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LPC- BLP - BUSINESS ACCOUNTS (DISTINCTION)
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Notes in the information revealed by business accounts that may be relevant to a solicitor
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BLPInformation revealed by business accounts.
Why do we need to read accounts?
Two main reasons:
• to assess how a business is performing
• to predict the future prospects of a business
The accounts of all the businesses we have looked at (i.e. sole trader, partnership and company) can
be “interpreted” or “read”
If we can “read” the accounts of a business we can:
• find out its profitability
• see if it can meet its current liabilities
• identify any trends in performance
• see how it is doing in relation to other businesses
• assess how is it doing in light of the prevailing economic conditions.
Who wants to read accounts?
• Investors - will there be a good return?
• Managers - is it performing to its potential?
• Lenders - will a loan (and interest) be repaid?
• HMR&C – what are the profits liable to tax?
• Purchasers - shall I buy the business?
• Employees - can we improve our pay / T&C’s?
Not all of these people will have access to full information. Only companies must file their accounts.
Managers will always have full information. A purchaser will be able to demand full information.
Limitations on the information revealed by accounts.
Accounts will not tell us everything about a business:
• Accounts are produced after the event - i.e. after payments have been made / received
• They only give financial information – they do not tell us about the state of staff relations or
the economy.
Additional information required.
We will need to find out about:
• the nature of the business
• is the business growing or contracting?
• is the market expanding or contracting?
• is it dependant on one product or has it diversified?
• how the business is managed
Public companies must prepare an annual report - this should contain an Chairman’s statement and
large companies must file full accounts. We will need to ask partnerships / sole traders for their
accounts. In any event we should consider “due diligence”.
Due Diligence.
A process by which all our clients questions and concerns are addressed:
• what is the reputation of the business?
• is it busy?
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