Statutory accounts are a legal requirement that must be presented to both Companies House and HMRC. They are essential in the internal running of a business as they allow shareholders to understand how the company is performing.
Whilst larger organisations must file comprehensive statutory accounts, smaller and medium size businesses usually have a choice of what to file, which can make knowing what to submit more difficult.
In this blog we’ll provide answers to what are statutory accounts, and what they must contain, as well as providing information regarding abridged accounts for small businesses.
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What are statutory accounts?
Statutory accounts are financial reports usually prepared annually by Limited Companies. Their purpose is to report the financial actions the company has taken throughout the year.
The documents included in statutory accounts can vary depending on the size of the business. For example whereas larger companies will include profit and loss reports, balance sheets which reference the value of assets & liabilities, along with statements of equity, and cash flow statements, smaller businesses can file statutory accounts which are smaller and contain a simpler balance sheet, with the decision as to whether to include profit and loss reports left purely to the discretion of the business.
Statutory accounts are used both externally and internally, but the predominant reason for producing them is for the purpose of HMRC. Internally, statutory accounts will document annual financial information for the company’s directors and shareholders.
In summary, statutory accounts are:
- Formatted generically to ensure they are easy for both shareholders, HMRC and other users to understand.
- Mandatory for all limited companies and a legality requested by HMRC.
- Usually completed once a year, and prepared only for a specific time.
Statutory reports are invaluable for businesses because they aid business owners in understanding the operational running of the business. They also help to identify any significant financial adjustments that have been made such as depreciation or tax adjustments.
What is the difference between management accounts and statutory accounts?
The purpose of both management accounts and statutory accounts is to monitor financial activity, report on monetary successes and failures, and detail financial forecasts. However there are significant differences between the two, so they shouldn’t be confused with one another.
Statutory accounts are only produced at a company’s financial year end, and are mostly created for the purpose of informing HMRC and company shareholders of the businesses financial activity throughout the year.
On the other hand, management reports are solely created for internal decision making, meaning they’re not presented to HMRC, and are also rarely given to shareholders unless requested.
Organisations will also produce management account reports on a weekly, monthly or even quarterly basis, as opposed to only once a year.
In summary, the key differences to watch out for are:
- Management accounts are useful and highly recommended to help businesses with their internal decision making, however they are not mandatory. It is entirely up to the business whether they want to produce management accounts and how many times a year to do so. In contrast, statutory accounts are mandatory and must be produced annually.
- Statutory accounts serve as an overview of all the businesses financial activities throughout a year, whilst management accounts will drill down into the finer details in order to aid decision making. From a business perspective, a statutory account allows the business owner to see the end result of their businesses efforts, whilst a management account allows for an in-depth analysis of the businesses financial comings and goings.
- Statutory accounts and management accounts both help to review the businesses financial situation, but management accounts are more timely, often providing forecasts and the ability to plan for the future. Management accounts can be created with a specific purpose in mind, i.e a time frame or income/expenditure adjustments to achieve a goal. Statutory accounts meanwhile only provide a snapshot of the previous year, and planning a businesses financial future based on the results of a previous year is never a good idea.
- Management accounts don’t need to look presentable because they are used for internal reports only. Statutory accounts on the other hand must follow presentable guidelines because they will be sent to and viewed by HMRC.
What do statutory accounts contain?
1. The Company Information page
This page simply contains the businesses information and should include:
- The company name
- The registered company number
- The registered office address
- The names of the company directors
- The name of the business accountant.
2. A Directors’ report
Directors’ reports is mandatory and sets out the basis on which the statutory accounts have been prepared. It can detail the main financial activities of the business, its performance and future prospects, as well as information regarding any dividends that shareholders will be paid. Generally, the larger the company, the more information that will be disclosed in the Directors’ report.
The report should list the names of all directors present throughout the reporting period, and contain a brief overview of their responsibilities.
This section can be used to explain the businesses financial performance and any business decisions, as well as provide information regarding any significant events that have impacted the businesses balance sheet, e.g Brexit. This section can also contain a forecast for the next 12 months.
The report must be signed by a director and contain a statement confirming the report has been approved by the board.
Please note that small businesses who have a turnover of under £10.2 million or £5.1 million on their balance sheet and fewer than 50 employees do not have to provide a Directors report in their Statutory Accounts if they so wish.
3. The balance sheet
Balance sheets show the value of everything the company owns, and what it owes. It’s a snapshot of the business at a point in time – showing it’s assets and liabilities on a given day. Anything the business owes must be included in the balance sheet as this shows what is due to be paid.
A balance sheet should include figures for the current reporting year as well as the previous year, and make numbered references to explanatory notes featured in the Notes page.
The main items to include in a balance sheet are:
- Fixed assets
- Tangible assets
- Current assets
- Stocks
- Debtors
- Cash at bank and in hand
- Total current assets
- Creditors: amounts falling due within one year
- Net current assets (liabilities)
- Total assets less current liabilities
- Creditors
- Provision for liabilities
- Net assets
- Capital and reserves
- Called up share capital
- Profit and loss account
- Shareholders’ funds
The balance sheet must be signed by a director, and contain a statement confirming that it has been approved by the board.
4. Profit and loss account
A profit and loss account ultimately displays the businesses profits by calculating the sum of all its sales minus the business costs. The profit and loss account should state:
- The businesses turnover
- The cost of business sales
- Gross business profit
- The businesses operating profit
- Profit on ordinary business activities before taxation
- Tax on ordinary business activities
- Profit for the financial business year
In the profit and loss account, EBITDA, or Earnings Before Interest, Tax Depreciation and Amortisation is one of the most important figures to be aware of. Businesses can include an explanation regarding the depreciation, interest, value of fixed assets, tax and amortisation in the notes that are supplied alongside the account.
5. Cash Flow statement
The cash flow statement details the income and expenditure of a business. This could include money from operational activities, any returns on investments, tax charges, dividends paid and capital spending costs.
Cash Flow statements are a useful tool in determining how frugal a business is because it ultimately details how a business spends money.
Please note that cash flow statements are mandatory requirements in larger companies statutory accounts, but small businesses and micro-entities are exempt.
6. Notes to the accounts
Notes to the accounts are notes that are included in the statutory accounts to help explain the balances in the profit and loss or balance sheet. They are an opportunity to provide context regarding information detailed on the balance sheet or profit and loss account.
Notes must include statements of the accounting principles used by the business, as well as explain the basis of the preparation and the way in which the business represents its turnover and depreciation.
For example numbers added beside specific figures in the balance sheet may show whether money is owed to a financial institution or the taxman. In tangible assets more detail may be supplied regarding the cost of a new asset, or depreciation.
7. Company tax return
Alongside submitting complete statutory accounts to Companies House, a company tax return must also accompany the company accounts.
A Company Tax Return refers to the financial data that companies submit to HMRC each year in order to report on their income, losses, loans, and any other data relevant to their tax liabilities. Corporation Tax owed by businesses is then calculated using this information.
Statutory accounts for small businesses
Some companies do not need to file full statutory accounts and may not be required to supply certain reports. Three types of businesses are subject to different rules when it comes to annual accounts: small companies, micro-entities.
Small businesses
Small businesses are identified as such if they meet at least two of the following criteria:
- An annual turnover below £10.2 million
- A balance sheet showing £5.1 million or less
- Under 50 employees
Small businesses are able to send filleted accounts to Companies House in place of the full statutory accounts. Filleted accounts consist of a balance sheet, and less information about the company is made publicly available as no profit and loss is submitted.
Whether to include a directors report and profit and loss statement is left entirely at the discretion of the small business if filleted accounts are filed.
Micro-entities
Micro-entities are very small companies. For a smaller business to be classified as a micro-entity, the business must meet at least two of the following criteria:
- An annual turnover below £632,000
- A balance sheet displaying £316,000 or less
- Under 10 employees
Companies that are classified as micro-entities have the same exemptions applied to them as small businesses. They can submit micro entity accounts, simpler statutory accounts which comprise just a balance sheet and very little in the way of accounting notes.
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