Unit 3.4 Final Accounts Flashcards
Final accounts
financial statements complied by a business at the end of a particular accounting period
Importance of final accounts
help inform external and internal stakeholders about the financial position and performance of an organization
The main final accounts
- Profit and loss account
- The balance sheet
Profit and loss account (definition)
also known as the income statement, is the record of income and expenditure flows of a business over a given period
Profit and loss account (3 parts and calculations )
- Trading account
gross profit = sales revenues - costs of sales
- Profit and loss account
profit before tax and interests = gross profit - expenses
- Appropiation account
retained profit = profit for period - dividends)
Cost of sales
opening stock + purchased stock - closing stock
Structure of profit and loss account
Sales revenues
Costs of sales
Gross profit
Expenses
Profit before interest and tax
Interest
Profit before tax
Tax
Profit for period
Dividends
Retained profit
Balance sheet
a financial statement that outlines the assets, liabilities and equity of a firm at a specific point in time
Assets
resource of value that a business owns or is owed to it
Total assets (formula)
non current assets + current assets
Liabilities
a firm’s legal debts or what it ows to another individual or institution
Total liabilities (formula)
non current liabilities + current liabilities
Net assets (formula)
total assets - total liabilities
Equity
the amount of money that would be returned to a business if all its assets were liquidated
Total Equity formula
Share Capital + Retained Profit
Liquidation
a situation where all of a firm’s assets are sold off to pay any funds owing
Balance sheet structure
- non-current assets
- current assets
total assets
- total liabilities
net assets
equity
share capital (not for non-profit)
retained profit
total equity
Equity (formula)
total assets - total liabilities
or
share capital + retained profit
Intangible assets
assets that are non-physical in nature
- Patents
- Trademarks
- Copyright
- Goodwill
Patents
provides the inventors with exclusive right to sell, use manufacture or control the process or product they invented
Copyright laws
legislation that provides to the creators the exclusive right to protect the production and sale of their artistic or literary work
Trademarks
a recognizable word, phrase, sign or design that is officially registered and identifies a product or a business
Depreciation
the decrease in value of a fixed asset over time
Types of depreciation
- Straight line depreciation
- Units of production
Straight line depreciation
method that evenly divides an asset’s cost over its life. Each year, a set amount (residual value) is subtracted from the asset’s value for depreciation
Straight-line depreciation (formula)
(original cost - residual value) /expected useful lifetime
Residual value
an estimation of an asset’s worth or value over its useful life, also known as scrap or salvage value
Units of production
also called the units of activity method calculates the depreciation of the value of an asset based on its usage
Unit of production (formula)
(original cost - residual value) / estimated total units to be produced over estimated useful life * actual units of production
Units of production rate
(original cost - residual value) / estimated total units to be produced over estimated useful life
Units of production
Advantages vs disadvantages
advantages
- depreciation expense is directly tied to wear and tear
- a more accurate reflection of physical valued
disadvantages
- complicated to compute: requires an accurate estimation of the total units that an asset will produce over its lifetime, which can be difficult to predict, especially for new or innovative types of machinery.
- Inapplicability to All Assets: only suitable for assets where usage can be directly measured in units (like machines measured by the number of units they produce or vehicles by miles driven).
Straight line depreciation
Advantages vs disadvantages
advantages
- simple to compute
- suitable for less expensive assets
disadvantages
- not suitable for expensive assets
- not take into account fast change in tech
- increase in repair and expenses
Goodwill
the value of positive or favourable attributes that relate to the business
