This applies to businesses with accounting periods starting on or after 1st January 2016. A new Financial Reporting Standard known as FRS 105 applies to these accounts. FRS 105 requires less information to be submitted to Companies House and HMRC about a company's performance compared to the previous reporting standards.
What makes up the year end FRS 105 accounts?
There are three main areas of the FRS 105 year end accounts. As a major stakeholder in the business, company directors sign these off for the use of company's shareholders. It also ensures compliance with HMRC and Companies House requirements.
This document shows the profit (or loss) you made for the period.
Statement of Financial Position
This is essentially a snapshot showing the value of a business. This is based on its assets, liabilities, capital, and reserves.
With the introduction of FRS 105, you now only need to provide basic information about transactions involving the company’s directors. The footnote is to the Statement of Financial Position.
What needs to be filed with Companies House and HMRC?
Small businesses (or micro-entities) must submit their FRS 105 accounts to Companies House and HMRC annually.
Companies House requires the submission of the FRS 105 accounts, but does not require the income statement (these are also known as filleted accounts). So the accounts that are publically available, are restricted to the Statement of Financial Position and footnotes.
HMRC requires the submission of the full set of FRS 105 accounts, including the Income Statement, Statement of Financial Position and footnotes. HMRC also needs your Corporation Tax Return (on form CT600). This is a stand-alone document that reflects the tax treatment of the figures in your accounts.
The CT600 form covers a period of 365 days, so if your accounts are for a period longer than 365 days (usually the year you incorporate) you’ll need to file two forms.
Reading and interpreting your year end accounts
In order to fully understand your year end accounts, it’s important to figure out the key accounting conventions and concepts.
True and Fair View
The reason for producing accounts is so that anyone can determine (with a decent degree of accuracy and reliability) the value and profit (or loss) of your company. Your accounts are presumed, in law, to give a true and fair view of the overall financial position and profit or loss.
All items must be proven to have a monetary value to be accounted for. So items such as goodwill (things like brand awareness) aren’t included in your accounts.
There is a high degree of judgement involved with preparing a set of accounts. Omissions or misstatements of important items in your accounts could be considered as material.
In laymen's terms, if you were to omit an item that could be considered fundamental to how the accounts are read (a high value fixed asset for example) then that could possibly influence the economic decisions of users of the accounts. The item you omit would be viewed as material. This often depends on the type of transaction and its size.
Accruals are adjustments for any expenditure that has not yet been recorded in the accounts (Accrued Expenses). For example, if your employee's earned a bonus in the year, but it isn’t due to be paid until the following financial year, you’ll need to adjust the year end accounts to include an accrual for the amount of that bonus.
This accounting principle is the assumption that your business will continue to trade for the foreseeable future.
If your business is not a going concern (meaning you won’t be trading after the end of the accounting period) then this will affect your accounts. You need to let us know so we can make the necessary adjustments.
The Income Statement
The Income Statement illustrates your business's financial performance for the period. It shows the profit or loss made over the last financial period (usually 12 months).
Your turnover is the amount of income your company receives through conducting business (the provision of goods and services) minus any trade discounts, before tax.
If you provide services to your client, but invoice them in the next accounting period, then we’ll have to make adjustments to your account.
Not all income is received from the sale of goods or services. Other income includes interest received from investments, Government grants, and any other miscellaneous income.
Cost of Raw Materials and Consumables
This figure shows the value of any raw materials used to produce the goods your business sells.
This figure includes salaries and wages, Director salaries, employer's NICs, staff training and welfare, Employer Pension Scheme Contributions, medical insurance contributions, Childcare Vouchers and Staff Benefits and expenses.
Depreciation and other amounts written off assets
Fixed assets value (assets that have a life of over 1 year) will be reduced over their expected lifespan. This amount is recorded as an expense in your Income Statement each year. The amount should also include any one-off reductions in value (impairment - such as flood damage) to the fixed asset, as well as any profit or loss made when you dispose of it.
This figure represents any other expenses not listed above.
This figure shows any Corporation Tax you owe to HMRC (if any).
Profit or Loss
For most people, this figure is the one to watch. It tells you how much profit the business made for the period, after tax. Or if you have incurred a loss.
Statement of Financial Position
The Statement of Financial Position (SoFP) provides a summary of your business's Share Capital, Total Assets, and Total Liabilities. These three areas of your SoFP allow people to understand what your business owns, what it owes to other people, and the amount invested by shareholders.
Called up Share Capital Not Paid
Called up share capital is the value of the shares that have already been issued to investors (i.e shareholders), but are due to be paid for at a later date. Called up means the business has issued a request for a portion (or all) of the unpaid balance. Technically, the demand for payment comes from the company's board of directors. The Balance Outstanding is the amount that shareholders have not paid on the balance sheet date.
These are assets which you expect to use for more than one year such as a car, computer, or any other machinery . Over time, these assets will reduce in value due to wear and tear and this reduction in value is accounted for through an annual depreciation charge. This charge is included as an expense in your Profit and Loss Account, and so, reduces the Fixed Asset Value on the Statement of Financial Position.
These are assets that can easily convert into cash within one year. This includes bank balances, amounts receivable from customers (debtors), stock, and any prepaid expenses. On your Year End, we check the amounts receivable to see if there are bad debts. If you have any bad debts, the Associated Debtors value on your balance sheet is reduced.
Prepayments and Accrued Income
Prepayments occur when you’ve paid a bill in this financial period that belongs (or partly belongs) in the next one. Accrued Income arises if you invoice a client after your year end when you have provided the goods or service before the end of your accounting period. Examples of both of these are shown below.
A good example of a prepayment is rent. Your year end is 30th April. On 5th April you pay three month’s rent in advance covering April, May, and June. You have to split the bill into two parts - one month (April) belongs in the current financial year, while two months (May and June) belong in the next financial year. The April part is included in your Income statement as an expense as it belongs to the current year. The May and June parts are included in the SoFP as a prepayment because they belong in the next financial year. At the end of April, the landlord effectively owes you two months rent because you have paid for rent that you have not yet used.
An example of accrued income would be work in progress for a client at the end of your company's year end. If your year end is March, but you didn’t invoice for the work you completed for the client until April, you include the invoice value in your March year end accounts.
These are costs that need to be paid within one year (such as day to day creditors or your corporation tax bill).
These are costs that need to be paid after one year (such as long-term loans or mortgages taken out by the business).
Provisions for Liabilities
A provision for a liability is made when an event has occurred, but the timing of any future liability is uncertain. For instance, if your business sold faulty goods and needed to compensate someone for replacements, you would need to make a provision for the future compensation payment (liability) even though you don’t know exactly when the claim will be.
Accruals and Deferred Income
Accruals are adjustments for any expenditure that has not yet been recorded in the accounts (Accrued Expenses). For example, your employee's earned a bonus in the year, but this isn’t due to be paid until the following financial year,you’ll need to adjust the year end accounts to include an accrual for the amount of that bonus.
Deferred income is an amount received by a company in advance of earning it. The amount unearned (and therefore deferred) as at the date of the accounts is included as a liability at the year end. An example of deferred income is a supplier paying you in advance for services you must provide at a later date.
Capital and Reserves
This is the money owed to the shareholders - the owners of the business. It is comprised of the amount of share capital paid, profit retained in the business, plus any reserves of money established for specific purposes (such as future investment).
Note: This figure always equals the total of the SoFP.
Footnote to the Statement of Financial Position
The following information needs to be provided as a footnote to the SoFP:
Advances, credit, and guarantees granted to directors
Financial commitments, guarantees, and contingencies