What are annual accounts?

What goes into annual accounts?

For a limited company, the accounts cover the accounting period ending on the company's accounting reference date. The profit and loss account summarises the year's trading; the balance sheet is the position on the last day; the notes explain the accounting policies and the figures that need it.

Small companies file a reduced version at Companies House — micro-entity or small-company accounts — which leaves out the profit and loss. The full accounts still have to be prepared for the shareholders and for HMRC, where they accompany the corporation tax return.

The accounts are not a separate exercise from the bookkeeping. They are the bookkeeping, summarised and adjusted for accruals, prepayments, depreciation and anything else the year-end requires. If the ledger is clean, the accounts are mostly already written.

A worked example

A two-person marketing company has a 31 March year end. Its ledger shows turnover of £142,000, direct costs of £58,000 and overheads of £51,000, giving a profit before tax of £33,000. Corporation tax at the current rate is deducted to reach profit after tax.

On 31 March the balance sheet shows a laptop and equipment at £6,200 after depreciation, trade debtors of £9,600, and £18,400 in the bank. Against that sit trade creditors of £7,900, VAT owed of £3,100, and the corporation tax due. What is left is the company's net assets.

The accounts are approved by the directors, filed at Companies House within nine months of the year end, and sent to HMRC with the corporation tax return. The filed version is public; the tax return is not.

Do sole traders need annual accounts?

Not in the formal sense. Nothing is filed at Companies House, and HMRC gets the figures through the Self Assessment return rather than a set of accounts. But the numbers on that return are the profit and loss for the year, so the exercise still happens — it just has no cover page.

Many sole traders prepare a simple set anyway, because lenders, landlords and mortgage brokers ask for them, and because a balance sheet is the only way to know what the business is worth.