Annual Accounts vs Annual Returns: A Beginners Guide

21st January 2020

The annual accounts, consist of the following: balance sheet, profit and loss account, the statement of changes in equity for the year, the cash flow statement, and memory. It is a single document that must be written clearly and according to the regulations established in the commercial code, the companies law, and the general accounting plan.

The purpose of these annual accounts will not be other than to show the authentic image of the company’s assets, its financial situation, and the results obtained through legal provisions. Hence, operational accounting is based only on economic reality and not the legal form.

What are the basic requirements for the HMRC to accept your annual accounts?

Stating only the basics is never ideal because no company does not grow further. And, if you are running a legitimate business, then you must fulfil these requirements and not make mistakes here.

Reliability

All the information you include in your annual accounts must be correct and verified. Because, of course, a falsification is an option. However, the first one you will be cheating will be yourself, and, if your reliability is not 100% assured, you may end up with serious problems.

Exhaustivity

These accounts serve, above all, so that you have a panoramic view of the economic status of your company. Useful annual reports are those rich in details in which there are no gaps or omissions.

Clarity

Adding complexity to your accounts to blur their results will only end up leading to a messy situation. So, when addressing your accounts, be as transparent as possible and strive to eliminate any expendable complications. Do not leave room for doubt.

What to include in the annual accounts?

Now that the necessary details of your annual accounts are more than evident, it’s time to address what exactly they have to include. Let us make clear from the beginning that there are five points that every annual account should contemplate.

Balance

It is usually the first document that opens all annual accounts. It expresses not only the assets and liabilities of the company but also its net worth.

Income Statement

The economic benefits generated by the business must segment according to exploitation, finances, and operations carried out. The idea is that the income statement is a kind of in-depth balance.

Changes of Ownership or Issue of Shares

Every company has to reflect its equity status in this section. Its usually generically and will be more productive, the more information it includes.

Cash Changes

The liquidity of the business is evident in this slice of the annual accounts. It informs about the monetary changes that have already appeared on the balance sheet. Its purpose is to clarify any cash movement.

Memory

The closure of annual accounts report is the ideal place to explain any financial statement of a company that there has not been a remark of in the previous sections. Understand it as a compliment as a conclusion.

The certification must contain, in addition to the approved:

  • The percentage of attending partners.
  • Mention of the call made or the indication that it is universal.
  • The certification must also contain identification of the president and the secretary.
  • Indication, where appropriate that the requirements for formulating abbreviated or SME annual accounts.
  • Several pages, signature, date of approval, and the date of certification that, logically, must be later than the support.
  • If they include an audit report, they should make express mention that the approved annual accounts coincide with the audited ones.
  • Also, some commercial registries require that the certificate include the alphanumeric code of the fingerprint that accompanies the deposit.

Usual problems

The most common problem in the annual accounts is usually the appearance of a change in criteria once they shutdown. The only possible way to solve this is to readjust all accounts based on the new rules. (This is also applicable if you have found some accounting error.)

It may also be the case that the change is not a criterion, but an accounting estimate. Things are complicated here because this type of evolution implies that it should be applied not only to the current year but also to the relevant net worth item.

Finally, there is a possibility of operations put through after the closing of the annual accounts. If they are predictable transactions, you should already include them in your annual reports. But if they have been impossible to predict, you can solve them by adding them directly in the memory.

The keys to making the annual accounts of the company:

Reliability

First of all, we must be aware that we are going to be showing all the keys to the company. Of course, it must carry reliable information. That you must take into account that many individuals play with the data to make up the documents before the partners. Hence meeting the standards of reliability becomes doubly significant.

Relevance

Such documents are critical for decision-making within the company because depending on the data and the strategy shown, the future will go on one side or the other. Hence it is essential to display vital information without any distortions.

Integrity

As we mentioned in the previous point, the annual accounts of the company must include all the vital information. Similarly, it would best if you put everything that should be inside without making selections of data that can affect the statements. 

Clarity

The idea of ​​the company’s annual accounts is that they can be easily interpreted by each other, so there is no place to complicate reading to hide something. Remember, first of all; clarity means sincerity.

Annual return

It merely refers to a compilation of general details regarding an enterprise’s directors, departments, registered address, shared capital, and shareholders. Often, companies are required to complete this information by hiring a secretary or two because “secretary” is included in the list of annual returns. Every year, companies in the UK are supposed to file annual returns to the HMRC.

Completing an annual return

In the UK, the normal practise for companies is to file their annual returns to the Companies House 28 days after it has been up to date. Members of the company accept this responsibility, and usually, it is the part of the director’s job to file an annual return after making updates to it each year. Here are some essential points regarding yearly returns in the UK:

  • You must turn in the annual return to the Companies House within the deadline of 28 days. Once a year or over for the incorporation of the company is complete. Or the update to the last annual return.
  • Annual returns is an accurate measure of a company’s management structure and the amount of capital at its disposal.

Annual Return AR01

The annual return must contain the following information:

  • The company’s name
  • Its registration number
  • The category of the basis and whether it is public or private
  • The office address that they register with the HMRC
  • The place or department (address) where the company’s books are, if not at the registered address
  • The primary business activities of the company
  • Directors’ information: their names, date of birth, nationality, permanent residential address, and business occupation
  • The time when the annual return was updated

In case if the company happens to have a share capital, then the annual return must also comprise the following:

  • The minimum value of total share capital that was issued
  • It must also contain the name of shareholders, the number of shares that they own, type of shares, and any transfer details of shares between fellow shareholders

In many business cases, there is also information regarding undertakings, which they must add as subject information to the annual return.

What is the date of the update?

That is the date by which every piece of information regarding an annual return must be up to date. The updated date emerges a year after the company’s incorporation or the last time by which the company files the annual return at the Companies House.

When must the Annual Return be delivered to Companies House?

You should note that annual returns should be filed to the Companies Hosue within 28 days after the date of the update written on the form. One must not forget that you must pay the document-processing yearly fee when a company’s director is filing the annual return.

Considerations when completing the form AR01

Keep the following things in mind.

You must fill the annual return to notify the Companies House about the following details:

  • Information regarding the company’s registered office
  • The office address where the register of the company
  • The office address where the debenture holders register is held
  • The primary business activities of the company
  • Information regarding the change of residential address, change of any company’s secretary, or the director
  • Date of the resignation of a company’s employee

At the same time, be careful about the AR01. You must not use the form for the following:

  • Appointment of a new employee at the company
  • Any change or shift in the company’s minimum capital
  • Any issue of new shares to existing shareholders or other investors

What is the information Companies House needs about share capital?

This information applies to every business that has a share capital. If the company has converted its shares into stocks, the directors will need to provide information regarding the corresponding stock. It should contain the amount of stock instead of the minimal value of the shares.

Companies that have a share capital must provide the following information regarding each value of the share:

  • Name of the category of each kind of stock. That can be preference shares or ordinary shares.
  • Companies must also provide the total minimum value of shares issued of that category at the date of the return.

The total minimum share values are the entire minimum or face value of shares, which, of course, excludes premiums.

Annual accounts and annual returns – what are the key differences?

Many companies tend to confuse both of the documents. It would help if you kept in mind that both materials are quite different from each other, even though business directors are required to file them to the Companies House. The annual returns reveal critical information regarding your company and its necessary credentials. Whereas, the annual accounts contain all kinds of information regarding how well your company is performing.

If anyone is confused, they should think of annual returns as information that reveals surface-level details on a company. Yearly accounts are nothing like that. They are purely financial. Both are related to each other, in a sense. When HMRC and Companies House have to make judgments about your company or have to assess your business situation, they will take into account the information provided in the company’s annual reports as well as limited company yearly returns. These federal bodies want to understand and know information regarding your company, and this is your best shot to make an impression.

In Conclusion

That is all you need to know regarding both concepts of accounting: annual returns and annual accounts. Company directors must develop their understanding regarding these two concepts so that they can make the right decisions and be proactive in their business dealings. The HMRC and Companies House are very peculiar about the information contained in these documents. 

A bit of crucial advice here would be that you do not make mistakes and do not fill in incorrect information regarding your business, as it may give the wrong impression about your company and may open a dispute.

Accountants London
Company Registration No. 07078392