Understanding your limited company accounts and how to read them

Reading and understanding the accounts of a limited company can seem like a daunting task, especially if you’re unfamiliar with financial statements and accounting.

That said, don’t give up, writes Chris Bradley of The Accountancy Partnership, because there are lots of benefits to learning how to use limited company accounts. But first, what are they?!

What are limited company accounts? 

The transactions that go through your contractor business are recorded in your bookkeeping. But this can sometimes be a lot of information to digest!

To make things simpler, your company accounts summarise the last 12 months of activity, in a way which is quicker for busy IT contractors to compute. 

Once fully prepared, company accounts do two jobs: legal and informative  

On the compliance side of things, your limited company needs to submit accounts to Companies House. The accounts are made publicly available, so that anyone with an interest in your company can take a look. 

Apart from being a legal requirement, though, your company accounts are also a useful tool for reviewing and understanding how your business is performing, without needing to wade through tons of individual transactions.  

How to review accounts as a limited company director? 

Having a good grasp of basic accounting terminology will make the task of reviewing company accounts much more manageable. 

It’s more essential that you know the reporting deadlines for your company, notably: 

• Sending your accounts to Companies House 
• Submitting your Company Tax Return to HMRC 
• Paying your bill for Corporation Tax 

How do you prepare your company accounts? 

According to HMRC and Companies House regulations, your company accounts must include a balance sheet; a Profit and Loss statement (‘P&L’), notes about the accounts and a director’s report.

The only exception is if you are a ‘micro-entity’ which, for these purposes, is a business with a turnover of £632,000 or less, or which has £316,000 or less on its balance sheet and 10 employees or fewer. 

Company – or statutory – accounts must also meet the regulatory requirements of either the International Financial Reporting Standards or the new UK Generally Accepted Accounting Practice, which is the body of accounting standards published by the UK’s Financial Reporting Council. 

Balance sheets for limited company contractors

A balance sheet gives an indication of the financial health of your company at a specific point in time.  

It consists of two categories: ‘business assets’ and ‘liabilities’.

In essence, your balance sheet explains what the company owns, and what it’s owed. Assets can either be: 

• Fixed: Long-term assets such as land, factories, and vehicles 
• Current: Short-term assets such as stock, petty cash and other items kept in the business for less than a year. 

Liabilities is another term for a debt that needs to be repaid and this could be long-term (money which is not due for repayment within a year), or current (due within a year). Liabilities from HMRC would feature here.

Balance sheets must be signed by a director, whose name should also be printed on the document. 

Profit and loss accounts as a limited company

The profit and loss account shows the company’s sales, running costs, and the profit or loss made over the financial year, with a view to making the business’s total revenue and expenses clear. 

You can compare this information to understand how financially healthy your company really is.

For example, you might make lots of sales, but profits could still be low if you also have very high costs!

Notes on accounts 

Limited companies are also required to provide notes on their accounts, giving additional context and details about the data shown in the financial statements.  

How do I file my company’s accounts and tax returns? 

Accounts are submitted by you to Companies House, and tax returns are filed by you with HMRC, using online services or accounting software.  

You’ll need to have the sign-in details for your Government Gateway account, the company’s Unique Tax Reference (UTR) number, and company registration number. 

As the owner of the business, it’s your responsibility to make sure your accounts are submitted accurately and on time, but you can ask a financial adviser, accountant, or a tax adviser, to help you. 

Using your company accounts 

Regularly reviewing the financial statements that make up your company accounts will help you make much more efficient business decisions, based on hard facts and cold numbers! It’s also a good idea to compare these to previous periods, so you can track progress, set goals, and make more accurate forecasts for the future. Good luck!