Page 3: Content of accounts
The best way to look at accounts is as a sort of shorthand for what is really going on in a company. The bare figures don’t conjure up the actual day-to- day activities of the organisation, but once you are reasonably familiar with the basic figure work you can begin to look at what lies behind it. The objective of financial accounting is to provide information about a business. This information is given in a set of accounts, which consists of two principal statements:
- The profit and loss account – a summary of the business’s transactions for a given period.
- The balance sheet - a statement of the financial position of the business at a given date (the end of the period covered by the profit and loss account).
Other information contained in the accounts includes an operating financial review, where management describe in words what has happened in the business during the year, a section on directors’ responsibilities and the opinion of the auditors.
The balance sheet gives a snapshot of a company’s financial position on one particular date - the last day of its financial year. Everything the company owned on this date and everything it owed on this date will be shown in the balance sheet, grouped under a number of different headings.
Profit and loss account
A profit and loss account shows the results of a company’s trading over the last financial period (i.e. the period between two balance sheets). Usually this means a year, although the year end date can be chosen by the company. December 31 and March 31 are popular, although it could be April 1 or November 5 etc. The profit and loss account shows the effect on the company’s revenue account of all the transactions over the past year.
The profit and loss account measures the profit or loss made on the goods or services sold during the period. It does not measure the cash flows into and out of the business. This is an essential difference. Cash flow is a vital part of the financial management of the business and is not dealt with here. To manage a business both profit and cash must be considered.