3.4 - Final Accounts

What are final accounts comprised of?

Final accounts comprise of:

• The profit and loss statement

• The balance sheet

All businesses need to keep records of their financial statements.

• Proper accounting allows for better financial control and planning.

• For many firms, it is also a legal requirement.

Stakeholder interest in final accounts

• Companies are legally obliged to produce final accounts which act to ensure transparency in their use of company funds when reporting to stakeholders.

	Stakeholder	Their interest in final accounts
Internal	Shareholders	To see where their money was spent and how well their investments have performed
	Employees	To assess the likelihood of pay increments and job security
	Managers	•To judge the operational efficiency of their organizations •Used for target setting and strategic planning
External	Competitors	To compare financial performance with their rivals
	Government	To examine accounts for tax purposes
	Financiers	To assess credibility of debt repayment
	Suppliers	To decide whether trade credit should be approved
	Potential investors	To use accounts to aid potential investment decisions

Trading Account

The trading account is the first section of the P&L account and shows the difference between a firm's sales revenue (the value of products sold to customers) and its costs of producing or purchasing those products to sell. Hence, the trading account shows the gross profit of the business

• Gross profit = Sales revenue - Cost of goods sold

Cost of Goods Sold

The cost of goods sold (COGS) is the accountant's term for the direct costs of the goods that are actually sold, such as raw material costs. COGS (or cost of sales when referring to services) is worked out by using the formula:

COGS = Opening stock + Purchases - Closing stock

Profit and loss account

financial record of a firm's trading activities over the last 12 months

• A profit and loss account shows the net profit (or loss) of a business over a trading period

Profit (define in relation to profit and loss account)

profit is the financial surplus from sales revenue after all costs and expenses are accounted for.

• Profit = Gross Profit - Expenses

Dividends

the amount of profit after interest and tax that is distributed to the owners (shareholders) of the company.

Balance sheet

contains financial information about an organization's assets, liabilities, and the capital invested by the owners, showing a snapshot of the firm's financial situation

Book value

it is the value of an asset as shown on a balance sheet. The market value of assets can be higher than its book value because of intangible assets such as the brand value or goodwill.

Cost of Sales (COS)

refers to the direct costs of producing or purchasing stock that has been sold to customers

Creditors

suppliers who allow a business to purchase goods and/or services on trade credit

Current asset

refers to cash or any other liquid asset that is likely to be turned into cash within 12 months of the balance sheet date. Examples include: cash, debtors, stock

Current liabilities

debts that must be settled within one year of the balance sheet date. Examples include: bank overdrafts, trade creditors, and other short term loans

Depreciation

the fall in the value of non-current assets over time, caused by wear and tear (due to the asset being used) or obsolescence (out-dated)

Expenses

the indirect or fixed costs of production, such as administration charges, management salaries, insurance premiums and rent

Final accounts

the published annual financial statements that all limited liability companies are legally obliged to report, namely the balance sheet and P&L account.

Goodwill

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

Gross Profit

the different between the sales revenue of a business and its direct costs incurred in making or purchasing the products that have been sold to its customers

Historic cost

refers to the purchase cost of a particular non-current asset. It is used in the calculation of depreciation.

Intangible assets

non-current assets that do not exist in a physical form but are of monetary value, such as goodwill, copyrights, brand names and registered trademarks

Net assets

show the value of a business to its owners by calculating the value of all its assets minus its liabilities. This figure must match the equity of the business in the balance sheet.

Non-current assets

items owned by a business, not intended for sale within the next twelve months, but used repeatedly to generate revenue for the organization, such as property, plant and equipment.

Non-current liabilities

debts owed by a business, that is expected to take longer than one year from the balance sheet to repay.

Residual (or scrap value)

an estimate of the value of the non-current assets at the end of its useful life.

Retained profit

the amount of profit after interest, tax, and dividends have been paid. It is then reinvested in the business for its own use.

Share Capital

refers to the amount of money raised through the sales of shares. It shows the value raised when the shares were first sold, rather than their current market value.

Straight-line method

it is a means of calculating depreciation that reduces the value of a non-current asset by the same value each year throughout its useful life.

Unit of productions method

The units of production method of calculating depreciation allocates an equal amount od depreciation to each unit of output rendered by a non-current asset

Window dressing

refers to the legal act of creative accounting by manipulating financial data to make the results appear more appealing