- By Peter Griffiths
What Are Annual Accounts? (Everything You Need To Know)
If good habits are the key to all success, accurate bookkeeping is one habit all companies should hone.
According to the Maltese Companies Act, every company incorporated in Malta is required to keep a standard set of statutory books as well as proper accounting records.
Also known as ‘financial accounts’, ‘company accounts’ or ‘statutory accounts’, in a nutshell, annual accounts present a comprehensive summary of the financial activity of the company during its latest financial year.
What Is A Financial Year And How Often Must Annual Accounts Be Done?
A financial year is typically 12-months long and classically from January – December, although some companies do have other year-end dates.
A company’s financial year will end on the same date every year unless otherwise changed.
The accounts of a company should reflect the true and correct position of the business, its financial performance and cash flow.
They should give sufficient clarification so as to be understandable and contain reliable, accurate information on the activities of the company.
Importantly, annual accounts should be prepared consistently year on year, with any change in methodology or reporting clearly stated, in order to provide the user with comparable information year on year.
What Is Included In Annual Accounts?
Annual accounts include the details of all the purchases, sales, receipts and payments, operating expenses, assets and liabilities of the company.
For this reason, they give a fairly accurate snapshot of the company at a specific moment in time.
At their core, annual accounts comprise:
- A Statement of Financial Position (a balance sheet);
- A Statement of Comprehensive Income (an income statement/profit and loss account); and
- Notes to the accounts.
Statement Of Financial Position
The statement of financial position depicts the net asset position of the company as at the financial year-end.
It lists the assets, be they tangible or intangible, fixed or current.
Typical fixed assets include property, equipment and investments; typical current assets include stock, debtors and cash/bank balances.
Corresponding equity and liabilities will also be stated in the balance sheet, be they short-term such as creditors or tax, or long-term, such as loans and similar debt.
Statement Of Comprehensive Income
The statement of comprehensive income is the sum of the company’s trading income and expenses.
This statement highlights total revenue, less the direct cost of sales and all other indirect costs incurred that year.
Notes To The Accounts
Lastly, the notes to accounts disclose pertinent information as to how the financial statements were drawn up and expand on any figures reported in the balance sheet or income statement.
The notes contain information on the accounting methodologies along with explanations necessary to the understanding of the accounts.
As a result, they provide additional clarity and are an integral part of the financial statements, as without them a user may be left in the dark on how certain balances were calculated and what they include.
Further to these, depending on the size of the enterprise, other statements may be required including:
- A Statement of Cash flows; and
- A Statement of Changes in Equity.
The statement of cash flows contains information on how much cash a company has generated and used during the reporting period.
Since cash is the lifeblood of any company, it shows how changes in the balance sheet and income statement have affected the cash position of the company.
The statement of changes in equity, as the name implies, shows the movements in equity over the financial year.
Equity is generally made up of shares, be they ordinary or preference, and reserves, such as retained earnings, share premium, revaluation reserve and others.
This statement will show the transactions that have affected these balances, namely: the profit for the year, any dividends paid, gains/losses on revaluation, and any possible issue of shares.
Under Maltese law, all companies are required to prepare annual accounts and have them independently audited by a qualified person who holds the relevant warrant.
How To Prepare Annual Accounts?
Company accounts are prepared on an accruals basis; meaning nothing other than recording revenue or expenses when they occur, rather than when they are paid.
This concept underpins all accounting, as it is a better measure of the profitability and financial position of a company at a given moment in time.
To ensure that every company is reporting in the same way, and hence to create comparability, standards exist to guide companies on how to keep their books, how to report and what to report on.
These are called International Financial Reporting Standards (IFRSs) and set forth the generally accepted accounting principles and practices that should be adhered to.
These standards, although robust, can be lengthy and too complex for some companies, especially given the local landscape where the majority of business are SMEs.
When preparing statutory accounts, one should keep in mind the end user.
While management and directors are more likely to refer to internal management accounts, annual accounts are external looking and are prepared for a wide range of possible stakeholders.
These include, but are not limited to, shareholders, investors, banks and financial institutions and even governments and the general public.