If you operate as a sole trader, or in a conventional partnership, your accounts will need to show a true and fair picture, but the exact form this must take is not laid down by law.
In practice, this means that you do not have to produce a balance sheet, but it would be a good idea to produce one as this can help create a good impression with your tax inspector or bank manager.
The form of accounts for a limited company is, however, defined by law. Your accounts have to be filed at Companies House. However, if you are classified as a small company, you can file a shortened balance sheet and special auditors report.
‘Small’ is defined as having two of the following: sales of £2.8 million or less, balance sheet total of £1.4 million or less, fifty or fewer employees on average.
Balance sheets
Your balance sheet will help you to calculate how much your business is worth by adding up all its assets and highlighting what money is owed to others.
“If you go into the website of any major PLC you can see profit and loss accounts and balance sheets, as the public can access these. A balance sheet is a physical representation of everything financial in the business – it shows the value of your business at any real time,” explains Nigel Lander, a specialist finance adviser at Business Link for London.
The balance sheet will normally look at your business’ assets, such as money you have in the bank and money that is owed to you.
You will also need to calculate the value of your fixed assets so you can produce an overall total for your assets.
The balance sheet will also highlight any liabilities, such as money that your business owes and long-term debts, such as bank loans, and it should also show an analysis of the equity in your business.
An online service, CAROL (Company Annual Reports Online) provides free access to UK and overseas company reports and other investor information, including companies’ balance sheets, profit and loss accounts and financial highlights.
Using an accountant
As Stephen Pegge, head of external communications for Lloyds TSB explains, the tax authorities don’t require you to use an accountant if you run a limited company with sales of less than £1 million and a balance sheet total of no more than £1.4 million.
‘Many firms actually use a bookkeeper and there is an International Association of Bookkeepers in the UK that can give more information.
I think forward-thinking accountants would usually promote their services not on the basis that you need them to deal with the tax man, but rather that they can help you run your business more efficiently and provide advice on key transactions where professional financial expertise is required,” believes Pegge.
He adds that you should then evaluate the costs against clear benefits and it is very reasonable to ask the firm to justify their costs in terms of business results and ideally agree objectives with them.
See also: Choosing the right accountant – how to separate the financial wheat from the chaff when choosing an accountancy firm
Business Link’s Lander adds that are plenty of software packages on the market that are cost-effective to use and which also provide support and training.
