Accounts

Every business must keep accounts.

There are many reasons for keeping accounts. For example to:

meet your legal duties

work out how much you have earned

calculate how much tax you owe the HM Revenue & Customs

show investors how well the business is doing

raise capital for the business

So it is essential to keep your accounts for the business and these should be regularly maintained and updated - not just an annual event to satisfy the tax man!.

What is Profit?

Income - Costs = Profit

Profits cannot usually be worked out by simply adding together the cash receipts of the business and deducting costs paid out

This would show the business's cash flow

To arrive at the profits it is necessary to draw up accounts using the methods which accountants and the tax man have developed for dealing with

income that has been earned but not received
costs that have been incurred but not paid or paid but not fully used

This is known as the accruals method - a word invented to make things sound complicated!

All you need to remember is to record all income and costs as they occur and not just when you pay out the money.

A set of accounts can be made up of a number of items:

Profit and Loss Account
Balance Sheet
Notes to the accounts
Directors Report

The structure of the business determines which of the above are mandatory.

For example a sole trader just needs a profit and loss account but a limited company would need all of the above and in a prescribed format.