3.4 Final accounts Flashcards
The principles and ethics of accounting practice
Ethics Professional behaviour Integrity Objectivity Confidentiality Professional competence
Profit and loss account
- trading account
- profit and loss account
- appropriation account
The trading account
records the results of the core business activity of selling goods or services
enables the firm to calculate its gross profit
Gross profit
profit made by a company
revenue - cost of goods sold
Opening stock
quantity of goods produced/owned by the business
available for sale at the beginning of the current accounting period
Closing stock
quantity of goods produced/owned by the business after sales at the close of accounting period such as a year
Purchases
quantities of goods bought by the business for resale during the accounting period
Cost of Goods Sold
Opening stock + Purchases - closing stock
Strategies to achieve a higher gross profit
Raise in the price of its product
negotiate lower prices from suppliers
Price elasticity of demand
measure of the responsiveness of charges in the quantity demanded of a product due a change in its price
Profit and loss account
purpose is to calculate the net profit or loss
Net profit
positive difference between a company’s gross profit and expenses
Expenses
costs such as lighting, advertising incurred by a firm to operate effectively
Net profit
gross profit - expenses
Strategies to achieve a higher net profit
reduce expenses
rentals: negotiating lower rentals
utilities: electricity
office expenses: stationary
The appropriation account
shows how profits are distributed between dividends paid and retained profit
Strengths of using the profit and loss account
gives an indication of the profitability of the business
comparisons
Limited of using the profit and loss account
used on its own, the profit and loss account only gives a limited indication of the financial health
window dressing
Balance sheet
statement of the financial position of a business in terms of assets, liabilities and owner’s equity at a particular point in time
Assets
are items of value that are owned by the firm
Liabilities
all funds owed by the company to financial and other institutions
Equity
funds invested in a business by the shareholders + retained profit
Current assets
items of value owned by the company that can be converted into cash in the short term
Fixed assets
long-term tangible items of value owned by the company that are not purchased for resale but to contribute to the operations of the business
