Accounts preparation starts with the output from the bookkeeping system – generally the trial balance (see Nutshell Guide to Bookkeeping).
The trial balance is essentially a summary listing of the income that has been received, the expenditure that has been made, the assets that the company owns and the liabilities that exist as at the date the trial balance was prepared.
The preparation of accounts for the business summarised these individual items by grouping them into meaningful categories. For example vehicle fuel costs, road tax, vehicle insurances and vehicle repairs and servicing may be combined in the accounts under the heading Motor Expenses and wages, salaries, training, employment and social taxes may be grouped as Employment Costs.
The accounts (sometimes also called Financial Statements) will also distinguish between transactions that relate to income and expenditure (which will appear within the Profit and Loss Account) and transactions that are assets or liabilities of the business (which appear within the Balance Sheet).
There is a vast array of rules and regulations applying to the way accounts are prepared whether from legislation or from best practice as determined by the accountancy profession and accounts prepared under GAAP (Generally Accepted Accounting Principles) are expected to comply with these.
Once the Accounts are finalised and approved by the management of the business they become the formal record of the trading results. The Profit and Loss account will cover a period of time and will show how much the business made (or lost) during the period. The Balance Sheet is a snapshot of what assets and liabilities existed as at the end of that period. The Accounts should also show comparatives for the preceding period that will give some idea of the trend within the business.
The Profit and Loss Account and Balance Sheet are the two main statements within a set of Accounts however there may be other statements and notes giving more detail on certain aspects of the results.
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