Final Accounts

Question 1

Introduction to final accounts.

Answer 1

Every business needs to know:
● How much profit did it make this year?
● How much is the business worth?
To find out this information a business must prepare Final Accounts
Final Accounts include:
Income Statement (Record Book 2)
Statement of Financial Position (Record Book 2)

Question 2

Income statement

Answer 2

this is made up of a trading account and profit and
loss account

Question 3

Trading account

Answer 3

calculates the gross profit that the business has
made from selling its products and services

Question 4

Profit and loss account

Answer 4

calculates the net profit that the business
has made after deducting expenses from the gross profit.

Question 5

Appropriation account

Answer 5

shows how the profit will be shared out to its
shareholders and any profits from previous years (called reserves)

Question 6

Sales

Answer 6

the value of goods sold by the business

Question 7

Cost of sales

Answer 7

is the total amount it cost the firm to produce the goods they actually sold

Question 8

Purchases

Answer 8

Purchases: the cost of goods bought during the year.

Question 9

Carriage inwards

Answer 9

Transport costs of bring goods to the business

Question 10

Custom duty

Answer 10

A tax paid on goods imported from outside EU

Question 11

Opening stock

Answer 11

The goods the business has at the start of the trading period

Question 12

Closing stock

Answer 12

The goods the business has at the end of the trading period

Question 13

Gross profit

Answer 13

This is the profit made by the business from selling goods
before any expenses taken away. Gross Profit = Sales - Cost of Sale

Question 14

Net profit

Answer 14

This is the profit made by the business from selling goods after the expenses have been taken away. Net Profit = Gross Profit - Expenses

Question 15

Depreciation

Answer 15

a reduction in the value of an asset over time. E.g. the
value of a car reduces over time due to rust and wear and tear. We will
look at Assets more closely in next section

Question 16

Dividends

Answer 16

This is a share of the net profit that is paid to shareholders

Question 17

Bad debts

Answer 17

this is when a debtor is unable to repay the debt that he owes
to the business so the money is written off as an expense

Question 18

Carriage outward

Answer 18

Transport costs of bring goods to the Custom

Question 19

Statement of Financial Position (SOFP)

Answer 19

this account shows the year end value
of the business’ assets, liabilities and capital structure.

Question 20

Fixed assets

Answer 20

these are assets that can be changed into cash quickly and will be used up within one year e.g cash, debtors, stock

Question 21

Debtor

Answer 21

this is someone who owes the business money

Question 22

Creditors Amounts Falling Due Within 1 Year

Answer 22

these are short-term debts
(under 1 year) that are owed by the business e.g creditors, unpaid bills (accruals)

Question 23

Creditors

Answer 23

these are people that the business owes money to

Question 24

Working capital

Answer 24

this is the difference between the business’ current assets and
their creditors amounts falling due within 1 year (Current Assets - Creditors
Amounts Falling Due Within 1 Year = Working Capital)