3.4 Final Accounts
Final accounts (using financial statement)
Usage of finance accounts:
Compare yourself to yourself and others.
Employees feel secure.
Shareholders measure the value of the business.
Financiers decide whether to send money (banks).
Suppliers assess whether the business has sufficient liquidity to pay.
Customers determine whether the business offers security and reliability.
The government calculates and checks the amount of tax.
Competitors.
Accounts are the final records of business purchases, sales, and financial transactions that provide information to groups within and outside an organization. Keep track of assets, liabilities, revenue, and expenses.
Profit or loss account
Records a business's revenue, costs, and profit or loss over a given period.
ABC Company
December 31, 2022
Profit & loss account
Sales revenue
Cost of goods sold = beginning stock + purchases – ending stock
Gross profit
Expenses
Profit before interest and tax
Interest
Profit before tax
Tax
Net profit
Retained profit = net profit – dividends
Financial position
A record of the values of a business’s assets, liabilities, and equity at one point in time shows a company's net worth.
Intangible assets
-Trademarks
-Copyright
-Goodwill
-Patents
Company
December 31, 2022
Statement of financial position
Non-current assets
Property
Land
Accumulated depreciation ()
Total non-current assets
Current assets
Stock
Cash
Debtor
Total current assets
Total assets
Current liabilities (less than one year)
Overdraft
Creditor
Salaries
Short-term loans
Net working capital = total current assets – total current liabilities
Non-current liabilities
Mortgage
Total liabilities
Net assets
Equity
Share capital
Retained profit.
Depreciation:
Straight line method - a way to calculate the depreciation exp. is constant for all useful life.
E.g. Machine=10000; 4 years; Residual value = 2000; Depreciation Exp.= (Initial Cost-RV)/years
Years | Depreciation Exp. (Initial Cost-RV)/yrs. | Acc. Depreciation (Add up the D Exp.) | Book Value (Year 0 -Depreciation Exp.) |
0 | - | - | 10,000 |
1 | 2,000 | 0+2,000=2,000 | 10,000-2,000=8,000 |
2 | 2,000 | 4,000 | 6,000 |
3 | 2,000 | 6,000 | 4,000 |
4 | 2,000 | 8,000 | 2,000 |
Simple to calculate and suitable for less expensive items, but not suitable for expensive items,
not considering the fast-changing technological environment.
Reducing balance method: Fixed depreciation rate throughout the years
E.g. Machine=10000; 4 years; Residual value = 2000
Years | Depreciation Rate | Depreciation Exp. (Book Value previous*D rate) | Net Book Value
|
0 | - | - | 10,000 |
1 | 0.33 | 3,300 | 6,700 |
2 | 0.33 | 2,211 | 4,489 |
3 | 0.33 | 1,481 | 3,008 |
4 | 0.33 | 993 | 2,015 |
The more realistic, more accurate measure increased non-cash expenses and improved cash flow; but complex charges a high depreciation rate in the early years and defers tax payments.