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Every year, you should receive a set of accounts from your accountant that summarise the financial activity of your practice. For many, the figures can be a challenge to understand, so Ian Tongue (left) looks at the key points of your annual accounts and some useful pointers on how to interpret them.

The Basics

Accounts or financial statements normally comprise of a profit and loss account and a balance sheet and both are prepared up to a financial year/period end. The profit and loss account can also be referred to as an income and expenditure account and both are often interchangeably used, although subtly different. These are a summary of the income and expenses of the practice, which then result in a profit or loss for the business. The balance sheet is a snapshot of the assets and liabilities of the business as at the financial year end date and, for most private practices, can be regarded as the net worth of the business. The way in which your accountant prepares the figures is governed by accounting standards as well as tax legislation and often these can be different – i.e. the accounting treatment differs to the tax treatment. This is the reason why often your taxable profit from your private practice is different to your accounting profit. The financial year-end is normally the end of a month and, for ease, many businesses use the tax or fiscal year-end to prepare their figures up to. There can be cash flow advantages to not having a financial year-end the same as the tax year end and your accountant should explain the pros and cons of adopting this. One very important part of accounting standards and principles is what is known as the accruals basis. In simple terms, this means that you disclose your income on the basis of when you earn money and not when you are paid. When it comes to expenses under the accruals basis, you claim costs on the basis of being incurred rather than paid. For smaller private practices with earnings below the VAT registration limit – currently £85,000 per year – a receipts basis is possible, but generally it works out best to go with the accruals basis from the start to avoid having to transition from one basis to the other later on.