What are the Basics of Company Accounts?

Company accounts are financial statements that clearly show a company's financial health and performance. These accounts are prepared for 12 months following accounting standards and regulatory requirements. The basics of company accounts include a range of financial statements, records, and reporting mechanisms that collectively show how a company earns, spends, saves, and manages its finances. Understanding the basics of company accounts is crucial for business owners, stakeholders, investors, and regulatory authorities.

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Components of Company Accounts

Balance Sheet

• Assets: What the company owns, including cash, inventory, property, and equipment.
• Liabilities: What the company owes, such as loans, creditors, and other financial obligations.
• Equity: The residual interest in the company’s assets after deducting liabilities. It represents the shareholders’ ownership stake.

• Fixed assets - Things that will be kept long-term such as land, factories, and vehicles.
• Current assets - Things that have a shorter life span such as stock items, petty cash, and cash in the bank.

• Long-term liability - Money that is not due to be repaid within the next year.
• Current liability - Money that is due to be repaid within a year.

Profit and Loss Account Statements

• Revenue: The income generated from normal business operations, such as sales.
• Expenses : Costs incurred during operations, including wages, rent, and utilities.
• Net Income or Loss : The difference between revenue and expenses. A positive figure indicates profit, while a negative figure shows a loss.

• Fixed expenses : Consistent expenses such as rent and salaries that are not affected by the company’s performance.
• Variable expenses : Expenses that vary with the company’s production or performance such as utilities and inventories.
• Accrued expenses : Recorded or reported expenses that are not paid.
• Operating expenses : Ongoing expenses incurred for company operations.

Cash Flow Statement

• Operating Activities : It is the cash flows that come from the company’s core business activities, such as selling products or services after spending the amount needed to make and sell the products or services.
• Investing Activities: It indicates cash flows related to capital expenditures such as the purchase and sale of long-term assets like property, equipment, or investments.
• Financing Activities : It refers to how much money has been spent on outside financial activities such as borrowing, repaying loans, issuing shares, or paying dividends.

Statement of Changes in Equity

Basic Accounting Concepts and Principles

Realization Principle

Going Concern Principle

Consistency Principle

Materiality Concept

Key Financial Ratios

• Profitability Ratios: Such as the net profit margin, which shows how much profit the company makes from its revenue.
• Debt-to-Equity Ratio: It measures how much a company is funding its operations using borrowed money. It is the ratio of Total Liability to Total shareholders’ equity.
• Quick ratio: It represents a company’s ability to pay current liabilities with assets that can be converted to cash quickly.
• Working Capital Ratio: It is the ratio of current assets and current liabilities. It indicates a company’s ability to pay its current liabilities with its current assets.

Auditing of Company Accounts