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Financial Accounting and procedures required in a company

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Date added: 17-06-26

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To form a limited firm in the UK, following few documents are needed to send to Companies House for registering it: IN01 application form to enlist a firm which includes

One address for the firm's registered office,

Different type of articles,

Also pre defined names and address for the directors of the firms,

It also includes the statement for the initial and total capital (paid up or un paid) and the initial number of shares that company is going to offer.

Memorandum of Association 

Giving the names of each subscriber and verification that each member is approved to turn into members of that firm

Articles of Association 

The document entails how the firm will perform its business operations, shareholder key rights, constrained substances if the firm has any and the details powers of company's directors.

Additional information 

If the application includes a prescribed or sensitive word or expression or according to application if any other document demands by the company house, company has to fulfil to proceed the registration process.

Requirements for Registering Public Limited Companies (PLC)

Before any business can start operating as a limited company in UK, it has to be registered with the Registrar of Companies at Companies House. Incorporation is the process by which a new or existing business is formed as a company and can sell its share in stock exchange to gather share capital.

A public limited company (plc) must fulfil these requirements:

Company that is going to be limited must show that it has at least two directors - who may also be members of the company.

The company also must have the one individual director at least.

The selected directors for the company should be aged 16 or over 16.

The company must also have one qualified secretary at least.

You cannot choose a name for the firm that is the same as an existing firm. It does not include any receptive words and jargon that need sanction from Companies House. For example, a firm is not authorized to select a name which comprises words that are potentially misleading, such as 'international' if the company is operating business only in UK.

When the plc firm is free to operate its business?

Unless the company house provides the trade certificate to the firm it cannot perform its operations and that the certificate will be issued by the company house when the company has the minimum required capital and this minimum amount for capital is £50,000 for UK plc business.

Question No. 2

Different Stakeholders and their interests In Company?


Employees and workers of the company

It is common concurrence that employees are major stakeholders because employees have the direct impact on performance of company and equally they have interest regarding their salaries, benefits and careers.


Shareholders of the company hold the shares which make them owners and mostly they are considered to be top priority stakeholders of the company because of their ownership. Since shareholders are owners of the company so they have desperate concern with business and this makes them the top stakeholder of firm.

Management of the company

It is somehow notorious debate among business personnel that management of the company is stakeholder of the company or not. Freeman and Evan supported the view as managers are directly involved to keep balance among the other stakeholders demand and fulfil them wisely and this extra responsibility of managers include them in stakeholders of the company.

Controversial, but some believe that managers are stakeholders As the managers also employees of the company but their high responsibility towards company's performance make them a separate stakeholder from employees.


Creditors or suppliers of the company also somehow involve in the ownership if company provides them the security by offering them right of sales of the assets which make them stakeholders. Creditors also have high interest because of their lending amounts which they offer to the company and interest payments which they get back from company. If the company performs poor that means there is risk to lose their payment and interest hence this interest makes them stakeholders.

Trade unions

Since trade unions also have somehow impact or effect on the decision making of the company and this makes them the stakeholder of the company.


Customers of the company are also very key stakeholders. Because sales/profitability of the company depends upon customers and equally company's policies also affect the customers and their buying attitudes.


Often considered a stakeholder because company gets raw material for production and equally suppliers have to get payments in result of these raw material supplies. So this interest makes the suppliers as one of the key stakeholder of the company.


Government is also stakeholder as government has high interest in any company regarding the tax. High the profit high the tax company has to pay.

Local community

The local community around the company where it operates the business is also included into the stakeholders of the company. Corporate social responsibility concept is an emerging concept and very important in company's growth so this shows that the local community around the company is also stakeholder of the company.

Stakeholders' interests (conflicts among the interests of firm's stakeholders)

Since each of the firm has different stakeholders and these different stakeholders have the different benefits and interests in firm. These different interests may create conflict among the stakeholders and also create trouble position for the management.

Common concerns of the stakeholders

Company's stockholders and the employees' have the common concerns with the company because they both want company earns high profitability so that company may return them with higher return and salaries.

High salaries, job security, growth of the business, and high dividend are the interests of the shareholders and employees which are commonly associated with the high profitability.

Creditors and suppliers also have the high profit interest in company because it may provide help to the company to return back their credits soon.

Conflicting Concerns of the stakeholders

Increase in wages and salaries in shape of high return may affect on the dividend amounts.

Management often concerned with high profit and further investment of that profit into the business which may sacrifice the dividend for shareholders.

By investing the huge amount of profit on growth of the company may not bring the positivity in society and management may postpone the aim of community and environment betterment.

Major Stakeholders of the Company

Source: www.themanager.org

Question No. 2

Reasons for Monitoring the Financial Performance of Business

All the stakeholders and stockholders of the company are in favour that efficient corporate governance needs the defined rules and regulations in company. The main principle of all stakeholders is to get timely and accurate information regarding their each concerning matter. To make it sure a company should practice the fair procedures and policies to monitor its financial performance so that the goal of disseminating the right information to the right person at right time can be fulfilled. Monitoring the financial performance of business provides benefits in following ways:


Full exposé of non financial and financial information let the stakeholders to approach on transparent information. If there is no transparency into financial system a company may face fraud and can deceive the stakeholders with mislead information. So to avoid these all scams a company should have to implement and follow the monitoring system that transparently expand all the financial information to company's stakeholders.


Accountability is very necessary to monitor the management performance whether it is performing in favour of the company or not and if necessary replace the management. There must be authentic, independent and authoritative body to monitor and control the management performance.


Equitable treatment of investors and their investments is another reason to implement the monitoring system. Through proper monitoring system a company can ensure that the money of investors is properly and fairly invested into profitable investments. If there is no monitoring system company may lose its profits by investing into wrong investments.


Ensuring the corporation fulfils its proper role in society by investing something for the betterment of community.


Is the business profitable or it is facing loss. How to manage the operations of the company to increase the overall performance and what suitable financial structure should be adopted by the company to generate and manage the business finance. What corrective measures a company can adopt to change its loss into profits. How to manage the profitability and even can enhance the profitability. What will be the suitable combination of policies for the company? So, all above questions indicate that without financial monitoring system a company cannot answer these questions.


Whether the company has enough growth or size to produce the desired level of profitability? What the key changes that company should have to implement in growth, finance and operating performance to achieve the desired profitability?

While checking the current financial resources company has to invest accordingly. May be currently company has available funds but due to higher cash outflows this could create problem for company in future. So after monitoring the size of company and size of investment, company should have to invest to achieve profitability from the investment.


Can the business grow to maintain or improve its long-term competitive position? What is a sustainable rate of growth for this business? Would the project provide the growth to business? A company can get answers for all such questions by implementing the continuous monitoring on financial performance of the company.

Question No. 4

Explain Link between Balance sheet and Profit & Loss Account?

Balance sheet 

A balance sheet is a main statement in the annual report that shows a current economic situation of the form at a specific point, and this financial statement is presented at the end of each fiscal year, but for the accounts of management, short-term financial statements can be prepared by the company which can be prepared at any date. 

It consists of the firm's long term assets, short term assets, short term liabilities, fixed liabilities and provisions, the abstract of which is the net assets, or shortage, of the company.

Profit and loss account

The profit and loss account is another chief statement in the annual report that shows a firm's performance over a specific time period. Being a firms' performance report the profit & loss account explains the financial gains and also explains how the firm has done the fair business during this fiscal year and what profitability the firm has earned or what loss company has suffered. The profit and loss account includes of sales and all other sources of income generation for business, direct costs of business, overheads and expenses, financial costs and the government tax payable expenses.

The Linkage

Regardless of being two entirely different chief financial reports the balance sheet and the profit and loss account are somehow linked between each other. As the bottom part of the balance sheet report includes the profit and loss reserves, which indicates the profit retained by the company by not paying the full dividend to its stockholders with the future investment purpose.

So in short the balance sheet statement provides overview of the financial health of the company at an accurate point, in contrast the profit and loss account statement expresses the financial gains of the company for the whole/current fiscal year. 

Both balance sheet and profit & loss statements have their own benefits and useful to review and analyze the company's financial position, however without assessing and viewing both statements financial position cannot be judged by individually viewing any of statement.

Above statement can be backed by the following illustration that if a profit & loss statement presenting the huge loss and would be de moralised its market worth and owners interests but having look on the balance sheet might clear the idea which shows the company's provision has further increase may cause the reduce profitability and loss.

Provisions are simply an "accounting entry" that influences profitability but not the cash-flow of the company, so on the basis of this the presentation that company is not performing that bad as profit & loss statement has showed.


Both statements profit & loss account and balance sheet statement are as significant as each other and no solitary statement is measured to be more helpful than the other. To completely understanding the company's financial performance where the reader of accounts need to know what the balance sheet and profit & loss statements are but also to know the relationship between these key statements and how positively and negatively they interact with each other.

Question No. 4

Explain the Break-Even point and give examples?

Break Even Analysis

Break-Even is the volume where all Fixed Expenses of the business are covered or one can say that the point in business where the sales equal the total expenses. The point where is no profit and no loss for the company. All the new business must forecast what the total sales figures should be to satisfy its business expenses and after this to earn the profitability. To know or forecast the breakeven point for the company is beneficial for the business in case that it can find the new ways and approaches to cut down the expenses to increase the profits of the company. Reducing admin expenses, job cut downs and other un-necessary expenses may be reduced when the company knows the breakeven point to increase the profits.

Through fixed expenses analysis, company can start to assess its breakeven point. To understand the breakeven concept let's take an example:

Admin expenses


Rent expenses


Other Utilities expenses


Insurance expenses


Tax expenses


Telephone bill expenses


Auto expenses


Supplies expenses


Advertising expenses


Financial Interest expense


Miscellaneous expenses




Gross profit margin

30% of total expenses

These are the expenses that must be covered by the gross profit (sales - cost of goods sold).

Gross margin percentage and the total fixed expenses figures are very essential in this example and if total fixed expenses are supposed as £10000 and gross profit percentage is given as 30% then the breakeven point after all calculation would be £40000.

Example of break even

Q. A newspaper agency business has fixed costs of £2500 per month. Its average sales price per item is £15, and its variable costs are on average £5 per item. How many items does it need to sell to break-even?

Q = FC / (UP - VC)

Q = Breakeven figure, i.e., Units of production (Q),

FC = Fixed Costs,

VC = Variable Costs per Unit

UP = Unit Price


Break-Even Point Q = Fixed Cost / (Unit Price - Variable Unit Cost)

= 2500 / (15 -5)

= 250

So if the company sales 250 items it will be break-even point where the total fixed cost will be satisfied and no profit will be gained by the company. For getting profit company has to sales more than 250 items.

Question No.6

Explain Budgeting and difference between budget and Account?


After the eighteenth century's industrial revolution the business entities started use of budgeting into their businesses to forecast the future conditions that companies may face. To prepare a right budget in those days and even in these days is very challenging for the management of every company.

Every department, team and group among company may have their own budgets but most of the companies have their overall final business for the whole of its business. Budgeting for small companies with limited products is simple but for the international business with number of product lines is really very challenging task. Budgeting is something to forecast the future of the business and accordingly allocate the resources.


Budget is a written document or evidence of all the income and expenditures that company would have earn or expense for the particular period which is normally one fiscal year. It can be prepared at organization level, department level, group level, team level or even for individuals. Businesses, governments, ministries, local authorities, NGOs and even individuals prepare their budgets and use them into their businesses for controlling the expenses. Budgets always prepare in advance and budgeting is one strong aspect of budget which means analyzing the future situation of business in advance, think about contact and implication of things in progress and tend to control the future situation in advance to secure the business.

Companies use a budget as a payments plan to assign their incomes to cover their expenses and to track how closely the actual expenditures line up with what the companies had planned to spend on certain heads or overall about all the business expenditures. An essential part of budgeting is creating an emergency fund, which the company can use to cover its unexpected expenses in case of over spending during the year. The company also wants to budget a percentage of its income for saving and investing. So budget is also a very good tool to measure whether the company is performing well according to plan into particular discipline what the budget has been prepared for or the department is over spending.

All the governments also prepare budgets to rule their expenses for a financial year same as businesses they make usual modifications to reflect financial reality. And, like businesses, governments can find themselves in trouble if their spending outpaces their income. Companies prepare different budgets such as Cash budget, purchase budget, sales budget and other budgets for different expenses.


Account is nothing technical but a very simple accounting term which is used to safe the transactions of each head at one place. Companies have different types of accounts such as supplier accounts for suppliers' transaction information, sales, purchase, liability and asset accounts. All the business transaction are saved by the company by using these accounts at one place and then with the help of these accounts at the end of financial year the complete financial report is being prepared by the companies.

Question No. 7

Business Cycle and documents required for final accounts?

Business Cycle

Every so often business climate are strong, with number of jobs,  factor job overtime and for a while business circumstances are feeble, and these ups and downs in business world are known as business cycle. Economic history provides evidence that the financial position/economy of any company or country can never nurture in flat and even patterns. A country may benefit from quite a few years of healthy economic growth and richness, as the US did in the 90s. This growth period may be pursued by a depression or even a economic disaster. Eventually the economy reaches at lowest level, and then financial revival starts. The financial revival may be started with sluggish or rapid pace. It may be unfinished, or it may be so swift as to lead to a new boom in the economy. Success may denote a long, constant period of quick demand, abundant job opportunities, and rising living standards. Or a rapid, inflationary increase of prices, to be pursued by one more crash, may spot it. Rising and descending movements in yield, price raises, interest rates, and new job opportunities shape the business cycle that considered all market economies.

Business cycle

Source: http://www.hsc.csu.edu.au/economics

Final account documentation

All accounts must be prepared with a very detail and after rechecking so that no mistake would be published. Dealing with queries and obtaining missing documentation takes up valuable time not only for the Auditor Final account documentation must include where relevant all of the following:

P&L account, Balance sheet, cash flow statement, loans and assets accounts, expenses accounts and all other accounts should be updated

Notes of the accounts

Audit, corporate governance report

Copies of all Instructions which were not previously provided to the Council's Representative

A detailed variation account setting out the adjustments with measurements where appropriate and referenced to supporting documents.

Day work Sheets

Documents used in the calculation of loss and expense compensation

Question No. 8

Bank and its financial Analysis

Banks may have a two way interests into businesses. At one side banks are the institutions who lend the money to the companies at the time of their need. Hence banks and their management is keener to look the companies' performance in order to know that whether that company will be able to return back the loan amount and the settled interest rate on that loan or not. The other perspective of banks to conduct the financial analysis on the companies is because banks collect the cash from their customers' accounts and then further invest into a place from where banks can generate high profit margins to provide high rate of returns to their customers. For this reasons banks hire specialists and professionals to conduct financial analysis on market to aware from the companies' financial health and make the decision where to invest for getting high rate of return. Financial Banks and their management highly needed to stay watchful about the information on the broader factors of the economy. Banks should also be very vigilant towards collecting the financial information of the companies operating their businesses. Most of the companies have their online press releases, information centres, and annual reports which are the best sources for getting the information. There are also authentic companies to conduct the market surveys which is another powerful source to collect the information regarding macro factors.

Another reason which may force banks to conduct financial analysis of companies could be to fulfil the purpose of growth by acquiring the particular company. This provides the bank growth and another opportunity to invest in a company owned and managed by bank itself. Hence more likely the whole profit will be distributed among the banks rather than to get only dividends by investing into other companies.

Investing into a well reputed firm and getting higher profits also provide high credibility to the bank which cause more customers for bank hence more funds available to invest hence more chances to earn high profits. So financial analysis is compulsory for banks to know the market and find out the best places to invest.

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