Your micro entity accounts explained in plain English — what every figure means, what to look for, and how it all fits together.
When you receive your annual accounts from HOMF, they'll contain a set of financial statements prepared under the micro entity rules. These are simpler than full accounts — but can still feel confusing if you don't know what you're looking at.
This guide walks through every section and every term so you know exactly what your numbers are telling you about your business.
And do you qualify?
A micro entity is the smallest category of limited company recognised under UK law. If your company qualifies, you benefit from a simplified set of accounts — less detail required, and less to file publicly at Companies House.
To qualify as a micro entity, your company must meet at least two of the following three conditions:
Your accounts are prepared under FRS 105 — a simplified financial reporting standard. You only need to file a balance sheet at Companies House (not a profit and loss account), which means less financial detail is made public about your business.
What your business earned and spent over the year
The Profit & Loss (P&L) account is a summary of all the income your business generated and all the costs it incurred during the financial year. It shows whether your business made a profit or a loss — and by how much.
Click any term below to see a plain English explanation.
Turnover is the total amount of income your business generated during the financial year — sometimes called revenue or sales. It includes all invoices raised and income received, before any costs are deducted.
These are the direct costs of delivering your product or service — often called Cost of Sales (COGS). They go up and down directly with how much you sell.
For an ecommerce business, this is typically the cost of the goods you buy to sell on. For a service business, it might be subcontractors or direct labour.
Gross profit is your turnover minus your direct costs. It shows how much profit you made before paying for overheads like rent, salaries and admin.
Your gross profit margin (gross profit ÷ turnover × 100) tells you what percentage of every pound of sales you keep after paying direct costs — a useful benchmark for your industry.
This covers all employment costs including wages and salaries paid to employees, the director's salary, employer's National Insurance contributions, and any pension contributions the company makes.
When your business buys a long-term asset (like a laptop, vehicle or equipment), the cost isn't written off all in one go. Instead, it's spread over the useful life of the asset — this annual charge is called depreciation.
Amortisation works the same way but applies to intangible assets — things you can't touch, like goodwill or a website.
A catch-all category covering your general overheads — all the running costs of the business that aren't direct costs or staff. This includes things like rent, utilities, insurance, accountancy fees, subscriptions and marketing.
In the detailed P&L (see below), these are broken down line by line so you can see exactly where your money goes.
The bottom line — your turnover minus every cost and expense. This is what the business actually made (or lost) during the financial year.
A positive number is a profit. A number in brackets like (£10,534) means a loss — the business spent more than it earned.
It's common to be profitable on paper but have little cash. Profit is calculated on an accruals basis — income is recognised when invoiced, not when received. If customers pay late or you've invested in stock, your cash position may look very different to your profit figure.
A financial snapshot of your business on one specific date
Unlike the P&L which covers a whole year, the Balance Sheet is a snapshot of your company's financial position on a single day — your year-end date. It shows everything the company owns (assets), everything it owes (liabilities), and what's left over (equity).
A Balance Sheet must always balance: Assets = Liabilities + Equity. The net assets figure will always equal the capital and reserves figure — hence the name.
Fixed assets are long-term assets the business owns and uses over multiple years — not intended to be sold. They fall into two types:
Tangible assets — physical things you can touch: vehicles, computers, machinery, office furniture, equipment.
Intangible assets — things you can't touch but that have value: goodwill (the value of your customer base or brand), trademarks, websites, software.
Fixed assets appear on the Balance Sheet at their net book value — the original cost minus all depreciation charged to date.
Current assets are short-term assets expected to be converted into cash within 12 months. The main types are:
Debtors — money owed to you by customers at the year-end. If you've invoiced but not been paid, this sits here.
Stock / inventory — goods you've bought to sell but haven't sold yet.
Cash at bank — the balance across all your business bank accounts at the year-end date.
These are amounts your company owes and must pay within the next 12 months. Common examples include:
Trade creditors (suppliers you owe money to), VAT owed to HMRC, PAYE and NI, corporation tax due, short-term loan repayments, and the director's loan account if the company owes money to the director.
Net assets is the total of all assets minus all liabilities. It represents the net worth of the company.
Positive figure — the company is solvent. It owns more than it owes.
Figure in brackets — the company has net liabilities and is technically insolvent. This is not unusual for early-stage companies or those investing heavily, but should be monitored and addressed.
Accruals are costs that relate to the financial year but where the invoice hasn't been received or paid yet. Your accountancy fee is the most common example — it's charged at year-end but may not be invoiced until after.
Deferred income is the opposite — money you've received in advance for work not yet completed. For example, an annual subscription paid upfront where service continues into the next year.
Capital and reserves represents the shareholders' stake in the company. It's made up of:
Share capital — the total value of shares issued when the company was incorporated (usually £1 or £100 for a small company).
Profit and loss reserves — all the accumulated profits the company has made since it started, minus any dividends paid out to shareholders. If the company has made losses, this will reduce (or become negative).
Your full expense breakdown, line by line
The detailed P&L expands the summary P&L to show every individual expense category. It breaks down the "other charges" line into its constituent parts so you can see exactly where money was spent.
Rent, rates, light and heat, cleaning and maintenance of your business premises.
Wages and salaries, director's salary, employer NI, pension, staff training and welfare.
Telephone, subscriptions, bank charges, insurance, equipment, repairs and maintenance.
Your accountancy fees, legal advice, consultancy and other professional services.
Annual write-down of fixed assets (vehicles, equipment) and amortisation of intangibles (goodwill, websites).
Commissions payable, other direct costs specific to your business model.
The figures in your detailed P&L feed directly into your Corporation Tax calculation. Some costs may be disallowable for tax purposes (e.g. client entertaining), so your taxable profit may differ slightly from your accounting profit. Your accountant adjusts for this automatically.
Things clients often ask about their accounts
Our team is always happy to walk you through your figures in plain English. No jargon, no confusion.