3.4 Final Accounts

2 main financial accounts

1. Statement of profit & loss

2. Statement of financial position (balance sheet)

The statement of profit & loss

Shows income and expenses over a period to reveal profit or loss (for the period ended xx/xx/xxxx)

3 parts of profit & loss statement

1. The trading account

2. The profit & loss account

3. The appropriation account

1. The trading account

sales revenue

cost of goods sold (COGS)

GROSS PROFIT

2. The profit & loss account

expenses

profit before interest & tax

interest

profit before tax

tax

PROFIT FOR PERIOD

3. The appropriation account

dividends

RETAINED PROFIT

How stakeholders use the statement of P&L

Shareholders – check profits, growth, dividends, ROI

Employees – look for wage increases, job stability, executive pay

Managers/Directors – use revenue & profit data for decisions & bonuses

Suppliers – assess company success & trade credit risk

Government – calculate tax, monitor jobs & public contracts

Community – care about stability, jobs, and sponsorship potential

The statement of financial position

Shows a business's assets, liabilities, and equity at a specific point in time, ensuring assets equal liabilities plus equity. used to calculate a firms net worth (as at xx/xx/xxxx)

SFP terms

Assets: Resources of value a business owns & is owed.

Liabilities: Legal debts or what a business owes.

Net Assets: Total assets minus total liabilities.

Equity: Value returned if all assets are liquidated.

Liquidation: Selling all assets to pay debts.

Assets (current vs. non-current)

Current assets: Short-term (<12 months), e.g., cash, debtors, stock.

Non-current (fixed) assets: Long-term (>12 months), e.g., buildings, machinery, vehicles (can depreciate), or intangible assets like patents.

Liabilities (current vs. non-current)

Current liabilities: Short-term (<12 months), e.g., creditors, overdrafts, tax.

Non-current liabilities: Long-term (>12 months), e.g., bank loans, mortgages.

Equity

Share capital: Original funds invested by shareholders (permanent).

Retained earnings: Accumulated profits kept in the business (not paid as dividends).

How stakeholders use the statement of financial position

Shareholders – check assets, working capital, and business value

Managers/Directors – assess financial position, capital structure, and liquidity

Suppliers/Creditors – judge solvency and trade credit risk

Employees – look at stability, performance, spending, pay, and tax

Intangible Assets

Patents: Exclusive rights to use, make, or sell an invention.

Goodwill: Value of positive attributes like reputation and customer loyalty.

Copyright: Exclusive rights to artistic or literary work.

Trademark: Registered symbol, word, or design identifying a product or business.

Depreciation

Records the decrease in value of fixed assets over time due to wear, tear, or obsolescence.

Methods of Depreciation

1. Straight line depreciation

2. Units of production depreciation

Straight line depreciation

Asset loses the same value each year over its lifetime

Advantages of straight-line depreciation

- simple to calculate

- predictable expense

- suitable for low-cost assets like furniture.

Disadvantages of straight-line depreciation

- not suitable for costly assets

- can inflate asset values

- ignores efficiency loss, repairs, and rapid obsolescence.

Units of production depreciation

Asset's value decreases based on how much it is actually used (e.g., machine hours, units produced)

Advantages of units of production depreciation

- Depreciation reflects actual wear and tear based on usage.

- Matches revenues with expenses, adjusting with customer demand.

- Provides a realistic view of business performance in financial statements.

Disadvantages of units of production depreciation

- Only useful for manufacturers or producers.

- Not accepted for tax purposes.

- Complicated to calculate; output measurement can be tricky and must be recalculated each period.

Reasons for calculating depreciation

1. Accurately calculate business value

2. Plan effectively for asset replacement

3. Realistically reflect asset performance in financial statements

Residual value

an asset's estimated value at the end of its useful life, AKA scrap or salvage value

When to Use Each Depreciation Method

Straight-line: Best for low-value assets, small businesses, predictable lifespan, little risk of obsolescence.

Units of Production: Best when value depends on usage, assets are valuable/precise, or in manufacturing.