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The accounting needs of your business will vary according to its size, type and sector.

As the business owner, it's your responsibility to make sure your business keeps accurate records and accounts.

There are two types of accounting information - financial accounts and management accounts.

Financial accounts describe the performance of your business and have to be filed at Companies House.

Management accounts are aimed at helping you to plan your business and make decisions about key areas such as sales, margins and stock.

This guide explains the basics of both types of accounts and what they should include.

It outlines your financial accounting obligations as well as how management accounting can help you run your business more effectively.

Financial accounts are a historical record of your business' performance over a past period - usually one year - for the benefit of external users such as shareholders, employees, suppliers, bankers and authorities.

Financial accounts normally include the following elements.

Profit and loss account

This measures your business' performance over a given period of time, usually one year.

It compares the income of your business against the cost of goods or services and expenses incurred in earning that revenue.

Balance sheet

This is a snapshot of your business' assets (what you own or are owed) and your liabilities (what you owe) on a particular day - e.g. the last day of your financial year.

Cashflow statement

This shows how your business has generated and disposed of cash and liquid funds during the period under review.

A cashflow statement is different from a cashflow forecast, which is used to predict the expected rises and falls in cashflow over the coming year.

Statement of recognised gains and losses

This records all gains and losses since the previous set of accounts.

For example, changes caused by currency fluctuations, property revaluation, profits earned by associates and joint ventures not included in the normal accounts.

Unincorporated businesses

Unincorporated businesses such as sole traders and partnerships are required by HM Revenue and Customs (HMRC) to maintain proper books and records to support annual income tax returns.

These must be kept for a minimum of six years.

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Limited companies are obliged by law to prepare a set of financial accounts each year and publish them by filing a copy with Companies House.

For accounting periods starting on or after 6 April 2008:

• Private companies must file accounts within 21 months of the business' formation, and within nine months of the end of each financial year thereafter
• Public companies must file accounts within 18 months of the business' formation, and within six months of the end of each financial year thereafter

For accounting periods starting before 6 April 2008:

• Private companies must file accounts within 22 months of the business' formation, and within nine months of the end of each financial year thereafter
• Public companies must file accounts within 19 months of the business' formation, and within six months of the end of each financial year thereafter

There are statutory penalties for late or incorrect filing, for which the directors are liable.

Small and medium-sized companies are allowed to file accounts with certain information omitted.

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Management accounts are invaluable in helping you to make timely and meaningful management decisions about your business.

Different businesses will have different management accounting needs, depending on the business areas that are important to them.

These can include:

• Sales process - including pricing, distribution and debtors
• Purchasing process - including stock records and creditors
• Fixed asset register - details of all fixed assets, including identification numbers, cost and date of purchase, etc
• Employee records

There is no legal requirement to prepare management accounts, but it is hard to run a business effectively without them.

Most companies produce them regularly - e.g. monthly or quarterly.

Management accounts analyse recent historical performance and usually include forward-looking elements such as sales, cashflow and profit forecasts.

The analysis is usually performed against forecasts and budgets that have been produced at the start of the year.

The information in management accounts is usually broken down so that the performance of different elements of the business can be measured.

For example if a business has more than one sales outlet, there might be a separate report for each.

There may also be a report produced to show how well a particular product has done across different outlets.

For businesses selling more than one product, it is advisable to provide a financial breakdown for each product category.

This will allow you to ensure that profitable products are not subsidising those that are selling poorly, unless you intentionally promote loss leaders to attract further custom.

Management accounts will allow you to:

• Compare your accounts with original budgets or forecasts
• Manage your resources better
• Identify trends in your business
• Highlight variations in your income or spending which may require attention

They should be used for the following:

Record keeping

• Recording business transactions
• Measuring results of financial changes
• Projecting financial effects of future transactions
• Preparing internal reports in a user-friendly format

Planning and control

• Collecting cash
• Controlling stocks
• Controlling expenses
• Co-ordination and monitoring of strategy/performance
• Monitoring gross margins

Decision making

• Using cost information for pricing, capital investment and marketing
• Evaluating market and product profitability
• Evaluating the financial effect of strategies and plans

It's important that your accounts are accurate and up to date, and that they are backed up with detailed records, such as:

• receipts
• invoices
• purchase orders
• payments in and out

Following careful record keeping procedures can also help you to prevent fraud or theft.

As businesses grow and take on more workers, the risk of theft or fraud can increase.

There are steps you can take to reduce the risks.

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