Preparing financial statements: limited companies and not-for-profit…
Preparing financial statements: limited companies and not-for-profit organisations
A limited company is a legal entity separate from its owners, unlike a sole trader
The ownership and management of limited companies are usually separate, except in the case of small companies or family companies. Owner's are shareholders and the management are the officers and employees of the company
The content and presentation of company financial statements are usually governed by company law in the local jurisdictions
Limited company profit and loss account
The profit and loss account for a company is less detailed than for a sole trader. It is no less informative but is governed by the Companies Act 2006
Trading account is identical to that of a sole trader, but thereafter differences arise
Distribution costs are the costs associated with the distribution of a company's goods/services to its customers or marketplace
The administration expenses are all the general operational expenses incurred in the daily operation of the company, for example staff costs, office expenses, and printing, postage and stationery. The administration expenses may be regarded as the company's overheads.
Other operating income is revenue income that arises from non -core activities such as the disposal of a fixed asset. For example a railway company may earn income from the letting of properties that t owns. The rental income may be classified as other operating income because the company's core business is the operating of railways
Income earned from savings and investments activities are separated and they are shown before taxable or pre tax profit
Investment income is derived from a company's investment in securities or another company's shares
Net interest is the difference between bank interest receivable and payable
After the deduction of corporation tax, a company is left with its post-tax profit. However this is also the start of the appropriation account. this is the amount of profit that a company can choose to use at its discretion
The post tax profit may be applied in four general ways:
Reinvest for the future
Distribute to shareholders
Set aside provisions for known or unknown contingent liabilities
Transfer to general reserves until a later date
The residual after the appropriation is the profit retained for the year. This is a measure of how much a company has let after payment to every other stakeholder of their share of the turnover.
The retained profit for the year is transferred to the revenue reserve on the balance sheet
Limited company balance sheet
Is identical in structure to a sole trader's balance sheet except the use of the terms: creditors due within 12 months, creditors due over 12 months and the lower section
Creditors due within 12 months has replaced current liabilities
Creditors due over 12 months has replaced long-term liabilities
The lower section of a company balance sheet is the internal financing of the company. The main elements are the share capital, revenue reserves and capital reserves.
The capital of a limited company is divided into shares and their owners are shareholders of the company
The share capital is the monetary value of the shares purchased and fully paid for by the shareholders
Revenue reserves are the accumulation of trading retained profit that a company may use for internal use or distribution to its shareholders in the future
Capital reserves are reserves that a company has accumulated from non-trading activity for use by the company but that are non-distributable to the shareholders.
The shareholders' funds represent the capital owned by the shareholders, which is akin to the sole trader's funds in the balance sheet of the sole trader
Limited Company Financial Statements FRS 102
From January 2015, all UK non-listed companies (excluding small companies as defined by Companies Act 2006) are required to adopt Financial Reporting Standard (FRS) 102 when producing their financial statements
This is one of the three new standards that replaces the former UK GAAP (Generally Accepted Accounting Practice) and which seeks to align UK financial reporting with the International Financial Reporting Standards (IFRS).
The outcome of the adoption and application of FRS 102 is a change in the terminology of the the financial statements. The profit and loss account will become known as an 'income statement' and the balance sheet will become as a 'statement of financial position' in line with IFRS
FRS 102 permits the profit and loss account and statement of recognised gains and losses to be combined into one statement and this will be called a 'statement of comprehensive income'
The financial statement terms used in the UK are derived from the Companies Act 2006 and therefore it is likely that for the foreseeable future, some companies will maintain the traditional names of 'profit and loss account' and 'balance sheet. This lack of enforced changeover is further supported by FRS 102 paragraph 3.22 which states 'an entity may use titles for the financial statements other than those sued in this FRS as long as they are not misleading'
Public limited company financial statements
The content and structure of financial statements for public limited companies are determined by International Account Standard (IAS) 1, 'Presentation of Financial Statements'
IAS 1 prescribes the basis for the presentation of general purpose financial statements, to ensure comparability with the entity's financial statements of previous periods and the financial statements of other entities
A complete set of financial statements as per IAS 1 is as follows
a) a statement of financial position as at the end of the period
b) a statement of comprehensive income for the period
c) a statement of changes in equity for the period
d) a statement of cash flows for the period
e) notes, comprising a summary of significant accounting policies and other explanatory information
f) a statement of financial position as at the beginning of the earliest comparative period when an entity applies an accounting policy retrospectively or makes a retrospective reinstatement of times in its financial statements, or when it reclassifies items in its financial statements
Statement of comprehensive income
In accordance with IAS 1, the profit and loss account for a public limited company is entitled 'statement of comprehensive income'
There are two presentations of the statement of comprehensive income
The statement of comprehensive income based on the function of the expense is the most popular approach
IAS 1 also details additional information to be presented either on the face of the income statement or in the notes
Statement of financial position
Replaces the balance sheet for public limited companies
Identical to a balance sheet except for some changes in terminology and the relocation of some items within the statement
Current and non-current assets, and current and non-current liabilities are presented as separate classification on the face of the statement of financial position. These distinctions are requires because how far into the future assets and liabilities are to be realised has clear implications for an assessment of the financial position and solvency of an entity
A current asset is one that is
Expected to be realised or is intended for sale or consumption in the entity's normal operations cycle, is held primarily for trading purposes and is expected to be realised within 12 months of the balance sheet sheet date
Cash or a cash equivalent
A current liability is one that is
Expected to be settled in the normal course of the entity's operating cycle
Due to be settled within 12 months of the balance sheet date
IAS 1 also details information to be presented either on the face of the balance sheet or in the notes