3.4 Final accounts

Profit and Loss (P&L) statement

Shows the net profit or loss of a business over a trading period

Title for P&L statement

[Company's name]'s Statement of profit or loss for the year ended at [Date]

Balance sheet

A snapshot of a firm's value at a specific point in time, usually on the last day of the financial year

Title for balance sheet

[Company's name]'s Statement for financial position as at [Date]

Purpose of keeping financial records

Ensures better financial control and planning; Legally required for many firms regardless of business type

Examples of trading period types

Quarterly for seasonal businesses; Monthly for regular financial tracking

Formula for Sales Revenue

Price per unit × Quantity of products sold

Formula for Cost of Sales

Direct cost per unit × Quantity of products sold

Formula for Gross Profit

Sales Revenue - Cost of Sales

Definition of Expenses

Indirect costs of operating a business

Definition of Interest

The cost of borrowing based on the initial loan amount (principal)

Definition of Tax

A percentage charged on profit before tax

Meaning of 'Profit' in non-profit organizations

Profit is referred to as a surplus

Purpose of a balance sheet

Required for legal auditing and provides a summary of assets, liabilities, and equity

Definition of assets

Resources with an economic value owned by a business

Formula for total assets

Non-current assets + Current assets

Definition of non-current assets

Assets used in business operations, likely to be held for more than 12 months (e.g. property, plant, equipment, accumulated depreciation)

Definition of accumulated depreciation

The total amount of asset value that has been depreciated over time

Definition of current assets

Assets likely to be converted into cash within 12 months or less (e.g. cash, debtors, stock)

Definition of liabilities

Legal obligations to repay lenders or suppliers at a future date

Definition of non-current liabilities

Debts to be repaid after 12 months (e.g. bank loans)

Definition of current liabilities

Debts to be settled within one year (e.g. overdrafts, trade creditors)

Definition of net assets

The difference between total assets and total liabilities

Formula for equity

Equity = Assets - Liabilities

Alternate definition of equity

Equity shows the value of the business belonging to the owners; it equals the sources and uses of finance

Formula for equity composition

Equity = Share capital + Retained earnings

Definition of share capital

Money raised through the sale of shares

Definition of retained profit (profit-making firm)

Profit reinvested back into the business instead of being distributed as dividends. Prepared after the P&L statement, since retained profit is carried over into the balance sheet.

Definition of retained surplus (non-profit firm)

Surplus reinvested back into future business activities

Source of equity in non-profit organizations

Equity comes from retained surplus, not share capital

Definition of intangible assets

Non-physical fixed assets that can generate revenue for a business

Challenge of valuing intangible assets

Difficult to place an objective and accurate price on intangible assets

Purpose of intangible assets

Provide legal protection for intellectual property (IP)

Definition of brands

Legally registered names used in a business's trading activities

Definition of patents

Legal protection granted to inventors for their product designs

Definition of copyrights

Legal protection for intellectual property such as songs, novels, theatre, and art

Definition of goodwill

The established reputation of a business

Definition of registered trademarks

Legal protection for logos used by a business

Definition of final accounts

Financial reports prepared by companies showing financial performance and position; Legally required to ensure transparency and accountability to stakeholders

Purpose of final accounts for shareholders

To monitor how company funds are used and evaluate investment returns

Purpose of final accounts for employees

To assess job security and potential pay increases based on company health

Purpose of final accounts for managers

To evaluate operational efficiency and support business planning and target setting

Purpose of final accounts for competitors

To compare financial performance and benchmark against rival firms

Purpose of final accounts for government

To check accuracy for tax assessment and regulatory compliance

Purpose of final accounts for financiers

To judge creditworthiness and ability to repay loans

Purpose of final accounts for suppliers

To decide on approval of trade credit based on company's financial stability

Purpose of final accounts for potential investors

To provide necessary financial information for making investment decisions