How FreeAgent handles the year end for a limited company

This article explains what happens at the year end for a limited company in FreeAgent.

At the end of an accounting year, a company's profit and loss accounts are ‘cleared down’ to retained profits (code 968 in FreeAgent) so that the company can measure profit and loss for the following year. FreeAgent clears the accounts down automatically and creates Corporation Tax entries in your accounts.

Below are the steps that FreeAgent takes for the year-end process for a limited company.

1. Individual categories in the profit and loss account are cleared

If an account in the profit and loss account has a credit balance, for example ‘Sales’, FreeAgent adds an equal debit entry to bring the account balance back to zero and adds a corresponding credit entry in the retained profit account.

If an account in the profit and loss account has a debit balance, for example a cost account, FreeAgent adds an equal credit entry to bring the account balance back to zero and adds a corresponding debit entry in the retained profit account.

2. Profit or loss for the accounting year is calculated

This means that the retained profit account (code 968 in FreeAgent) will have some credit and some debit entries. If the total of the credit entries in the retained profit account is higher than the total of the debit entries, the company has made a profit for the year. If the total of the debit entries in the retained profit account is higher than the credit entries, the company has made a loss for the year.

3. Corporation Tax entries are created

If the company has made a profit for the year and doesn't have losses brought forward that outweigh the profit, FreeAgent will automatically add a credit entry to code ‘820 Corporation Tax’ and a debit entry to code ‘502 Corporation Tax Expense’, for the amount of Corporation Tax it has calculated. As the Corporation Tax expense account (code 502 in FreeAgent) is a cost account in the profit and loss account, it will be cleared by FreeAgent's automatic year-end process, because the company keeps the profit after it has paid tax.