Unit 3.4: Final Accounts

Purpose

To keep records of their financial statements - Legally required to audit these (check for truthfulness - not some money luandring company) 

Profit and Loss Account

1. reports the revenues and expenses of a business at the end of a specified accounting period - trying to make profit to survive

1. Trading Account

2. Profit and loss account

3. Appropriation account

Trading Account

1. First section showing the difference between the sales revenu and the cost of producing/ purchasing the products 

• This will show the gross profit

• GROSS PROFIT = Sales Revenue - Cost of Goods Sold

• COST OF GOODS SOLD = Opening stock + Purchases - Closing Stock

  • Direct cost of goods that are sold

    

Profit and loss account

1. SHows the net profiit or loss of a business at the end of the period 

• Net Profit: Financial Surplus from sales revenues after all costs and expenses are accounted for → Actual profit earned

  • NET PROFIT = Gross Profit - Expenses

• Expenses: Indirect/ Fixed costs of production 

  • Includes taxes and interest they pay

• Profit and Loss Account Format

  

• Attempts to reduce costs

1. Rent Change: move to cheaper premises or negotiate

2. Fuel Consumption: Heat or lighting can be reduced

3. Administrative Costs: Employing less people or combining jobs so there are less salaries 

Appropriation account

Final section with two parts showing how the net profit after interest is distributed 

1. Dividends: The amount of net profit after interest and tax that is distributed to the owners (shareholders) of the company. 

2. Retained Profit: Shows how much of the net profit after interest and tax and dividends is kept by the business for its own use as an internal source of finance

Balance Sheet/ Statement of Financial Position

Reports the value of assets and the liabilities of a business at a particular point in time - all incoming earning and outflowing costs add up and balance

• Most countries require businesses to provide this information 

Assets

items with monetary value owned by the business 

1. Noncurrent/Fixed Assets: Assets for the businesses operations and not for selling - normally stays 12 months after the balance sheet 

   • Eg, property, plants or equipment

2. Current Assets: Cash or any liquid asset that will probably be turned into cash within the 12 months after the balance sheet 

   • Cash: Money that is held in a bank or at the business

   • Debtors: People or other organizations that owe money to the business - Trade credit 

   • Stocks: Unsold supplies of raw materials 

     • Finished stocks are more liquid than raw materials

Liabilities

Legal obligation of a business to repay its lenders or suppliers at a later date - liabilities are the amount of money owed by the business.

1. Noncurrent/ Long-term Liabilities: debts that are due to be repaid after twelve months of the balance sheet date - Sources of long term borrowing

   • Eg, Mortgages, bank loans, debentures 

2. Current Liabilities: Debts that are settled within one year - Short term borrowings

   • Eg, Bank overdrafts, tade creditors, and others short-term loans 

NET ASSETS

= Total assets - total liabilities = Total equity = (Noncurrent assets + current assets) - (Noncurrent liabilities + current liabilities)

Equity/ Capital/ Reserves

Value of the business that belongs to the owners 

• Share Capital: The amount of money raised through the sales of shares

  • Publicly traded companies: on the stock exchange 

  • This is what makes up the equity in limited liability companies 

    • Sole traders and partnerships don’t have this

• Retained Earning: Total amount of accrued profit after interest and taxes and dividends 

  • This is the owners own money and it’s normally reinvested

Purpose to stakeholder group (7)

1. Shareholder: 

• Want to see where their money was spent and the returns on their investment 

• Allows them to consider future dealing with the company

2. Employees

• See if they are likely to get pay raises soon 

• Asses their job security as well → is the business going bankrupt 

3. Managers

• Judge their operational efficiency for their organizations

4. Competitors

• TO make comparisons with their own final accounts

5. Government Financer

• Exam the final accounts to make sure they’ve been paying the correct amounts

6. Suppliers

• Supplier see what extent they need trade credit → are they stable enough to receive it - reassurance in a way

7. Potential Investors

• Assess whether investments in the particular business would be worthwhile → calculate the profitability ratio and gearing ratio

Limitations of Profit and Loss Account:

1. The account only shows the historical financial performance - this does not guarantee future financial performance will be the same 

2. No internationally standardized format it can be difficult to compare the accounts of different firms

3. Window Dressing: legal act of creative accounting by manipulating final accounts so they seem more attractive - Might include the sale of fixed assets to make their profit seem larger

Limitations of Balance sheet/ Statement of Financial Position: 

1. Static document: Financial position of the business is very different in different periods 

2. Only estimates of the value of the assets and liabilities: 

3. No standardized international method of creating it - makes it harder to compare with other firms 

4. Not all assets of the business are included in the balance sheet

   • A lot of intangible assets and human capital is ignored - hard to determine their valeu

• General Limitations: of final accounts

1. No information on their goals outside of finance or their culture

2. Human resources aren’t considered

3. A sole year isn’t a good place to judge their finance 

4. Time consuming when benchmarking your final accounts with other businesses 

5. DO not always reveal the truth despite needing to be lawfully produced - Window dressing 

6. Historical accounts that don’t consider the future and can’t predict what it’s going to be like later on

Intangible Assets

 Non-physical fixed assets that have the ability to earn revenue for a business that are legally protected by laws 

Intellectual property rights

: Laws protecting intangible assets of a business

Examples of intangible assets

1. Branding

2. Patents

3. Copyrights

4. Goodwill

5. Registered Trademarks

Branding

Help drive global sales for companies that are recognizable

• An indefinite asset as brand recognition and brand loyalty stay with the company for as long as it exists

Patents

Provide legal protection for inventors preventing others from copying their creations for a certain number of years

• Allows them to have exclusive rights to it and others have to pay a fee to use or a fine if they used without permission

Copyrights

Provide legal protection for the original artistic work of the creator

• Anyone wishing to reproduce or modify the artist's work must first seek permission from the copyright holder, usually for a fee

Goodwill

exists when the value of a firm exceeds its book value (the value of the firm's net assets). It includes the value of an organization's reputation and corporate image as well as its business connections.

• Reputation of being good eg Lush

Registered Trademarks

Distinctive signs that uniquely identify a brand/product or business entity 

• These are names, symbols, phrases or logos and images

• Trademarks provide legal protection against those who try to copy the creation