The UK company law requires companies to prepare their financial statements according to UK Generally Accepted Accounting Practice (UK GAAP) and this assumption must be disclosed in the notes to the company accounts under the heading of accounting policies.
The basic accounting principles that a set of company accounts must adopt is explained below.
Going Concern
The accounts must be prepared on the assumption that the business will continue to trade in the future and therefore a going concern.
Where a company ceases to trade the company may incur a number of costs which it would not normally face, such as redundancy payments to employees or early termination of contracts penalty and so on.
The value of the company assets have to be marked down to their actual realizable value in the open market. For example, unfinished products may have to be completely written off the profit and loss account.
Should the company is going to prepared the accounts not on a going concern basis, this fact has to be disclosed in the director report and notes to the accounts so that the readers (suppliers, bankers, creditors, shareholders, staff and other interested parties) of the financial statements understand the company financial and trading position clearly.
Consistency
The directors must select suitable accounting policies for depreciation of business assets, foreign exchange translation and accounting for stock valuation and applied them consistently within the same accounts so as to make the accounts easy to read and comparable from year to year.
Prudence
Accounts should be prepared prudently. This means only profits that have been realized should be included in the profit and loss account. In other words, sales should not be recognized in the profit and loss account until the goods or services have been supplied and normally the invoice raised.
Losses should be recognized in the account as soon as possible by providing for the costs or writing down any asset whose value has been impaired as soon as appropriate. So you should recognize bad debt or write off obsolete stock as soon as you become aware of the problem.
Accruals Concept
All income and expenses for the period to which the accounts relate must be included in those accounts. Prepayments, accruals, capitalization of long term assets are examples of accruals concept being applied. The introduction of the accruals concept is to match costs against revenue so as to achieve accurate profitability for the relevant accounting year.
Historical Cost Convention
The revenue, costs and assets bought by the business are recognized in the accounts at the original cost regardless of present value.
Netting Off
Items should not be netted off in the accounts.
Departure from accounting principles
It is the directors’ responsibility to ensure the company accounts are prepared in compliant to Companies Act 2006, a departure from any of these basic accounting principles would require a disclosure notes in the accounts together with the reasons for the departure.
Overall, the accounts must always give a true and fair view.
Professional Help
If you require help with your company accounts, our accountants at Concise are more than happy to help you with your company accounts preparation and submission to Companies House and HMRC.
If your company is dormant, you must file the dormant accounts with Companies House to avoid late filing penalty.
Our accountants at concise offer fixed fee accounts packages to startup companies. these packages include our accountants to take care of your company accounts and company tax return for you. Feel free to contact our accountants to discuss your business requirements.
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