When it comes to businesses, accounting refers to the information concerning the financial and/or economic events of the business. There are various sets of accounts that measure these activities, but normally they are broadly categorized into two. That is financial accounting and management account. The first one is prepared for external users while the second one is more aimed for internal users.
Companies’ Accounts and their Significance
The business accounts need to be accurately maintained and that is helped by the directors. For a day-to-day decision making, the company will need management accounting which can be kept away from the public. However, the company is under obligation legally to produce end of the year account reports for external scrutiny. These reports are also required to be submitted to the tax authorities to determine the company’s tax position.
The major use of financial accounts by the company is to be able to know the financial position of the business at any particular point in time. This is facilitated by the use of the two main types of financial accounting, namely the statement of income and retained earnings (this was formerly known as the profit and loss account) and the statement of financial position (formerly called the balance sheet) prepared at the end of the company’s reporting period.
For a company to know what resources it owns at a particular point, it needs the statement of financial position. From this report, the company is also able to know what it owes to other parties (that is its liabilities), how much the investment was and where the investments came from. This report has a tendency to change every time an accounting transaction takes place.
The statement of income and retained earnings offers
The statement of income and retained earnings offers the company with a future perspective. It provides a longer time picture of the company. It is opposite of what the statement of financial position does. It reveals what transactions took place at what time and what effects those transactions had. The major use of this financial statement is to measure the company’s sales revenue turnover or income against its expenses and costs.
Management accounting is majorly aimed at providing information to people inside the business entity such as employees, managers, owners, and auditors. The current financial position of the company provided by the management accounting act as a basis on which the company needs to run.
The end of year accounts is normally prepared at the end of a financial period which is 12 months. These reports must be revealed to the public as per the Companies Act. The end of year accounts includes the statement of income and retained earnings and statement of financial position accompanied by notes explaining each transaction. The deadline for submitting accounting statements by a company is normally nine months after the official year-end.
The modifications of Companies Act 2006
For small business entities, there are options to reduce disclosures to the public domain due to the modifications of the Companies Act 2006. Some of the changes that were made include
- Reduced number of notes accompanying the financial reports.
- Recognition and measure of transactions are based on the FRS 102 requirements.
- The profit and loss accounts changed to the statement of financial statement and retained earnings while the balance sheet became the statement of financial position.
- The companies become obliged to disclose the average number of employees in that period of accounting.