There are two distinct reasons, and both matter.

The legal reason. Every limited company is required by law to prepare annual accounts and file them with Companies House. This is not optional. Failure to do so results in financial penalties and, ultimately, the company being struck off the register. In addition, your Corporation Tax return is based on your annual accounts and must be submitted to HMRC.

The business reason. Annual accounts are a record of how your business performed over the year. They show whether you made a profit, how the business grew or contracted, and what the financial position of the company is. Used properly, they are a management tool, not just a compliance exercise.

Many directors treat accounts as a once-a-year obligation to be completed as quickly as possible. The businesses that use them properly treat them as the starting point for planning the following year.

More people than you might think.

• Your accounts form the basis of your Corporation Tax computation and are subject to enquiry.
• Companies House. Filed accounts are publicly visible. Anyone can download them for free.
• Banks and lenders. When you apply for a loan, overdraft or any form of business finance, your accounts will be reviewed. Most lenders want to see at least two years.
• Potential investors or buyers. If you ever seek investment or sell the business, accounts are the first document any serious party will examine.
• Larger suppliers sometimes conduct credit checks before agreeing terms.
• Some clients, particularly public sector bodies and large corporations, check the financial health of their suppliers before placing contracts.

The fact that accounts are publicly available is something many directors forget. Filing abbreviated accounts (as many small companies do) reduces the information disclosed, but the accounts are still filed and visible.

Statutory accounts are the formal, year-end accounts prepared in accordance with accounting standards and filed with Companies House and HMRC. They follow a prescribed format and are subject to strict rules about what must be included.

Management accounts are internal documents, prepared more frequently, typically monthly or quarterly, for the use of the directors. They are not filed anywhere and can be in any format that is useful to you.

Management accounts typically include a profit and loss account, a balance sheet and a cash flow statement, often with comparisons against budget or the prior year. They are designed for decision-making, not compliance.

The most common mistake small businesses make is relying solely on statutory accounts, which may be prepared months after the year end, to understand how the business is performing. By the time you receive them, they are already historical. Management accounts give you current information.

Because they contain information that can change how you run your business, if you know how to read them.

Your accounts show you:

• Whether your margins are improving or deteriorating over time.
• How much the business owes and is owed.
• Whether your overhead base is growing faster than your income.
• How efficiently the business converts sales into cash.
• Whether the business has the financial strength to invest, hire or borrow.

A director who reads their accounts in this way is asking different questions from one who simply checks that the profit figure looks about right. The accounts are a diagnostic tool. Used properly, they point to where attention is needed before problems become serious.

More than most directors realise. Specifically:

• Not just whether you made a profit, but whether margins are healthy and trending in the right direction.
• Whether the business has enough short-term assets to meet its short-term obligations, the working capital position.
• How quickly the business collects debts, pays creditors and turns stock into cash.
• Whether the company’s total assets exceed its total liabilities.
• Funding structure. The balance between equity, retained earnings and debt.

Many of these insights come not from a single year’s accounts but from comparing two or three years in sequence. Trends are often more telling than individual figures.

Your accountant makes adjustments to ensure that the accounts accurately reflect the financial position and performance of the company for the year, rather than simply reporting what happened to flow through the bank account.

Common adjustments include:

• Spreading the cost of an asset over its useful life rather than writing it off in the year of purchase.
• Recognising an expense that has been incurred but not yet invoiced, such as an accountancy fee or a utility bill for the final quarter of the year.
• Excluding a portion of a cost that has been paid in advance and relates to the following year, such as an annual insurance premium paid in November for a December year end.
• Stock adjustment. Valuing closing stock correctly so that only the cost of goods actually sold is charged in the year.
• Deferred income. Excluding income received in advance for services not yet provided.

These adjustments are not creative accounting. They are the application of accounting standards to ensure that profit is reported in the period to which it relates, a principle called matching.

Depreciation is the accounting treatment for the cost of a fixed asset, a vehicle, a machine, a computer, spread over its expected useful life.

If a business buys a van for £20,000 and expects to use it for four years, it would charge £5,000 of depreciation per year to the profit and loss account. The balance sheet would show the van initially at £20,000, reducing by £5,000 each year.

Depreciation reduces profit but involves no cash movement in the year it is charged (the cash was spent when the asset was purchased). This is one of the reasons profit and cash flow diverge.

For tax purposes, depreciation is not a deductible expense. Instead, the tax system has its own version, capital allowances, which may give relief at a different rate or in a different year. This is one of the reasons your accounting profit and your taxable profit are often different.

Your accounting profit is calculated according to accounting standards. Your taxable profit is calculated according to tax law. The two use different rules and will rarely be identical.

Common differences include:

• Depreciation is not deductible for tax, but capital allowances (a tax version of depreciation) are.
• Some expenses are disallowable for tax, entertainment costs, most fines and penalties, and certain provisions.
• Certain income may be treated differently for tax purposes.

Your accountant prepares a tax computation that starts with your accounting profit and makes the necessary adjustments to arrive at taxable profit. The Corporation Tax is then calculated on the taxable profit figure.

Because the amounts owed to and by the company at the year end affect the accuracy of the accounts.

Debtors (trade receivables) are amounts owed to the company by its customers. Your accountant needs to confirm which invoices remain unpaid at the year end so that income is correctly recognised and any debts that are unlikely to be collected can be identified and potentially written off.

Creditors (trade payables) are amounts the company owes to its suppliers. Your accountant needs to ensure that all invoices received before the year end are included in the accounts, even if they have not yet been paid.

Getting these figures right is not just a compliance matter, it directly affects the reported profit for the year and the working capital position shown on the balance sheet.

The profit and loss account covers a period, it tells you what happened during the year. The balance sheet covers a point in time, it tells you where things stand at the year end.

The profit and loss account starts with turnover and works down to net profit. The balance sheet shows assets, liabilities and equity.

The two are connected: the net profit from the profit and loss account flows into the balance sheet, increasing retained earnings in the equity section. This is why the balance sheet always balances, equity equals assets minus liabilities, and equity includes the cumulative profits of the business since incorporation.