It might be difficult to keep track of your company’s financial operations and prepare records, especially if you are unfamiliar with the accounting industry. Small and medium-sized businesses (SMEs) must compile their financial statements in the UK in compliance with the Financial Reporting Standard (FRS). This blog post provides a simple, step-by-step tutorial on how to prepare your company’s accounts in accordance with FRS UK in an effort to make the process easier for laypeople.
Become knowledgeable about FRS 102 and FRS 105
Understanding the unique FRS that applies to your firm is the first step in creating your company’s financial statements. FRS 102 and FRS 105 are the two sets of FRS standards used in the UK.
- FRS 102: This standard is applicable to small and medium-sized businesses that are neither financial institutions or publicly traded businesses. If your business meets the criteria to be classified as a small or medium-sized enterprise, you must comply with FRS 102.
- FRS 105: This regulation was created for micro-entities, the tiniest businesses in the UK. You must adhere to FRS 105 if your business satisfies the requirements for micro-entity classification.
Knowing which standard applies to your business is crucial since it will determine the accounting procedures and presentation styles you must use.
Accounting based on accruals
The accruals-based accounting method is used in FRS accounting. This implies that you must record all financial transactions for your business at the time they are incurred, not when cash is received or paid. This is crucial since it gives a more realistic picture of the financial status of your business.
Compile Your Financial Documents
It’s imperative to have a well-organized record-keeping system in place before beginning the process of compiling your company’s accounts. Gather and organize all of your financial records, including bank statements, invoices, and receipts. You can either choose to keep a manual record-keeping system or use accounting software to assist you in this process.
Keep track of your earnings and outgoing costs
After arranging your financial records, you can commence entering your company’s income and spending. FRS accounting divides income and expenses into various categories, which include:
Sales of goods and services, rent, and other forms of income are all considered to be revenue.
- Cost of Sales: The cost of sales encompasses the expenses directly incurred in the production of goods or delivery of services.
- Operating Expenses: Operating expenses encompass the continuous costs that require payment, including rent, utilities, payroll, and depreciation.
- Financial Expenses: This group of expenses includes loan interest payments and other related expenses.
Make sure to note the date, sum, and details of each transaction when tracking income and spending. This will enable you to compile an accurate and thorough account of the yearly financial performance of your business.
Determine Important Financial Metrics
After keeping track of your earnings and outgoing costs, you can compute important financial metrics that shed light on the state of your company’s finances. Among the crucial financial indicators are:
- Gross Profit: This figure is calculated by subtracting sales costs from revenue.
- Operating Profit: This is the amount left over after operating costs are deducted from gross profit.
- Operating profit is subtracted from net profit to arrive at net profit.
Preparing financial reports
You can now create the financial statements required by FRS after organizing your financial data and calculating important financial parameters. The particular financial statements you must prepare could change depending on whether your organization adheres to FRS 102 or FRS 105. The principal financial statements you will most likely need to prepare, though, are as follows:
- Statement of Financial Position: The Statement of Financial Position, also known as the Balance Sheet, provides an overview of your company’s financial status at a particular point, typically at your year-end. It lists the assets, liabilities, and equity of your business.
- Income Statement: The Income Statement summarizes your company’s income and expenses for a specific accounting period, commonly referred to as the profit and loss account. It shows the revenue, costs, and net profit or loss for your business.
- Statement of Changes in Equity: This statement describes how the equity of your company has changed over the course of an accounting period, taking into account any gains or losses, dividend payments, and other alterations.
- Cash Flow Statement: This statement lists all of your company’s cash inflows and outflows for a certain accounting period. Operating activities, investing activities, and financing activities make up its three components.
Follow FRS Disclosure Guidelines
Moreover, FRS accounting necessitates specific disclosures to feature in your financial statements. Users of the financial statements can make more informed decisions thanks to these disclosures. Which offer additional details on the financial position and performance of your company. Typical disclosures comprise:
- Accounting Policies: You must disclose the precise accounting principles, such as the depreciation method and revenue recognition policy. Utilized in preparing your company’s financial statements as part of accounting policies.
Contingent liabilities refer to liabilities arising from past events that may occur but are not yet certain. Must list any contingent liabilities your company may have in the financial statement notes.
- Related party transactions: You must report the details of any related party transactions your company has made with shareholders or directors, for example.
Submit Your Business Accounts
You must file your firm accounts with the relevant authorities after you have compiled your financial statements and guaranteed they adhere to the applicable FRS requirements. This normally entails submitting your accounts to Companies House and HMRC in the UK. To avoid fines and guarantee that your business remains compliant with the applicable regulations. Make sure to satisfy the filing deadlines.
Even a layperson can successfully traverse the accounting standards by following the methods indicated in this article. Preparing your company accounts in accordance with FRS UK may appear to be a difficult job. Remember that managing your company’s financial reporting duties requires maintaining correct records, comprehending the applicable FRS standards, and filing your accounts on time.