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Final Accounts
Final Accounts
Purpose of Final Accounts
Purpose of Final Accounts
What is the purpose of Final Accounts?
What is the purpose of Final Accounts?
Final accounts give an idea about the profitability and financial position of a business to its various stakeholders
All business transactions are first recorded in a journal. They are then transferred to a ledger and balanced. These final tallies are prepared for a specific period.
The accounts consist of 2 statements:
The accounts consist of 2 statements:
The profit and loss account shows the trading position of a business at the end of a specified accounting period.
The balance sheet shows the assets and liabilities of a business at a particular point in time.
The Profit & Loss Account
The Profit & Loss Account
A financial statement of a firm's trading activities over a period of time, usually one year. (aka Income Statement)
Profit:
Positive difference between a firm’s revenue and costs
Revenue:
Inflow of money from ordinary trading activities
e.g. cash sales, credit sales, charges/fees
Cost:
the outflow of money from a business due to its operations
e.g. wages, salaries, rent and the purchase of stock.
Trading Account
Trading Account
It shows the differences between a firm’s sales revenue and it’s cost of producing
The ‘Trade Account’ shows the gross profit
Gross Profits = Sales Revenue - Cost of goods sale
Cost of goods sold (COGS):
The direct costs of the goods that are actually sold (e.g raw materials cost)
COGS = Opening stock + Purchases - Closing Stock
Profit Statements show Net Profit (or loss):
Net Profit = Surplus from any sales revenue after all expenses are accounted for
The actual profit ==> Net Profit = Gross Profit - Expenses
Interest Charges and Taxes are not included in a Profit & Loss Account
Interest Charges: A cost that is represented as the charge or fee that a business pays to its lenders for loans.
Appropriate Account
Appropriate Account
Appropriation - Tax & Dividends to Shareholders
Two parts to this account, which show how the net profit after interest and tax is distributed
Dividends:
The amount of net profit after interest and tax that is distributed to the owners (shareholders) of the company.
Interim dividend is paid approximately half way through the year and then the final dividend is declared and paid at the end of the firm's fiscal year.
Retained Profits:
How much net profit after interest and tax by the business for its own use, such as reinvesting it in the company or to expand the business.
Depreciation
Depreciation
Depreciation is an expense
Depreciation is an expense
A fixed asset's value over time
Cars depreciate in value over times
Causes of Depreciation:
Usage (wear and tear)
Time
Obsolescence (due to technology)
Where put depreciation
Expenses in a profit and loss diagram
Under fixed assets in a balance sheet
Fun Fact:
Due to land's availability, land is technically the only fixed asset that appreciates in value over time despite what it is/was used for.
Key terms:
Key terms:
Initial cost: the cost of purchase
Useful life: how many years the business will use the asset
Annual depreciation: the percentage decrease in value
Book value: the current value of the asset
Residual value: value after useful life
Capital Expenditure
Capital Expenditure
Anything you buy in the time span of under a year
Very large purchases (even if they are purchased all at once) can be "staggered"
The single cost is spread across multiple years to make the accounts look better
Straight line method:
Straight line method:
(Initial Cost - Residual Value) / Useful life
(Initial Cost - Residual Value) / Useful life
Reducing balance method:
Reducing balance method:
Initial Cost * (1 - percentage loss)^number of years
Initial Cost * (1 - percentage loss)^number of years
Key Questions & Answers:
Key Questions & Answers:
Q: Which method is easier to calculate?
Q: Which method is easier to calculate?
A: Straight line method
A: Straight line method
Q: Which method is more realistic?
Q: Which method is more realistic?
A: Reducing balance method
A: Reducing balance method
Q: What difficulties could there be if using the straight line method?
Q: What difficulties could there be if using the straight line method?
A: You need an accurate residual value and an accurate number of years
A: You need an accurate residual value and an accurate number of years
Q: Which method will lead to a higher fixed value for fixed assets in the first years after the purchases?
Q: Which method will lead to a higher fixed value for fixed assets in the first years after the purchases?
A: Straight line method
A: Straight line method
Q: Which method will lead to a higher profit figures in the first years after the purchase?
Q: Which method will lead to a higher profit figures in the first years after the purchase?
A: Straight line method
A: Straight line method
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