Accounts

Interpreting Accounts

Key Accounting Documents

Public Limited Companies in the UK are required to publish their accounts

This will usually consist of three key accounting documents:

The Income Statement (Sometimes referred to as “Profit and Loss”)

The Balance Sheet (Sometimes referred to as “Statement of Financial Position”)

The Cash Flow Statement

The Income Statement

The income statement will summarise the trading that has taken place during a specific period

It will calculate whether the business has made a net profit or a net loss during the period

It is based upon the profit formula:

Profit = Total revenue – Total Costs

An Example

Money received from selling goods and services

Money spent providing the goods

and services sold (direct costs)

Profit or loss made before indirect costs are

taken off

The indirect costs, or expenses that the business has had to pay

Profit or loss available to the business after tax

The corporation tax the business

must pay

Profit or loss made before tax is taken

off

The profit or loss from trading

Costs or revenue from financial dealings

The Balance Sheet

May be referred to as “Statement of Financial Position”

The balance sheet is a snapshot of the assets and liabilities of a business

It shows the value of the resources within the business, and how they were financed

A balance sheet must “balance” since the resources that have been obtained must have been financed in some way

An Example

Fixed assets that the business has

obtained for long-term use, e.g.

premises

Items that the business has, but does not intend to

keep longer than 12 months. E.g. stock

The total value of things the business owns

Debts that the business intends to pay within the next 12 months

The funds contributed into

the business by the owners

The difference between total assets and total

liabilities

Long-term borrowing, e.g. a bank loan

The total value of what

a business owes

The Cash Flow Statement

Unlike a cash flow forecast, the cash flow statement is a factual document

It shows the flow of cash both into and out of the business

Most businesses will only publish this document in a summary form

An Example

The net amount of cash flowing into or out of a business from

its trading activity

The net amount of cash flowing into or

out of a business from its investment activity (i.e. buying

or selling fixed assets)

Figures in brackets show cash outflows

The total increase or

decrease in cash within the business

The net amount of cash flowing into or

out of a business from its activity with banks or shareholders