ib business management unit 3.4

profit or loss account

financial statement of a firm’s trading activities over a period of time (usually one year)

profit

the positive difference between a firm’s revenues and its costs (revenue - cost)

revenue

the inflows of money from ordinary trading activities

costs

the outflows of money from a business arising from its operations

trading account

show the difference between a firm’s sales revenue and costs of production or purchases

gross profit

the amount of money you are left with after deducting the cost of goods sold from revenue

cost of sales (COS)

the accountant’s term for direct costs of the goods that are actually sold
(opening stock + purchases) - closing stock

expenses

the indirect costs of production (administration charges, salaries, insurance, etc)

dividends

the amount of profit after interest and tax that is distributed to the owners of the company

retained profit

how much money is kept by the business for its own use of internal sources of finance

the balance sheet

one of the annual statements that all limited liability companies are legally required to produce for auditing purposes

assets

items of monetary value owned by a business

liabilities

money a business owes to lenders or suppliers

net assets

shows the value of a business to its owners

total assets - total liabilities

equity

the value of the business that belongs to the owners (MUST match to net assets)

share capital

the amount of money raised through the sale of shares

retained earnings

the total amount of increased profit after interest, tax and dividends have been paid

intangible assets

non-physical and non-current assets that have the ability to earn revenue for a business, such as brand names, goodwill, trademarks, copyrights and patents

branding

an indefinite asset as brand recognition and brand loyalty stay with the company (brand recognition and brand value play a big role in helping to drive global sales)

patents

provide legal protection for inventors, preventing others from copying their creation for a fixed number of years (pay fee to copy/use the idea)

copyrights

provide legal protection for the original artistic work of the creator, such as an author, photographer, painter, or musician (must ask permission to be used)

goodwill

an intangible asset which exists when the value of a firm exceeds its book value (aka net assets value).

(firm’s reputation and corporate image and business connections)

trademarks

distinctive signs that uniquely identify a brand, product, or business entity. (expressed by names, symbols, phrases, or images)

depreciation

the fall in value of non-current assets over time

wear and tear

non-current assets such as computers and motor vehicles being used repeatedly

obsolescence

newer and better products being available, so the demand and value of existing non-current assets falls

straight line method

reduces the value of a non-current asset by the same value each year throughout its useful life.

(annual depreciation = purchase cost/lifespan)

residual value

estimate of the value of the non current asset at the end of its useful life

units of production method

allocates an equal amount of depreciation to each unit of output rendered by a non-current asset. calculates depreciation based on physical output

1. depreciation per unit = (purchase cost - scarp value / expected number of units over a lifetime

2. depreciation expense = depreciation per unit x number of units sold