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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