3.4 - Final Accounts + Depreciation Flashcards
Final Accounts
- Outline the financial performance of a business over a period of time
- For publicly-held companies, these are published in the annual report
Might include:
- Statement of Profit & Loss
- Balance Sheet
- Cash Flow
Internal Stakeholders
- Investors/Shareholders
- Managers
External Stakeholders
- Banks
- Suppliers
- Employees, Customers, Government, etc…
Profit & Loss Account
- Also known as Income Statement
- A summary of the business’s financial performance over a given time period
- Uses the revenue, cost and profit over a period of time to calculate how much money the “business has made”
Structure of Profit and Loss
- Statement of Profit & Loss for XX for year ended 31/12/2025
- Sales Revenue
- Costs of Sale
- Gross Profit
- Expenses
- Profit before interest and tax
- Interest
- Profit before tax
- Tax
- Profit per period
- Dividends
- Retained Profits
Sales Revenue
Price x Quantity
Costs of Sales
Costs x Quantity
Gross Profit
Sales Revenue - Costs of Sales
Expenses
Fixed or indirect cost not directly involved in production
Profit before interest and tax
Gross Profit - Expenses
Interest
Interest paid on any loan
Interest rate x Bank loan amount
Profit before tax
Profit before interest and tax - Interest
Tax
Pay tax on any profit
No profit = no tax (non-profit business)
Profit per period
Profit before tax - Tax
Dividends & Pros and Cons of Paying Dividends
- The business may choose to pay out dividends to owners
- The rest is retained, and put back into growing the business
Pros of paying dividends:
- Satisfies shareholders who get a return
- Possible impact on share price
Pros of not paying dividends:
- Can retain the money and grow the business
- May lead to higher profits and dividends in the future
Retained Profits
Profit for period - Dividends
What happens if the company is a non-profit enterprise?
Use “Surplus” rather than “Profit”
Dividend = 0 - DO NOT INCLUDE IN PNL
Usually no tax is paid
- Gross Profit = Gross Surplus
- Profit before interest = Surplus before interest
Balance Sheet
- Financial Statements contained in the Annual Report
- Records the net worth of a business at one moment in time
- Shows the profitability of a business over a certain period of time
Structure of Balance Sheet
Statement of financial position for XX as at DD/MM/YY
Non-Current Asset
- Property, plant and equipment
- Accumulated Depreciation
- Non-Current Assets (Net)
Current Asset
- Cash
- Stocks
- Debtors
Total Asset
Current Liabilities
- Bank Overdraft
- Trade Creditors
- Other short-term loans
- Current Liabilities (net)
Non Current Liabilities
- Borrowings Long-term
- Non-Current Liabilities
Total Liabilites
Net Asset
Net Equity
- Share capital
- Retained earnings
- Total Equity
Assets
Items of monetary value owned by the business
Non-Current Assets
Long-term assets - Used for > 12 months
- Tangible - Property (land), plants (factory) and equipment (vehicles, machinery)
- Intangible - Patents, copyrights, goodwill
Current Assets
Assets that are likely to be converted into cash within 12 months (berfore the next account)
- Cash
- Stock
Will be sold and then turn into cash - Debtors
Customers who have bough our product will pay at a certain date in the future
Things on the Balance Sheet
- Title
- Non-Current Assets
- Current Assets
- Total Assets
- Current Liabilities
- Non-Current Liabilities
- Total Liabilites
- Net Assets
- Equity
Title of Balance Sheet
Statement of financial position for XX as at DD/MM/YY
Non-Current Assets in Balance Sheet
- Property, plant and equipment
- Accumulated Depreciation
- Non-Current Assets (Net)
Current Assets in Balance Sheet
- Cash
- Debtors
- Stock
- Current Assets (Net)
Total Assets
Non-Current Assets + Current Assets
Current Liabilities in Balance Sheets
- Bank Overdraft
- Trade Creditors
- Other short-term loans
- Current Liabilities (net)
Non-Current Liabilities in Balance Sheet
- Borrowings Long-term
- Non-Current Liabilities (Net)
Total Liabilities in Balance Sheet
Current Liabilites + Non-Current Liabilites
Net Asset
Total Asset - Total Liabilities
Equity in Balance Sheet
- Share capital
- Retained earnings
- Total Equity = Net Asset
Liabilities
A financial obligation that must be paid in the future
Current Liabilities
Debts of the business to be paid in less than 12 months
- Bank Overdradt
- Trade Creditors
You have bought an input from another and will pay at a certain date in the future - Other short-term loans
Non-Current Liabilities
Long term loans of the business longer than 12 months
Net Assets
- One measurer of the worth of the busines
- If all assets were sold and debts paid, this is the amount left to go to investors
Equity
Sum of all previous profits put back into the business
Tangible assets
Assets that are physical
- E.g. factory, land, vehicles
Intangible assets
Assets that have no physical properties
- And are not financial instruments (e.g. bank account)
Marketing-related
- Trademarks, logos, brand names, slogans, internet domain sites
Technolgy-related
- Patents
Contract-related
- Franchises, licensing agreements
Goodwill
- Value of the customer base and brand image
Depreciation
The reduction in the value of an asset over time
For example, a business buys new machinery. The value of this will go down over time due to:
- Operational wear - less reliable as one gets older
- Outdated
Important to put it onto the balance sheet as we can see the real value of the asset over time
Straight-line method of depreciation
- The amount that an asset decreases every year is the same
- Each year the asset depreciates by the same amount every year
- (Original value - expected residual value) / Expected future life of asset
Pros and Cons of Straight-line method of depreciation
- Simple to calculate and understand
- Best for small-value assets with minimal balance sheet impact.
- Generally unrealistic - assets usually lose more value in earlier years
Units of production method of depreciation
- The assets depreciate according to the amount of production
- More usage = higher depreciation
Formula: (Units of production in one year/total life units of production) x (Original value - expected residual value)
Pros and Cons of Units of production method of depreciation
- More depreciation in years of heavy use
- More accurate
- Harder to calculate
- Requires detailed tracking of usage or output
