3.4 FINAL ACCOUNTS / IB BUSINESS MANAGEMENT / profit and loss account, balance sheet, depreciation

Purpose: Learn to prepare the balance sheet and profit and loss account.
Structure:
- Part 1: Purpose of final accounts to different stakeholders.
- Part 2: Final accounts (Profit and Loss Account & Balance Sheet).
- Part 3: Depreciation (higher-level content).
Note: Higher-level content is optional for standard-level students.

Definition of Final Accounts:
- Balance Sheet: Displays the organization's worth.
- Profit and Loss Account: Shows trading performance; profits (net and gross).
Stakeholders:
- Owners (Shareholders): Interested in dividends and performance.
- Unlimited Liability Organizations: Owners want profit attribution.
- Managers: Use accounts for performance evidence and to control expenses.
- Employees: Assess job security based on organization performance.
- Governments: Ensure tax compliance and legality in accounting practices.
- Competitors: Analyze each other's performance and market position.
- Creditors/Suppliers: Evaluate debtor's ability to repay based on accounts.
- Customers: Some may examine accounts for ethical considerations of the organization’s practices.
- Pressure Groups: Focus on organizational ethics and practices that may affect environment/society.

Purpose of Profit and Loss Account:
- Shows organization’s trading over a period (usually 1 year).
- Indicates profits or losses; non-profits refer to it as surplus.
Components of Profit and Loss Account:
- Trading Account:
  - Shows gross profit: Revenue minus cost of sales (COGS).
  - Formula: COGS = Opening Stock + Purchases - Closing Stock.
  - Example: Calculate COGS based on a single day of trading.
- Profit Statement:
  - Shows net profit: Gross profit minus expenses.
  - Differentiates between profit before and after interest and tax.
- Appropriation Account:
  - Shows retained profits and dividends for for-profit entities.

Calculating COGS:
- Ivan's stock scenario: Start $100, Purchase $150, End $80.
- COGS = $100 + $150 - $80 = $170.
Calculating Gross Profit:
- Gross Profit = Revenue (4 x COGS) - COGS.
- For Ivan: $170 x 4 - $170 = Gross Profit of $510.
Expenses Breakdown:
- Rent: $40, Electricity: $30, Overheads: $25 → Total Expenses: $95.
- Net Profit = Gross Profit - Total Expenses (i.e., $510 - $95).
Final Profit and Loss Account:
- Shows each section clearly for assessment.

Purpose:
- Snapshot of an organization's finances at a specific moment.
- Displays assets, liabilities, and equity.
Structure:
- Assets:
  - Current: Less than 1 year (Cash, Debtors, Stock).
  - Non-Current: More than 1 year (e.g., Machinery, Buildings).
- Liabilities:
  - Current: Payable within a year.
  - Non-Current: Payable after more than a year.
- Equity:
  - Represents organizational worth if liquidated.
Equation:
- Net Assets = Assets - Liabilities = Equity.

Concept of Depreciation:
- Assess how assets lose value over time.
Key Terms:
- Purchase Cost, Lifespan, Residual Value, Book Value, Market Value.
Methods:
- Straight-Line Method: Simple method focusing on time.
  - Formula: If residual value is zero, Annual Depreciation = Purchase Cost / Lifespan.
- Example: $1,000 phone over 5 years = $200/year.
- Units of Production Method: Reflects asset usage rates.
  - Formula: UPR = (Purchase Cost - Residual Value) / Total Quantity Produced.
  - Annual Depreciation = UPR x Actual Quantity Produced.
- Example: Printer costing $1,000 can produce 10,000 pictures over lifespan demonstrates different annual depreciation based on usage.

Profit and Loss Account:
- Useful for analyzing past performance but may be manipulated.
- Balance Sheet:
- Great for providing a financial snapshot but may lack dynamic reflection and be subject to estimation inaccuracies.

Emphasizes the importance of understanding financial statements for organizational analysis and decision-making.