How to read company accounts
For the uninitiated, trying to interpret a set of statutory accounts can be tricky.
And there are lots of reasons to want to do so - you might be thinking about acquiring a company, engaging in some competitive research or even just trying to understand your own company's year end accounts.
These tips assume you have to hand a set of full accounts for a UK based private limited company. The format is a bit different for accounts for publicly listed entities (which are published for the benefit of investors and generally include more information than necessary) or indeed abbreviated accounts (which is all small UK based companies are required to submit and includes the bare minimum of information which unfortunately isn't terribly informative).
Company accounts work like this:
The company's trading activity is recorded on the Profit and Loss statement. This essentially records how much has been sold and how much has been spent running the company.
This profit figure then gets adjusted to reflect the cash actually generated by the business through the Cash Flow statement. Once it emerges from the Cash Flow statement, then you can see how it turns up on the Balance Sheet.
In these three articles, we explore:
1. how to understand the profit and loss statement which definition of profit is the most useful
2. how to understand cashflow statement and how this then flows through to the balance sheet
3. and finally how to read a balance sheet.