3.4 Final Accounts

Accumulated depreciation (HL ONLY)

This refers to the accrued value of non-current assets, most of which fall in value over time due to depreciation.

Assets

The possessions owned by a business, which have a monetary value, e.g., buildings, land, machinery, equipment, inventories, and cash.

Balance sheet

Also known as the statement of financial position, this set of final accounts shows the value of a firm's assets, liabilities, and the owners' investment (or equity) in the business, at a particular point in time.

Cash

This refers to the money an organization has either "in hand" (at its premises) and/or "at bank" (i.e., in its bank account). It is the most liquid type of current assets.

Copyrights

These intangible assets give the registered owner the legal rights to creative pieces of work, such as the works of authors, musicians, conductors, playwrights (scriptwriters) and directors.

Costs of sales (COS)

These are the direct costs of production, such as the cost of raw materials, component parts, and direct labour.

Creditors

Also known as trade creditors, this refers to the suppliers that allow a business to purchase goods and/or services on trade credit.

Current assets

Short-term assets belonging to an organization which will last in the business for up to 12 months, e.g., cash, debtors, and stock (inventory).

Current liabilities

These are the short-term debts of a business, which need to be repaid within twelve months of the balance sheet date. Examples include bank overdrafts, trade creditors, and other short-term loans.

Debtors

A type of current asset, referring to individual or business customers that owe money to the organization as they have bought goods or services on trade credit, i.e., they need to pay within 30 and 60 days.

Depreciation (HL ONLY)

The fall in the value of a fixed asset over time, mainly due to wear and tear (usage) and obsolescence.

Dividends

These are the payments from a company's profit (after interest and tax) paid to the shareholders (owners) of the company. The amount of dividends paid to an individual shareholder depends on the number of shares held by the individual.

Equity

Refers to the value of the owners' stake in the business, i.e., what the business is worth at the time of reporting the balance sheet.

Expenses

These are a firm's indirect costs of production, e.g., rent, management salaries, marketing campaigns, accountancy fees, bank interest charges, travel expenses, utilities, repairs and maintenance, and general insurance.

Final accounts

These are the published accounts of an organization, made available to and used by different stakeholders, e.g., managers, employees, shareholders, sponsors, financiers, and investors.

Finished goods

These are the final products of a business, ready to be sold to customers.

Fixed assets

The long-term assets (possessions) of an organization that have a monetary value and are used repeatedly but are not intended for resale within the next twelve months, e.g. property and equipment.

Goodwill

The reputation and established networks (know-how) of an organization, which adds to a firm's monetary value.

Gross profit

This refers to the profit from a firm's everyday trading activities. It is calculated by the formula: Sales revenue - Cost of sales.

Illiquid assets

These items of value, owned by the business, cannot be sold quickly, are difficult to sell, and/or cannot be sold easily without incurring a significant loss in value.

Intangible assets

Non-physical fixed assets that are valuable to a firm's survival and success, such as brand value, goodwill, copyrights, trademarks, and patents.

Intellectual property rights

Abbreviated as IPRs, these are a firm's fixed, intangible assets with a monetary value, comprised of goodwill, patents, copyrights and trademarks.

Liabilities

The debts of a business, i.e., the money owed to others, e.g., money owed to financiers, trade creditors, and the government (for tax).

Net assets

Refers to the overall value of an organization's assets after all its liabilities are deducted. It is calculated by the formula: total assets minus current liabilities minus non-current liabilities.

Non-current assets

Also known as fixed assets, this refers to the long-term assets or possessions of an organization with a monetary value but are not intended for resale within the next twelve months of the balance sheet date.

Non-current liability

Also known as long-term liability, this refers to debt owed by a business which will take longer than a year (from the balance sheet date) to repay.

Overdrafts

This financial service allows customers to temporarily take out more money than is available in their bank account.

Patents

The official rights given to a business to exploit an invention or process for commercial purposes.

Profit and loss account

Also known as the income statement, this shows a firm's profit (or loss) after all production costs have been subtracted from the organization's revenues, each year. It is also known as the statement of profit or loss or income statement.

Profit after interest and tax

Also referred to as profit for period, this section of the P&L account shows the actual value of profit earned by the business after all costs have been accounted for.

Profit before interest and tax

This section of the P&L account shows the value of a firm's profit (or loss) before deducting interest payments on loans and taxes on corporate profits.

Raw materials

These are the natural resources used in the production process to create goods and provide services to customers.

Residual value (HL ONLY)

Also known as the scrap value, this is the value of a fixed asset at the end of its useful life before it is replaced.

Retained profit

Also referred to as retained earnings, this refers to the value of a firm's earnings after all costs are paid (including interest and tax) and shareholders have been compensated (dividends).

Sales revenue

Shown on the profit and loss account, this refers to the money an organization earns from selling goods and services.

Share capital

The value of equity in a business that is funded by its shareholders, either through an initial public offering (IPO) or via a share issue.

Short-term loans

These are advances (loans) from a financial lender, such as a commercial bank, that needs to be repaid within 12 months of the balance sheet date.

Stocks

Also known as inventories, these are the goods that a business has available for sale, per time period.

Straight line depreciation (HL ONLY)

A method of depreciation that spreads the depreciation of a fixed asset evenly over its useful life, i.e., the value of the asset falls by the same amount each year.

Tax

Refers to the compulsory deductions paid to the government as a proportion of a firm's profits.

Total assets

The sum of a firm's non-current assets and its current assets.

Total liabilities

These are simply the sum of current liabilities and non-current liabilities, i.e., the sum of all the monies owed by the business.

Trade creditors

Suppliers may give trade credit, which needs to be repaid at a future date (typically 30 to 60 days).

Trademarks

A form of intellectual property or intangible asset which gives the listed owner the legal and exclusive commercial use of the registered brands, logos, and/or slogans (corporate catchphrases).

Units of production method (HL ONLY)

Method of depreciation that apportions an equivalent value of depreciation to a non-current asset based on each physical unit of output. Depreciation is based on the units of usage rather than time (as used for the straight-line method).

Window dressing

Also known as creative accounting, this is the legal manipulation of financial statements based on the accounting principles and rules in the country in order to make the figures look more flattering (in the same way that people clean and tidy their homes before guest are due to arrive).

Work-in-progress

Also referred to as semi-finished goods, these are parts and components used in the production process.

Working capital

The money available for the day-to-day running of a business. It is calculated by subtracting current liabilities from current assets.