What Are Annual Accounts? Everything You Need to Know

What Are the Components of Annual Accounts?

There are a few important papers that make up annual accounts. Some are main financial statements, while others are annual accounts reports and accounts that back them up. Let’s make them easier to understand.

1. Core Financial Components

A few main statements make up most sets of annual accounts.

i. Income Statement

The income statement is often called the profit and loss account.

It shows:

• Sales (money made).
• Costs that come directly from things like materials.
• Costs that aren’t directly related to the business, like rent and software.
• The year’s profit or loss.

A simple thought can help here:

• What is left after costs is profit.
• When costs are higher than income, you lose money.

ii. Balance Sheet

The balance sheet shows what the company looked like on the last day of the financial year.

It includes:

• Assets are things that the company owns.
• Liabilities (what the company owes).
• Equity (the value left for owners).

The balance sheet in UK statutory accounts must have a director’s name on it and be signed by a director.

iii. Cash Flow Statement

A cash flow statement shows how money came in and went out.

It usually divides cash flow into:

• Day-to-day trading is an example of operating activities.
• Investing activities, like buying equipment.
• Activities that involve cash movement (loans, repayments).

This is worth noting: UK rules say that a lot of small and micro businesses don’t have to file as many forms. The size of your business and the reporting framework you use will determine the exact annual statements you need to include.

2. Other Key Components

Extra annual accounts reports may also be included in yearly accounts, depending on the size and type of the company.

i. Director’s Report

This is a brief annual accounts report from the directors about the year.

It could have:

• A review of business performance.
• Main risks.
• Plans for the future.

Companies House lets small businesses choose whether or not to send in the director’s annual accounts report and profit and loss account.

ii. Auditor’s Report

There is an auditor’s annual accounts report with your company’s audit if it needs one.

Many private limited companies do not need an audit, unless they meet audit rules or an audit is required by their governing documents or shareholders.

iii. Letter to Shareholders

Some businesses send a short letter to their shareholders. It’s more common in bigger companies or those that get money from investors.

It often explains results in simple terms, such as:

• What worked out well.
• What changed?
• What comes next?

iv. Management Discussion and Analysis (MD&A)

This is a more in-depth ‘plain-language’ explanation of the results.

It often includes:

• Why revenue changed.
• What caused the costs to change?
• What are the main risks?
• What management intends to do next?

Most small private companies do not include MD&A as a formal section, but a clear plain-language summary of results can still help.

v. Corporate Governance

Corporate governance is the system that tells a company what to do and how to do it.

In bigger companies, governance annual accounts reporting might include:

• The structure of the board.
• Rules and policies.
• Managing risk.

Smaller businesses may be able to keep this lighter, but good governance still helps cut down on mistakes and fraud.

How Do Account Types Vary by Company Size?

Not all businesses file the same kinds of accounts. The rules in the UK let you use different formats depending on the size and type of activity. These are the most common types of accounts you will see.

1. Full Statutory Accounts

The most detailed version is the full statutory accounts.

They are usually needed when a business doesn’t qualify for small or micro rules or when it decides to file full accounts.

Full accounts usually have:

• Account of profit and loss with more information.
• A balance sheet with all the information.
• Notes that explain the rules of accounting and important numbers.
• It might be a cash flow statement, depending on the framework.

2. Small Company Accounts

A company that meets the UK small company criteria is treated as small for reporting. The test is based on turnover, balance sheet total, and employee numbers. Check the current thresholds before filing, as they can change. 

You can do the following if your business is small:

• Use the exemption so that your company’s books don’t have to be checked.
• You can choose whether or not to send Companies House a copy of the director’s annual accounts report and the profit and loss account.
• Send Companies House your shortened accounts.

So, for many small companies, what the public sees on Companies House can be less detailed than what you prepare internally.

3. Micro-Entity Accounts

Micro-entities are even smaller than small businesses. UK Government official website says that a micro-entity must meet at least two of the following conditions:

• A turnover of less than £1 million.
• £500,000 or less on its balance sheet.
• Fewer than 10 people work there.

Micro-entities can make simpler accounts and may only send a simpler balance sheet to Companies House.

4. Dormant Accounts

A dormant company is one that doesn’t do any ‘significant’ business during the financial year. Dormant companies still have filing duties. Many people send Companies House dormant company accounts, which are easier to read. It’s better to ask an accountant if you’re not sure. Filing incorrectly can still lead to penalties.