This site is intended for health professionals only


How to read practice accounts

Any GP aiming to become a partner in a practice will need to acquire some essential business skills and learning how to read a set of practice accounts is high on the list of priorities, and many existing partners would benefit from becoming more confident when reading their accounts. Without a thorough understanding of how GP accounts are drawn up, it is almost impossible to consider the full financial implications of any partnership offer.

GP accounts can be considerably more complex than discussed in these examples. If you are considering joining a practice you must review the practice accounts before you make any decisions. Indeed, practices may consider your business skills to be lacking if you do not ask to see the accounts. An accountant who specialises in the medical sector is best placed to help you review and interpret the accounts of any prospective partnership with you.

This article refers to three sections of the accounts documents. You can read examples of these, with annotations to explain each column, by clicking these links:

What are accounts used for?

The practice annual accounts serve many purposes. The main purpose is that they summarise the financial transactions of the practice for the year, detailing income, expenses and ultimately profit for sharing across the partners.

Accounts also:

  • State the financial standing of the practice on the last day of the accounting year, including the position of individual partners.
  • Benchmark performance against other practices and national averages.
  • Act as a starting point for projecting and planning the future year, including the monthly drawings for each partner and whether additional staffing is financially justifiable.
  • Provide a tool for partner changes, such as calculating the amount due to a retiring partner and demonstrating to potential new partners their likely earnings.
  • Present the foundation for calculating partners’ tax liabilities and superannuation contributions.

What is the main information I’d find in the practice accounts?

There are a variety of accounts layouts in use, but for GP practices the accounts should show detailed breakdowns of income and expenditure, an explanation of how profit is shared, and a summary of the position at the year-end, both for the practice in total and for each partner. The Association of Independent Specialist Medical Accountants (AISMA) has a recommended layout, which would normally include:

  • Partners’ approval – The partners must sign the accounts to demonstrate that they are in agreement with them.
  • Accountants’ report - The practice accountants state that they have prepared the accounts from the information provided, and in accordance with normal accounting principles.
  • Income and expenditure account – It summarises the income received and expenses incurred over the year, resulting in the profit for sharing.
  • Distribution of net income – It demonstrates how the profit has been shared amongst the partners.
  • Balance sheet – This illustrates the financial position of the practice at the end of the year.
  • Notes to the accounts – Notes provide more detailed breakdowns of income and expenses, together with major items from the balance sheet such as fixed assets and the individual partners’ capital and current accounts.
  • Performance statistics – Practices benefit from comparing their own figures with national averages.

What are our accruals?

Before examining some of the sections above in more detail, it is important first to grasp the concept of accruals. It is a common misapprehension that the accounts simply summarise the money that came into and went out of the bank account during the year. But this is far from the case. All income earned and all expenditure incurred during the year must be brought into the accounts.

Take, for example, income from the QOF where part of the money earned is received during the year (aspiration pay), and part is received after the year-end (achievement pay). All the work necessary to earn this money is carried out during the year to March and therefore any partner working at the practice during that period should share in the total QOF income received, rather than just the aspiration pay. The accruals concept ensures that money earned during the year but received in the bank after the year-end is brought into the accounts (shown as ‘income’ and ‘debtors’).

An example for expenditure could be the accountants’ fees, which, although they may not be paid until after the year-end once the accounts are prepared, are properly an expense of the year. Under the concept of accruals, these are brought into the accounts (shown as ‘expenses’ and ‘creditors’).

Three key accounts

1 The income and expenditure account

The income and expenditure account summarises the main streams of income and the major heads of expenditure, seen on the interactive PDF linked here.

2 Net income - ‘charges’ and ‘share’

Certain parts of a practice’s income are often allocated to individual partners rather than split according to the agreed profit sharing ratio. These are termed ‘prior shares of profit’ and include income for items such as seniority, surgery rental income and internal locums.

Seniority is income paid according to a GP’s length of service in the NHS and most practices award this to the individual GP. Some, though, do pool this income.

If the surgery property is owned by some of the partners then surgery rental income will be received, effectively to finance borrowing costs. Ownership may not be across all partners and may be held in a different ratio to time commitments or profit share ratio, and therefore it is right that this income is prior-shared.

On occasions partners may offer to carry out additional sessions, beyond their agreed commitment, and this additional internal locum income will be allocated as a prior share.

In contrast to prior shares are ‘prior charges’ for items such as property loan interest and employer’s superannuation. These are expenses paid by the practice for items relating to individual partners and consequently it is not right for all partners to share them according to the profit share ratio. Accordingly a property-owning partner will be allocated his or her relevant share of the mortgage interest.

For technical reasons, the employer part of superannuation contributions for all partners is charged as an expense or deduction from income in the accounts. However the calculation of this expense relates to each individual partner’s personal financial circumstances. Therefore it is correct to split the overall employer superannuation expense appropriately and prior charge it to the relevant partner. You can see how this works on the ‘Net Income’ PDF.

3 The balance sheet

The top half of the balance sheet summarises the funds that partners have had to either leave in, i.e. by not drawing out all profits, or introduce, for example by paying money in to buy a retiring partner’s share in the surgery premises.

The bottom half of the balance sheet lists the assets and liabilities owned by the practice such as fixed assets (solid items like the premises, furniture and equipment), debtors (income due to the practice) and bank accounts, less the creditors (amounts owed by the practice) and loans.

The net assets total always equals the partners’ funds total because it is the amount of money left in the business by the partners to fund the ownership of the assets. This is why it is called a balance sheet – because it must balance.

The term ‘depreciation’ is sometimes seen in the fixed asset note and as an expense in the income and expenditure account and requires some explanation. Depreciation is used to allocate the cost of major items of equipment or furniture over their expected lifetime.

For example, the furniture for a new surgery costs £50,000 and may be considered to last 10 years. It would unfair to treat the full cost as an expense in the first year, since a partner retiring at the end of the first year would have paid their share of the £50,000 for ten years, despite using the item for only one year.

Similarly a new partner joining at the start of year two would have received nine years use of the furniture without being charged for it at all. Depreciation is a useful accounting invention to spread the cost of these major items across their lifetime.

In the example above it could be that depreciation of £5,000 would be charged as an expense in each of the ten years. So the retiring partner will have only paid for one year of use and the new partner will pay for nine years of use.

You can see how this works on the balance sheet linked.

Chris Howe is a director at Foxley Kingham, a member of AISMA.