Small accounting entity

What it means

A small accounting entity is a size class under the Accounting Act, not an informal label for a smaller firm. It sits between the micro and the large class, and the entity assigns itself to it; the tax office does not.

The criteria are assets, net turnover and the average headcount, and what counts is meeting them over two consecutive periods. The size criteria set the class and the class sets the scope of the statements, but not the duty to have an audit, which runs on thresholds of its own.

A small accounting entity is not the same as a small enterprise for state aid and grants. There size is judged under the European definition, with other thresholds and often with linked companies counted in. The same company can be small in its accounts and medium-sized in a grant application, or the other way round, and neither status follows from the other.

How it works in practice

A small entity files a full balance sheet and profit and loss account; the shortened form belongs to a micro entity. Its notes go further than a micro entity would give and stop short of what a large one has to disclose.

The statements go into the register of financial statements together with the record of their approval. The class changes only once the criteria are breached in two consecutive periods, and then from the start of the following period.

At every year end we record the criteria for both the current and the previous period. When a growing company first exceeds the thresholds of a large accounting entity, we see it a year ahead, and the client has time to choose an auditor and prepare for fuller notes instead of dealing with it just before the deadline.

What to watch out for

A company that has exceeded the large-entity thresholds for two years running and still reports as small skips both the audit and the annual report. The fine under the Accounting Act is derived from the value of its assets, so it grows with the company, and a bank sends such statements back.

A common mistake is to test the asset criterion on net book value after depreciation. The law uses the balance sheet total before adjustments, that is without deducting accumulated depreciation and impairment allowances. A company with large, already depreciated assets can cross the threshold sooner than expected and find out only when the missing audit comes to light.