What information is included in a company’s accounts?

The most important sections of an account are the following:


Balance sheets

These documents are divided into two columns: assets and liabilities. An asset is anything that is owned by the company or owed to it - equipment and invoice payments, say. Liabilities is anything the company owes to someone else. Tax would be an example. 

Balance sheets usually categorise assets and liabilities into short-term (things that are going to be owned or owed for less than a year) and long-term (things that are going to be owned or owed for more than a year). Short-term assets are known as current assets. Common examples include stock, cash and trade (payments from customers). 

Long-term assets are fixed assets.  They often include tangible things like machinery and factories, and intangible things like patents or trademarks. Then there are investments, which are valuable things that are not being used in the company’s own business. For example, they may own some stock of another company. 

There’s also something called goodwill. This one’s a little complicated. Imagine you own a cake business and decide to buy a neighbouring pie business, which you pay £1 million for. However, the pie business’ assets add up to less than the amount you paid for it. Let’s say those pie assets are worth half a million quid. Your accountant would write that £500,000 difference between what you paid and the assets you received as a ‘goodwill fixed asset’ because the assumption is that extra value exists somewhere, otherwise why would you have paid for it? 

Liabilities can also be separated into short-term (referred to as current liabilities or short-term creditors) or long-term (called non-current liabilities or long-term creditors). Common current liabilities are money owed to suppliers and any tax bills that need to be paid that year. Non-current liabilities include deferred tax bills and long-term borrowing - things like loans. There’s also something known as provisions which is when a company preemptively assumes that some of their assets are worth less than their face value. An example would be if you know one of your customers isn’t ever going to pay you all the money they owe you because they’re facing bankruptcy. 

Minusing total liabilities from total assets leaves you with the company’s equity. The bigger the equity, the more valuable the business is, basically. (If liabilities are bigger than assets, we say the company has negative equity.) Accountants also look at the gaps between different types of assets and liabilities. For example, when it comes to determining a company’s overall financial health, generally the most weight is put on the difference between short-term assets and liabilities (known as the working capital) and there is less concern about the gap between long-term ones. 


Profit and loss account

This one is a record of the bread-and-butter bit of a company’s operations. It looks at how much stuff the business has sold and how much it has spent and determines whether the company has made a profit (more sales than costs) or a loss (more costs than sales). 

A few different types of profit are recorded. The first, gross profit is worked out by taking the amount earnt from all sales (this is called turnover, income or revenue) and minusing the cost of sales, which is all the things that were needed in order to sell the products; things like materials and staff wages and electricity for the shops. 

Then there is operating profit, which takes away operational costs from the gross profit. Operational costs are expenses that aren’t directly related to creating and selling products. An example would be the wages of an HR person or Office Manager (or accountant!). It also includes distribution costs (packaging, posting and transporting stuff) and decreases in the value of assets. (If you want to get really technical, accountants refer to tangible assets going down in value as depreciation, intangible assets as amortisation, and an unpredictable decrease in value - say if a piece of equipment breaks - as impairment.) 

Accountants also look at profit before tax. This takes the operating profit, adds on any other non-sales income the company made (say it owns shares in another company) and takes away financing costs, which are any interest payments due on company loans. The final profit calculation accountants use takes tax owed away from the profit before tax figure to show the company’s profit for the year.


Cash flow statement

Cash in accounting doesn’t just mean physical coins and notes, it means any money you could get hold of quickly if you needed to. So the contents of bank accounts count as cash, as long as they offer easy withdrawals.  

A cash flow statement details how much cash the company has spent and received. An important difference from the profit and loss account is that it also includes financial stuff that is not connected to the everyday running of the business. This includes the buying and selling of fixed assets (called capital expenditure), interest payments on loans, dividends and shares in other companies (technical terms: returns on investment if the company is receiving the interest, service of financing if its paying it), tax, dividends (parts of a company's profit paid out to shareholder) and financing: any cash funds that have been raised for the businesses, say by issuing new shares.  


Notes to the accounts

The notes contain a bunch of other information that is important but not mentioned in the account documents we talked about above. This includes (a) details on the number of employees a company has and how much in pays them in wages and benefits, (b) specifically, how much in wages and benefits the company is paying its highest ranking staff, (c) money spent and owed on the company’s pension scheme, (d) how much money has been paid out to shareholders via dividends, and (e) any other companies that the company owns a large amount of - called subsidiaries

The notes might also detail the methods the company is using to create their accounts: which calculations they are using, how they decide what counts in each section, etc. Large companies might also include some analysis on how their accounts breakdown by sector or country of operation or whatever. 

Something you may have noticed from this description of accounts is how  focused they are on purely financial stuff such as sales, profits, costs and losses. Not everyone thinks this is a good thing. There are advocacy movements pushing for accounts to include broader information about a company. Examples of extra information that people think could be useful to fold into accounts include the governance structure and the company’s policies on pay, diversity, and environmentalism.