How to Prepare Financial Statements: A UK Guide

Getting to Grips with Core UK Accounting Principles

In the UK, most small and medium-sized businesses operate under FRS 102, which is part of the UK Generally Accepted Accounting Practice (UK GAAP). This framework is the rulebook for how we record and report every single transaction. At its heart lies the fundamental accounting equation:

Assets = Liabilities + Equity

This is not a dusty old theory; it is a practical tool that keeps your books balanced with every entry. For any transaction, this equation must hold true. For example, if a business buys a £1,000 computer (an asset) with cash (another asset), one asset goes up while the other goes down, keeping the equation perfectly balanced. If it buys that same computer on credit, assets increase by £1,000, and so do liabilities.

To truly master this, you need to understand the mechanics of double-entry bookkeeping—it’s the system that ensures this equation never breaks.

Gathering and Organising Your Source Documents

Every number you put into a financial statement needs a paper trail. This trail is made up of source documents—the physical or digital proof that a transaction actually happened. Without them, you have nothing to show an auditor.

Here are the key documents you will be collecting:

• Sales Invoices: The bills you send to your customers.
• Purchase Invoices: The bills you receive from your suppliers.
• Bank Statements: A complete record of all money moving in and out of the business accounts.
• Receipts: Proof of smaller cash purchases or expenses.
• Payroll Records: Details of payments to employees, including tax and National Insurance contributions.

To prepare accurate financial statements, precise record-keeping is vital. This includes using proper documentation for every single transaction, no matter how small. Using professional sample business receipt templates, for instance, ensures even minor cash expenses are captured correctly.

Structuring a Chart of Accounts

Once you have your documents, you need a system to classify everything. This is where the Chart of Accounts comes in. Think of it as the index for your entire financial system—a complete list of every account in the general ledger, neatly organised by type: asset, liability, equity, revenue, and expense.

Setting this up properly in software like Xero, Sage, or QuickBooks is a core skill for any accounts assistant. A well-structured chart makes data entry consistent and pulling numbers for the trial balance a breeze. A messy one, on the other hand, is a recipe for chaos.

From Raw Data to a Rock-Solid Adjusted Trial Balance

Once you have organised all the foundational data, the next job is to transform those raw numbers into a structured and accurate adjusted trial balance. This is where your bookkeeping and VAT training truly comes to life, turning a simple list of transactions into the reliable source you will use to build the final reports.

The process always starts by posting journal entries for all the business activities that happened during the period. But the real test of an accounts assistant’s skill is making those crucial period-end adjustments. These are the tweaks and refinements that ensure the accounts accurately reflect the company’s financial performance and position, not just the cash that has moved in and out.

This graphic breaks down the fundamental flow, from gathering the initial information to applying the core accounting principles.

This systematic approach—Gather, Structure, then Apply—is essential. It prevents simple errors from compounding by ensuring the initial data is logically organised before any accounting rules are implemented.

Making Crucial Period-End Adjustments

An unadjusted trial balance is just a starting point. Think of it as a first draft. It is a complete list of all your account balances, but it does not yet account for revenues earned or expenses incurred that have not been officially recorded. This is where adjusting entries come in, covering things like accruals, prepayments, and depreciation.

Without these adjustments, you would be violating the matching principle, which is a core accounting concept stating that expenses should be recognised in the same period as the revenues they helped generate. Let’s walk through some of the most common adjustments you will be handling.

Calculating and Recording Depreciation

Depreciation is simply the process of allocating the cost of a tangible asset over its useful life. It is a non-cash expense that reflects an asset’s wear and tear or obsolescence over time. One of the most common methods you will use is straight-line depreciation.

Worked Example: Straight-Line Depreciation

Imagine a business buys a delivery van for £25,000. They expect the van to last for five years and have a residual (or scrap) value of £5,000 at the end of that time.

1. Calculate the Depreciable Amount: Cost of Asset – Residual Value = £25,000 – £5,000 = £20,000
2. Calculate Annual Depreciation: Depreciable Amount / Useful Life = £20,000 / 5 years = £4,000 per year

The journal entry to record this annual expense would look like this:

• Debit: Depreciation Expense (£4,000)
• Credit: Accumulated Depreciation (£4,000)

This entry increases the company’s expenses for the year while reducing the asset’s carrying value on the balance sheet. Getting depreciation right is a cornerstone of UK financial reporting. For a real-world example, the UK Statistics Authority’s 2024/25 accounts show assets revalued by £1,238k and a depreciation charge of £5,936k for the year, demonstrating a direct application of FRS 102 principles. You can see in the full report how these figures impact balance sheet integrity.

Handling Accruals and Prepayments

Other vital adjustments involve accounting for items where the timing of the cash payment does not match the accounting period.

• Accrued Expenses: These are expenses the business has benefited from but has not yet paid for. A classic example is employee salaries for the last week of the month that are paid in the following month. You must record an entry to recognise the expense in the period it actually occurred.

• Prepaid Assets: This is the opposite scenario. The business has paid for something in advance, like a six-month insurance policy. The initial payment creates an asset (Prepaid Insurance), and each month you would expense one-sixth of that total cost.

The whole point of these adjustments is to achieve a true and fair view of the company’s financial health. By correctly timing the recognition of revenues and expenses, the adjusted trial balance becomes the solid bedrock upon which all the main financial statements are built. You can dive deeper into how these checks and balances work in our guide on what is reconciliation in accounting.

Drafting the Core Financial Statements

Once your adjusted trial balance is locked in and accurate, it is time for the main event: constructing the three financial statements that tell the company’s story. This is where your accounts assistant training truly comes to life, turning those neat columns of numbers into reports that business leaders, investors, and regulators actually understand and use.

We will build them in a logical order: first the Statement of Profit or Loss, then the Statement of Financial Position, and finally, the Statement of Changes in Equity. By following a continuous example, you will see exactly how the figures flow from one report to the next—a fundamental skill for anyone handling final accounts.

Constructing the Statement of Profit or Loss

The Statement of Profit or Loss (often just called the P&L or income statement) is always the first one you tackle. It answers the most critical question: did the business actually make any money this period? For business analysts and management, this report is everything when it comes to judging performance.

To build it, you will be pulling every single revenue and expense account from your adjusted trial balance. The structure is simple and flows directly to that all-important bottom line.

A Quick Guide to the Profit or Loss Statement:

• Start with Revenue: Grab all your income accounts from the trial balance. This is mainly your sales revenue, but do not forget other bits like interest received.
• Calculate Cost of Goods Sold (COGS): Next, find the direct costs of what you sold. If you are a retailer, this is simply the cost of the stock you shifted during the period.
• Find Gross Profit: Subtract COGS from your total revenue. This gives you the gross profit, a key metric that shows how efficiently the business is making and selling its products before we even think about overheads.
• Add Up Operating Expenses: Now, pull in all the other costs of running the business for the period. Think salaries from payroll, rent, utility bills, marketing, and that depreciation expense you calculated earlier.
• Get to Net Profit: Finally, subtract your total operating expenses from the gross profit. The result is your net profit (or net loss), the ultimate measure of how profitable the company was.

Assembling the Statement of Financial Position

Next up is the Statement of Financial Position, which everyone still calls the Balance Sheet. This is a snapshot of the company’s financial health on a specific day—usually the last day of the accounting period. It all comes down to one unbreakable rule: Assets = Liabilities + Equity.

Getting this right is a core part of any accounts assistant or bookkeeper’s job. It is the final check that confirms the books are, literally, in balance.

This report is the bedrock of financial analysis. It reveals what a company owns (assets), what it owes (liabilities), and the value belonging to its owners (equity). A solid balance sheet shows stability and solvency.

You will use all the remaining accounts from your trial balance to draft it—that is every asset, liability, and equity account.

Key Sections of the Balance Sheet:

• Assets: These are broken down into current assets (cash, accounts receivable, inventory) and non-current assets (property, equipment, vehicles, net of their accumulated depreciation).
• Liabilities: These are split the same way. Current liabilities are short-term debts like accounts payable or the VAT bill, while non-current liabilities are long-term debts, such as a bank loan.
• Equity: This includes the original share capital and, most importantly, the retained earnings.

When you are done, the total of your assets must perfectly equal the total of your liabilities and equity. If it does not, you have an error somewhere in your accounts that needs finding.

Creating the Statement of Changes in Equity

The final piece of the puzzle is the Statement of Changes in Equity. Think of this report as a bridge connecting this year to last year. It shows exactly how the owners’ stake in the company has changed over the period, which is obviously something shareholders are very interested in.

The hero of this statement is retained earnings. This is the figure that links your P&L directly to your Balance Sheet.

The calculation is really straightforward:

1. Opening Retained Earnings: Start with last year’s closing balance for retained earnings.
2. Add Net Profit: Take the net profit figure you just worked out on the P&L and add it on.
3. Subtract Dividends Paid: Deduct any payments made to shareholders during the period.
4. Closing Retained Earnings: The number you are left with is the closing retained earnings. This is the exact figure you will plug into the equity section of your new balance sheet.

Mastering how to prepare these three interconnected statements is essential. It shows you truly understand how a company’s day-to-day activities translate into its financial results—a skill that is highly valued in every finance role, from bookkeeping right through to business analysis.

Mastering the Statement of Cash Flows

After you have drafted the profit or loss statement and the balance sheet, it is time to get to grips with what many trainees find the most challenging report: the Statement of Cash Flows. While profit is a crucial performance metric, it is ultimately an accounting concept. Cash, on the other hand, is the real-world fuel that keeps a business running.

There is a saying in accounting: “profit is opinion, but cash is fact.” This statement is so important because it reveals a company’s actual ability to generate cash to pay its debts, fund its operations, and make investments. It answers one simple but vital question: where did the cash come from, and where did it go? For business analysts and investors, this report often tells a more honest story about a company’s health than the income statement alone.

Getting to Grips with the Indirect Method

While there are two ways to prepare this statement, the indirect method is by far the most common in practice and the one you will encounter ninety-nine percent of the time. Instead of tracking every single cash transaction (the direct method), this approach cleverly reconciles the net income from the P&L to the actual change in cash you see on the balance sheet.

You start with your net profit figure and then make a series of adjustments to strip out any non-cash items. You will also account for the timing differences between when transactions are recorded and when cash actually moves.

Calculating Cash Flow from Operating Activities

This first section is the trickiest part of the statement and a real test of your bookkeeping knowledge. Its job is to convert the accrual-basis net profit into a cash-basis figure.

Here’s how you break it down:

• Start with Net Profit: Grab the final ‘bottom line’ number from your Statement of Profit or Loss.
• Add Back Non-Cash Expenses: You need to add back any expenses that reduced your profit but did not involve an actual cash outflow. The classic example here is depreciation—it is an accounting entry, not a cash payment, so it gets added back to net profit.
• Adjust for Changes in Working Capital: This is where you look at the changes in current asset and current liability accounts between the beginning and end of the period. The rules of thumb are:
  • An increase in a current asset (like accounts receivable or inventory) means cash was used, so you subtract it.
  • A decrease in a current asset means cash was freed up, so you add it.
  • An increase in a current liability (like accounts payable) is a source of cash, so you add it.
  • A decrease in a current liability means cash was used to pay it down, so you subtract it.

By making these adjustments, you isolate the cash generated purely from the company’s core, day-to-day business operations. This final figure, Net Cash from Operating Activities, is one of the most heavily scrutinised metrics for assessing a company’s underlying financial strength. This is a critical skill for any aspiring business analyst or data analyst.

Classifying Investing and Financing Activities

Thankfully, the next two sections are much more straightforward. They involve analysing changes in the non-current asset and long-term liability/equity sections of the balance sheet. This is where interpreting reports from software like QuickBooks or Xero becomes invaluable, as they can help you trace these specific cash movements.

• Investing Activities: This section is all about the cash flows related to buying and selling long-term assets. Think cash spent to purchase new machinery (a cash outflow) or cash received from selling an old company vehicle (a cash inflow).

• Financing Activities: This part details how a company raises capital and pays it back to its investors. It includes cash received from taking out a bank loan (inflow), cash used to repay loan principal (outflow), and cash paid out to shareholders as dividends (outflow).

Once you have calculated the net cash flow from all three activities—operating, investing, and financing—you sum them up. The result is the net increase or decrease in cash for the period.

This final figure absolutely must match the change in the cash balance shown on your Statement of Financial Position from the beginning to the end of the year. If it does not, it is a red flag that an error has crept in somewhere, and it is time to start digging.

Polishing Your Accounts: Compliance, Context, and Final Checks

You have drafted the core financial statements, which is a massive step. But the job is not quite done. The final stretch is all about adding crucial context, ticking every compliance box, and running a fine-tooth comb over the numbers to catch any last-minute errors.

This is where you separate a good set of accounts from a great one. It is the meticulous detail that ensures your work stands up to scrutiny from regulators, investors, or the board. Think of it as adding the narrative, meeting the deadlines, and applying a healthy dose of professional scepticism. These are vital skills for final accounts preparation.

Telling the Full Story With Notes to the Financial Statements

The numbers in your profit and loss or balance sheet only give you the headlines. The real story, the essential “why” and “how” behind those figures, lives in the Notes to the Financial Statements.

These are not just an optional extra; they are a mandatory part of any complete set of accounts under UK GAAP (like FRS 102). Their job is to add clarity and transparency, explaining the accounting policies you have followed and breaking down key line items. For anyone learning the ropes, mastering what goes in here is a game-changer.

You will typically need to prepare disclosures for things like:

• Principal Accounting Policies: A quick summary of the ground rules you followed, like how you depreciate assets or value your stock.
• Tangible Fixed Asset Breakdown: A clear table showing the cost, accumulated depreciation, and net book value for assets like property, vehicles, and equipment.
• Debtors and Creditors Analysis: More detail on what is due within one year versus after one year. It gives a much better picture of liquidity.
• Contingent Liabilities: Information on potential future costs that are not certain yet, like an ongoing legal dispute.

Nailing UK Compliance and Filing Deadlines

In the UK, filing your accounts with Companies House is a hard deadline. Miss it, and you will be hit with automatic, escalating penalties. It is a non-negotiable part of the job for any accounts professional.

Before diving into the deadlines, it is worth noting the huge push towards digital record-keeping. Initiatives like Making Tax Digital (MTD) now mandate HMRC-approved software for VAT submissions. This is not just about compliance; it genuinely reduces mistakes. Early adopters saw a 25% drop in errors, proving that good software and solid processes go hand-in-hand.

Here is a quick rundown of the standard filing deadlines you absolutely need to know.

Key UK Financial Statement Filing Deadlines

This table summarises the standard deadlines for private limited companies filing with Companies House.

As a rule of thumb, you have 9 months from your company’s financial year-end to get everything filed. Keep these dates circled in your calendar!

The Final Review: Your Last Line of Defence

Before you hit “submit,” one final, thorough review is your last line of defence against embarrassing or costly mistakes. This is where your analytical eye is your most valuable tool. You need to step back and look for consistency across all the reports you have just built.

Make sure these key reconciliation points are on your checklist:

1. Profit to Equity: Does the net profit from your Statement of Profit or Loss flow correctly into the retained earnings on the Statement of Changes in Equity? It has to.
2. Equity to Balance Sheet: Does the closing retained earnings from the Statement of Changes in Equity perfectly match the retained earnings figure on your Statement of Financial Position?
3. Cash Flow to Balance Sheet: Does the closing cash balance on your Statement of Cash Flows exactly match the cash at bank figure on the Statement of Financial Position?

This final review is more than just a box-ticking exercise. It is about applying professional judgement to ensure the accounts present a true and fair view of the company’s health. It is your professional seal of approval.

This final push often involves working with busy EOFY accountants who are experts at getting everything over the line. And if you want to get a better handle on the rules governing all this work, our guide to financial reporting standards is a great place to start. Nailing this final, detail-oriented stage is what proves your competence and makes you a truly valuable asset to any finance team.

Your Questions Answered: Preparing Financial Statements

When you are starting out in accountancy, it is natural to have questions about how the theory translates into practice. Moving from raw data to a full set of final accounts can feel like a huge task, but understanding a few core principles makes the whole process manageable.

Let’s tackle some of the most common queries we see from trainees to help build your confidence.

What Is the Most Important Statement to Prepare First?

While every financial statement is crucial and they all link together, you should always prepare the Statement of Profit or Loss (P&L) first.

The reason is simple: the final “bottom line” figure from the P&L—the net profit or loss for the period—is a vital piece of the puzzle for another statement. Specifically, you need that net profit figure to calculate the closing retained earnings on the Statement of Changes in Equity.

If you have not finalised your profit figure, you cannot complete the equity statement. And without that, you will not have the correct figures to make your Balance Sheet balance. It is a domino effect, and it all starts with the P&L.

Can I Use Software to Prepare Everything Automatically?

Yes, modern accounting software like Xero, Sage, and QuickBooks are designed to automate a huge part of the statement preparation process. Once you have got the chart of accounts set up correctly and all the transactions are properly categorised, the software can generate a trial balance and draft the core financial statements in just a few clicks.

However, a skilled accounts assistant never relies on software blindly. Your real value comes from:

• Understanding the “Why”: You need to know how the software arrived at those figures so you can spot anything that looks off.
• Making Adjustments: Software cannot always handle complex period-end adjustments like accruals, prepayments, or specific depreciation calculations without your manual input and oversight.
• The Final Review: Performing the crucial reconciliation checks to make sure the numbers flow correctly between statements is a human task that requires critical thinking.

Think of software as a powerful calculator. You are the mathematician who makes sure the inputs are right and the final answer actually makes sense.

How Do VAT and Payroll Affect Financial Statements?

VAT and payroll are not just separate administrative tasks; they are fundamental to the numbers you report in the final accounts.

VAT Impact:

• The VAT you owe to HMRC (or are due back as a refund) at the end of a reporting period shows up as a current liability (or current asset) on the Statement of Financial Position.
• If VAT is recorded incorrectly, it can distort both your profit and your balance sheet figures. This is exactly why solid Bookkeeping & VAT training is so important for accuracy.

Payroll Impact:

• Gross wages, employer’s National Insurance contributions, and pension costs are major operating expenses on the Statement of Profit or Loss.
• Any unpaid PAYE, National Insurance, and pension contributions are recorded as current liabilities on the balance sheet until they are paid over.

Advanced payroll knowledge ensures these significant costs and liabilities are calculated and recorded perfectly, which is vital for a true and fair view of a company’s financial health. A small error in payroll can have a material impact on the reported profit.

What Are the Most Common Mistakes Trainees Make?

Even with the best intentions, a few common pitfalls can catch out accountants who are new to preparing final accounts. Knowing what they are is the first step to avoiding them.

One of the most frequent errors is forgetting to post adjusting entries, especially for things like accrued expenses or prepaid income. This mistake directly violates the matching principle and will overstate the profit for the period. Another classic slip-up is a miscalculation in depreciation, often from using the wrong asset cost or useful life.

Finally, a simple data entry mistake made early on can ripple through the entire process. This is why those final reconciliation checks are not just a formality—they are your safety net for catching errors before the accounts go out the door. These skills are essential for accounts assistant roles and form a core part of final accounts training.

Ready to build the practical skills that turn theory into a successful career? Professional Careers Training provides hands-on, expert-led courses in everything from bookkeeping and final accounts to advanced software and data analysis. We offer flexible 1-2-1 training, recruitment support, and official certifications to make you truly job-ready. Start your journey by exploring our accountancy courses.