Company accounts for small companies - notes to the accounts

In the introduction, I outlined key elements to a set of accounts (I'm not finished yet...), referring to Section 226, Companies Act 1985. To the profit and loss account and the balance sheet, it emerges that you need notes too.

Schedule 4, Part III explains what should appear in the notes. Most of it won't apply to the average one person business, but here are some key elements that you should be aware of:

Paragraph 36 requires that;

"the accounting policies adopted by the company in determining the amounts to be included in respect of items shown in the balance sheet and in determining the profit or loss of the company shall be stated (including such policies with respect to the depreciation and diminution in value of assets)."

This is pretty key to the way your accounts are put together. At what rate are you depreciating your capital assets? Are you using cash accounting or not? You need to be consistent otherwise, if HM Revenue & Customs have questions, you have problems.

Paragraph 38 states;

1) The following information shall be given with respect to the company’s share capital—

(a) the authorised share capital;

(b) where shares of more than one class have been allotted, the number and aggregate nominal value of shares of each class allotted

This may not seem terribly important, but if there is more than one director (your spouse, your partner, a friend), it will be important in proving who owns what and their entitlements in case the worst happens.

Paragraph 42 relates to your fixed assets - machinery, computers etc;

(1) In respect of each item which is or would but for paragraph 3(4)(b) be shown under the general item “fixed assets” in the company’s balance sheet the following information shall be given—

(a) the appropriate amounts in respect of that item as at the date of the beginning of the financial year and as at the balance sheet date respectively;

(b) the effect on any amount shown in the balance sheet in respect of that item of—

(i) any revision of the amount in respect of any assets included under that item made during that year on any basis mentioned in paragraph 31;

(ii) acquisitions during that year of any assets;

(iii) disposals during that year of any assets; and

(iv) any transfers of assets of the company to and from that item during that year.

(2) The reference in sub-paragraph (1)(a) to the appropriate amounts in respect of any item as at any date there mentioned is a reference to amounts representing the aggregate amounts determined, as at that date, in respect of assets falling to be included under that item on either of the following bases, that is to say—

(a) on the basis of purchase price or production cost (determined in accordance with paragraphs 26 and 27); or

(b) on any basis mentioned in paragraph 31, (leaving out of account in either case any provisions for depreciation or diminution in value).

(3) In respect of each item within sub-paragraph (1)—

(a) the cumulative amount of provisions for depreciation or diminution in value of assets included under that item as at each date mentioned in sub-paragraph (1)(a);

(b) the amount of any such provisions made in respect of the financial year;

(c) the amount of any adjustments made in respect of any such provisions during that year in consequence of the disposal of any assets; and

(d) the amount of any other adjustments made in respect of any such provisions during that year;

shall also be stated.

Think of this as your asset register. There are plenty of other items, and if they are likely to apply to you, you may want to consider seeking professional guidance. You don't have to, you just might like to...

In the next instalment, we'll look at the directors' report...

Back to the Companies Act, however. Reading on brings you to Section 234;
1) The directors of a company shall for each financial year prepare a report (a “directors' report”) complying with the general requirements of section 234ZZA and containing—
(a)the business review specified in section 234ZZB,
It might have been helpful had this been mentioned earlier, but at least we've run into it...
Directors' report: general requirements
(1) The directors' report for a financial year must state—
(a) the names of the persons who, at any time during the financial year, were directors of the company,
(b) the principal activities of the company in the course of the year, and
(c) the amount (if any) that the directors recommend should be paid by way of dividend... (3) The report must also comply with Schedule 7 as regards the disclosure of the matters mentioned there.