Introduction to financial accounts

There are two main forms of accounting information:

(1) Financial Accounts, and

(2) Management Accounts

Financial Accounts - A Definition

Financial accounts are concerned with classifying, measuring and recording the transactions of a business. At the end of a period (typically a year), the following financial statements are prepared to show the performance and position of the business:

Profit and Loss Account	Describing the trading performance of the business over the accounting period
Balance Sheet	Statement of assets and liabilities at the end of the accounting period (a "snapshot") of the business
Cash Flow Statement	Describing the cash inflows and outflows during the accounting period
Notes to the Accounts	Additional details that have to be disclosed to comply with Accounting Standards and the Companies Act
Directors' Report	Description by the Directors of the performance of the business during the accounting period + various additional disclosures, particularly in relation to directors' shareholdings, remuneration etc

Financial accounts are geared towards external users of accounting information. To answer their needs, financial accountants draw up the profit and loss account, balance sheet and cash flow statement for the company as a whole in order for users to answer questions such as:

- "Should I invest my money in this company?"

- "Should I lend money to this business?"

- "What are the profits on which this company must pay tax?"

Company Law Requirements for Financial Accounts

Every UK company registered under the Companies Act is required to prepare a set of accounts that give a true and fair view of its profit or loss for the year and of its state of affairs at the year end. Annual accounts for Companies Act purposes generally include:

- A directors’ report
- An audit report
- A profit and loss account
- A balance sheet
- A statement of total recognised gains and losses
- A cash flow statement
- Notes to the accounts

If the company is a "parent company", (in other words, the company also owns other companies - subsidiaries) then "consolidated accounts" must also be prepared. Again there are exceptions to this requirement (see consolidated accounts).

Comparative figures should also be given for almost all items and analysis given in the year end financial statements. Exceptions to this rule are given individually. For example, there is no requirement to give comparative figures for the notes detailing the movements in the year on fixed asset or reserves balances.