Notes on Final Accounts and Depreciation

Purpose of Accounts to Different Stakeholders

  • Final Accounts are vital for various stakeholders: - Managers, Employees, Shareholders, Financiers, Suppliers, Customers, Government, Competitors.

Key Financial Documents

  • Profit & Loss Account: Displays profit/loss after deducting costs from revenue.

  • Balance Sheet: Snapshot of assets, liabilities, and owner's equity at a specific time.

Stakeholder Interests in Final Accounts

Managers

  • Assess performance, set future budgets, and monitor spending.

Employees

  • Measure job security based on profitability.

Shareholders

  • Track profitability and growth for investment decisions.

Financiers

  • Evaluate risks before lending.

Suppliers

  • Assess business liquidity for creditworthiness.

Customers

  • Judge supplier stability for long-term relations.

Government

  • Ensure tax compliance and business growth.

Competitors

  • Benchmark performance against others.

Final Accounts: Profit & Loss Account

Key Components

  1. Sales Revenue: Earnings from goods/services.

  2. Costs of Sales: Direct costs, calculated as
    [ \text{Cost of Sales} = \text{Opening Stock} + \text{Purchases} - \text{Closing Stock} ]

  3. Gross Profit:
    [ \text{Gross Profit} = \text{Sales Revenue} - \text{Cost of Sales} ]

  4. Expenses: Indirect costs (excluding interest/tax).

  5. Profit Before Interest and Tax: Pre-interest/tax profit.

  6. Interest: Bank loan payments.

  7. Tax: Deductions from profits.

  8. Profit for the Period: Net profit available for distribution.

  9. Dividends: Shareholder payments from profits.

  10. Retained Profit: Profits reinvested in the business.

Final Accounts: Balance Sheet

Overview

  • Illustrates a company's financial position on specific date.

Core Elements

  1. Assets: Business possessions with value - Types: Buildings, Land, Machinery, Cash.

  2. Liabilities: Debts owed - Types: Loans, Trade Creditors.

  3. Net Assets: Total assets - total liabilities.
    [ \text{Net Assets} = \text{Total Assets} - \text{Total Liabilities} ]

  4. Equity: Owner's claim on assets - Components: Share Capital, Retained Earnings.

Types of Assets

  1. Non-Current Assets: Long-term resources (e.g., machinery).

  2. Current Assets: Short-term (e.g., cash).

  3. Categories of Stocks: Raw Materials, Work-in-Progress, Finished Goods.

Types of Intangible Assets

  • Goodwill: Reputation value.

  • Patents: Rights to inventions.

  • Copyrights: Rights to creative works.

  • Trademarks: Rights to brands/logos.

Depreciation (HL Only)

Concept

  • Decrease in asset value due to use/wear.

Accounting for Depreciation

  • Recorded as an expense, affecting financial statements.

Methods of Depreciation

  1. Straight Line Method: Equal yearly expense - [ \text{Annual Depreciation} = \frac{\text{Purchase Cost} - \text{Residual Value}}{\text{Useful Lifespan}} ]

    • Example: $6,000/year for a $30,000 van over 5 years.

  2. Units of Production Method: Based on usage (e.g., mileage). [ \text{Depreciation Expense} = \text{Units Produced} \times \text{Depreciation Rate per Unit} ]

    • Steps to calculate:

    1. Calculate depreciation rate per unit.

    2. Compute annual depreciation expense based on units produced.