

This measures your business' performance over a given period of time, usually one year.

It compares the income of your business against the cost of goods or services and expenses incurred in earning that revenue - see set up a profit and loss account for your business.

Balance sheet

This is a snapshot of your business' assets (what you own or are owed) and your liabilities (what you owe) on a particular day - eg the last day of your financial year - see balance sheets.

Cashflow statement

This shows how your business has generated and disposed of cash and liquid funds during the period under review. A cashflow statement is different from a cashflow forecast, which is used to predict the expected rises and falls in cashflow over the coming year - see cashflow management.

Statement of recognised gains and losses

This records all gains and losses since the previous set of accounts. For example, changes caused by currency fluctuations, property revaluation, profits earned by associates and joint ventures not included in the normal accounts.

Unincorporated businesses

Unincorporated businesses such as sole traders and partnerships are required by HM Revenue & Customs (HMRC) to maintain proper books and records to support annual income tax returns. These must be kept for a minimum of six years - see set up a basic record-keeping system.

For more information on what to include in a company's annual accounts, see Companies House annual returns and accounts.

Limited companies are obliged by law to prepare a set of financial accounts each year and to file a copy with Companies House:

• private companies must file accounts within 21 months of the business' formation, and within nine months of the end of each financial year thereafter
• public companies must file accounts within 18 months of the business' formation, and within six months of the end of each financial year thereafter

Read Companies House guidance on preparing and filing accounts.

There are statutory penalties for late or incorrect filing, for which the directors are liable. 

For more information, see Companies House annual returns and accounts.

Small companies

For micro-entity accounts, a company must meet at least two of the following criteria:

• turnover is no more than £1 million
• balance sheet total is no more than £500,000
• average number of employees is no more than ten

If your company is a micro-entity, you can:

• prepare simpler accounts that meet statutory minimum requirements
• send only your balance sheet with less information to Companies House
• benefit from the same exemptions available to small companies

Small companies must meet at least two of the following criteria:

• turnover is no more than £15 million
• balance sheet total is no more than £7.5 million
• average number of employees is no more than 50

If your company is small, you can:

• use the exemption so your company’s accounts do not need to be audited
• choose whether or not to send a copy of the director’s report and profit and loss account to Companies House
• send abridged accounts to Companies House

Medium-sized companies

A medium-sized company must meet at least two of the following criteria:

• annual turnover must not exceed £54 million
• the balance sheet total must not exceed £27 million
• the average number of employees must not exceed 250

Medium-sized accounts must include:

• a profit and loss account
• a balance sheet, showing the printed name and signature of a director
• notes to the accounts
• group accounts (if appropriate)

The accounts should be accompanied by:

• a directors’ report, showing the printed name of the approving secretary or director
• a strategic report
• an auditor’s report that includes the name of the registered auditor (unless the company is exempt from audit)

A medium-sized company must deliver all of the component parts of their accounts to Companies House.

Management accounts can help you make timely and meaningful management decisions about your business.

Different businesses will have different management accounting needs, depending on the business areas that are important to them. These can include:

• the sales process - such as pricing, distribution and debtors
• the purchasing process - such as stock records and creditors
• a fixed asset register - details of all fixed assets, including identification numbers, cost and date of purchase, etc
• employee records

There is no legal requirement to prepare management accounts, but it is hard to run a business effectively without them. Most companies produce them regularly - eg monthly or quarterly.

Management accounts analyse recent historical performance and usually include forward-looking elements such as sales, cashflow and profit forecasts. The analysis is usually performed against forecasts and budgets that have been produced at the start of the year - see budgets and business planning.

The information in management accounts is usually broken down so that the performance of different elements of the business can be measured. For example if a business has more than one sales outlet, there might be a separate report for each. There may also be a report produced to show how well a particular product has done across different outlets.

For businesses selling more than one product, it is advisable to provide a financial breakdown for each product category. This will allow you to ensure that profitable products are not subsidising those that are selling poorly, unless you intentionally promote loss leaders to attract further custom.

Uses of management accounting includes enabling you to:

• compare your accounts with original budgets or forecasts
• manage your resources better
• identify trends in your business
• highlight variations in your income or spending which may require attention

They should be used for the following:

Record keeping

• recording business transactions
• measuring results of financial changes
• projecting financial effects of future transactions
• preparing internal reports in a user-friendly format

Planning and control

• collecting cash
• controlling stocks
• controlling expenses
• co-ordination and monitoring of strategy/performance
• monitoring gross margins

Decision making

• using cost information for pricing, capital investment and marketing
• evaluating market and product profitability
• evaluating the financial effect of strategies and plans

It's important that your accounts are accurate and up-to-date. Your accounts should be backed up with full and detailed records of all business income and expenditure, such as receipts, invoices and purchase orders, payments in and out, etc. 

Why you should keep records and documents

Following careful record keeping procedures can also help you with tax returns and prevent fraud or theft. Using a good record keeping system will help you to:

• track expenses, debts and creditors
• apply for additional funding
• save time and accountancy costs
• pay tax, accurately and on time, avoiding penalties
• apply for and receive the correct amount of benefits or credits

If you are starting a new business it is essential that you get a proper record keeping system in place immediately.

You can use various storage methods to keep records as long as they:

• show all information contained within a document
• allow information to be presented in a readable format

You should try to keep all original documents, and must keep any which show that tax has been deducted - eg your end of year certificate for PAYE (form P60).

See set up a basic record-keeping system.

Detailed and up-to-date records will help you comply with tax legislation as you can be penalised for:

• not keeping adequate records
• failing to keep records for required periods of time
• inaccurate tax returns

Analytical accounting tools

Analysing your financial accounts enables you to compare your performance against previous years and with its competitors.

Ratios enable you to quickly compare relative values - eg two items on the balance sheet.

Ratios are often split into the following areas of common control:

• liquidity ratios - measure solvency and short-term survival prospects
• capital structure ratios - measure the adequacy of owners' funding in relation to long-term debt
• activity and efficiency ratios - measure the operating efficiency of the business in non-financial terms
• profitability ratios - measure overall profitability and how well the business is using its assets and covering overhead costs

See balance sheets.

False accounting is fraudulent and usually occurs when a business or employee:

• deliberately records false financial information
• changes, defaces or destroys records
• exaggerates the business' assets or understates its liabilities

In this way, an employee who adds only a few pounds to an expenses claim could constitute false accounting, even though it might not seriously affect your finances. More serious fraud could mean that your business suffers major financial losses, or that it has been trading while insolvent.

What to do if you think an employee has been falsifying accounts

You should immediately report false accounting to Report Fraud, who may then pass it to the police to investigate. Your business can also take action to recover any losses if an employee was involved.

To work out how much your business has lost and how the fraud occurred, you might need to use an accountant or auditor. 

You may suspend an employee while the investigations are carried out, but only if their contract of employment allows it - see disciplinary procedures, hearings and appeals.

Reduce the risk of false accounting

Common sense and sound business practices will help you to protect your business against the risks of theft and fraud. For example, you should:

• maintain thorough recruitment procedures and carry out pre-employment checks
• put in place a whistle-blowing policy and try to encourage a culture of fraud awareness across the business
• have a 'zero tolerance' approach to employee theft and fraud and clearly state this in employees' terms and conditions
• restrict access to financial information and divide duties so that no single person is responsible for all accounts
• check bank statements and other accounts - look into any unusual transactions or discrepancies, and audit processes and procedures regularly
• commission a registered auditor to conduct an external audit to examine the business' financial report to check that they show a true and fair view of the business' financial performance
• undertake an assurance report to review the entire business' accounts, but with specific aspects checked where necessary