COMPANY ACCOUNTS

The laws on limited liability companies date back to the mid-nineteenth century. Since then there have been a number of further Acts of Parliament governing company legislation. Companies are currently governed by the Companies Act 1985 (with its subsequent amending Acts and Statutory Instruments) which brings together all the regulations for the control of companies.

Limited companies are obliged by law to keep accounting records and to present annual accounts to the shareholders each year.

Furthermore, although a sole trader or partnership can present accounts in any format they wish, the disclosure of information in company accounts is set down by law. The accounts must include:

• a profit and loss account
• a balance sheet signed by a director
• an auditors’ report signed by the auditor (unless able to claim exemption – see below)
• a directors’ report signed by a director or the secretary of the company
• notes to the accounts.

The profit and loss account and balance sheet must be presented in a fixed format and companies also have to consider other rules set out in the Statements of Standard Accounting Practice (SSAPs) and Financial Reporting Standards (FRSs) issued by the main accountancy bodies. Certain types of company may also have to obey specialist regulations contained within other Acts of Parliament (for example, insurance broker accounts).

The fixed format of company accounts

The Companies Act 1985 states the layout that the annual accounts of a company must comply with. There are two balance sheet formats and four profit and loss account formats. The formats are as follows:

Balance sheet

Format 1 – Vertical layout

Format 2 – Horizontal layout

Profit and loss account

Format 1 – Vertical layout – with expenses classified by function (e.g. cost of sales, distribution costs)

Format 2 – Vertical layout – with expenses classified by type (e.g. raw materials, staff costs)

Format 3 – As Format 1 but in horizontal layout

Format 4 – As Format 2 but in horizontal layout

The horizontal layout uses one page to record the profit and loss expenditure and the facing page to record the income. In a similar manner one page of the balance sheet shows the liabilities of the business and the facing page shows the assets.

The more modern vertical layout shows the figures of the profit and loss account or the balance sheet in one vertical column and by carefully choosing the order of the items certain key figures can be disclosed to the user of the accounts.

Balance sheet format 1 and profit and loss formats 1 and 2 are reproduced in Appendix 3.

It will be appreciated that accounts prepared in this way reveal very little information. It is therefore usual for a more detailed profit and loss account to be prepared to help the management. As this management profit and loss account is not a statutory document there is no fixed format. However, a format similar to that used by sole traders and partnerships for their accounts is normally adopted.

Who else sees my company’s accounts?

All limited companies must file their accounts with the Registrar of Companies each year. In the case of private companies they must normally file the accounts within ten months of the end of their financial year. Public Limited Companies have a shorter period and must normally lodge their accounts with the Registrar within seven months of the year end. However, these time periods for filing accounts are currently under review and may be shortened. There are special rules that apply to new companies.

Once filed the accounts are on public record and can be inspected by anyone for the payment of a small fee. You can also obtain copies of the accounts via the Internet: see www.companieshouse.gov.uk There are, however, exemptions for small and medium-sized companies which are able to send in abbreviated accounts which put less information on public record.

Is my company a small or medium-sized company?

The Companies Act sets out the meaning of ‘small’ and ‘medium’ when they are applied to companies. The factors to take account of are the level of annual turnover, the average number of employees and the balance sheet total. The balance sheet total means the total of the fixed

and current assets. See Figure 40 for more details of the conditions. In each case the company has to meet at least two of the three conditions in the particular year although there can be complications if the company did not also meet the criteria in earlier years.

Preparing abbreviated accounts

All companies must prepare full accounts for presentation to the company’s members but as mentioned above small and medium-sized companies can send abbreviated accounts to the Registrar of Companies.

Small companies’ accounts delivered to the Registrar must contain:

• an abbreviated balance sheet
• selected notes to the accounts including
  • accounting policies
  • share capital
  • particulars of creditors payable in more than five years
  • the basis of any foreign currency transactions
• a special auditor’s report (unless exempt).

For medium companies the accounts must contain:

• a full balance sheet
• an abbreviated profit and loss account
• notes to the accounts
• a directors’ report
• a special auditor’s report.

The rules of disclosure are complex and the above only gives a brief outline of the requirements. If you are in doubt as to the information that you must provide then you should take professional advice.

Where the company takes advantage of the regulations permitting the filing of abbreviated accounts it must have a special auditor’s report confirming that the exemptions have been satisfied and the directors must make a statement at the foot of the balance sheet saying that they have relied upon the exemptions.

The audit report

Some companies will be required to appoint an auditor and have their accounts audited. It is the job of the auditor to report to the members (shareholders) of the company as to whether the accounts have been properly prepared taking notice of the appropriate accounting rules. The auditor must also report as to whether the accounts give a true and fair view of the state of the company’s affairs.

In order to arrive at their conclusion the auditor will carry out an examination of the records on a test basis to ensure that the accounts are not materially incorrect. This does not mean that the auditor will check every transaction or that the accounts have to be 100 per cent accurate: just that anyone looking at the accounts will be able to obtain a fair view of the state of the company’s affairs and will not be misled if they rely upon the figures. Very often, particularly with smaller companies, the auditor will also act as accountant to the company and they will prepare the accounts and deal with the necessary taxation matters.

Choosing an auditor

The auditor of your company must be a member of a recognised professional body and hold the relevant practising certificate so as to be eligible for appointment as a company auditor under the rules of that body. Under the Companies Act there are five recognised bodies:

• the Institute of Chartered Accountants in England and Wales
• the Institute of Chartered Accountants of Scotland
• the Institute of Chartered Accountants in Ireland
• the Chartered Association of Certified Accountants
• the Association of Authorised Public Accountants.

For the addresses of these organisations, see page 168.

Some companies are exempt from audit

Statutory Instrument 2004/16 revised the requirement for an audit and now the smallest companies, with a turnover of less than £5,600,000 can be exempted from the requirement of an audit subject to certain conditions. You should not, however, confuse this exemption with the definition of a small company as set out in the Companies Act. Some companies which qualify as small companies are nevertheless required to have their accounts audited.

There are a few classes of company which cannot be exempt from an audit. They are:

• parent or subsidiary companies
• insurance broker companies
• banking or insurance companies
• companies authorised under the Financial Services and Markets Act 2000
• public limited companies (PLCs)
• charitable companies with gross income of more than £250,000.

In addition, if the shareholders owning more than ten per cent of the issued share capital request an audit then the requirement cannot be waived.

If the company claims exemption from the audit requirements it must still prepare its accounts in accordance with the terms of the Companies Act and send them to the Registrar of Companies. In this case there must be a directors’ statement at the foot of the balance sheet stating amongst other things that:

• exemption from audit has been claimed
• the members have not requested an audit
• the directors acknowledge their responsibility for maintaining proper accounting records and preparing accounts based upon those records.

Limited Liability Partnerships

The accounts of Limited Liability Partnerships (LLPs) are prepared in much the same way as limited companies (see above) and they have the same disclosure regulations. The accounts must be filed on public record with the Registrar of Companies within the ten month time limit. If the business qualifies it may file abbreviated accounts and it may be exempted from audit in the same way as a limited company.

Getting professional help

As you will see from the notes above, the preparation of company accounts, which comply with all the requirements of the Companies Act and at the same time permit the maximum exemption from disclosure, can be highly complex. Some useful information can be obtained from Companies House (Central Enquiries 0870 33 33 636; Web site www.companieshouse.gov.uk.). However, unless you have time on your hands to study the detailed legislation, then it is suggested that you ask a professional accountant to prepare the accounts for you. There are notes in Chapter 12 on choosing an accountant.

SUMMARY

• Limited companies are obliged by law to maintain proper accounting records.
• The accounts of a limited company have to be prepared in accordance with a set format laid down by the Companies Act.
• In addition to the requirements of law there are other regulations that must be complied with (e.g. the Statements of Standard Accounting Practice).
• There is a requirement in law for the accounts of limited companies to be audited, subject to an exemption for smaller companies.
• A company must file its accounts with the Registrar of Companies annually.
• Small and medium-size companies can file abbreviated accounts with the Registrar of Companies.