1. IB Business Management
Unit 3/Section 3.4
Final Accounts

2. 3.4 FINAL ACCOUNTS On completing this chapter you should be able to
Discuss the purpose of accounts to different stakeholders.
Examine the principles and ethics of accounting practice.
Prepare and interpret final accounts, namely the profit and loss account and the balance sheet.
Describe the different types of intangible assets.

3. What are final accounts?
Are financial statements compiled by businesses at the end of a particular accounting period, such as at the end of a fiscal or trading year.
These records of accounts including transactions, revenues and expenses, help to inform internal and external stakeholders about the financial position and performance of an organization.
Internal stakeholders include shareholders, managers and employees.
External stakeholders are customers, suppliers, the government, competitors, financiers and the local community.
There are two statements that make up final accounts: the profit and loss statement and the balance sheet.

4. Principles and ethics of accounting practice
The Association of Chartered Certified Accountants (ACCA) is a global regulatory body for professional accountants, assuring that its members are appropriately regulated.
The ACCA’s Code of Ethics and Conduct sets out five guiding principles for accounting practice:
Integrity
Objectivity
Professional competence and due care
Confidentiality
Professional behavior

5. 1. THE PROFIT AND LOSS ACCOUNT (OR INCOME STATEMENT) – P&L
Is a financial statement of a firm’s trading activities over a period of time, usually one year.
Covers the year’s trading, its profit and loss.
It shows how profit and loss was distributed at the end of the financial year.
There are three sections :
The Trading Account
The Profit and Loss Account
The Appropriation Account

6. a. The Trading Account Gross profit = sales revenue – cost of sales
Shows the difference in sales revenue and the cost to the business of those sales.
It is shown at the top part of the income statement that establishes the growth profit of the business.
Basically, it shows the gross profit of a business.
Gross profit = sales revenue – cost of sales
Cost of sales = COGS (Cost of goods sold)
Cost of sales = opening stock + purchases – closing stock

7. Example:
If a business opens in trading with $1000 worth of stock then receives a delivery which costs $2000.
If at the end of day trading the business has stock worth $1800 left then the costs of sales becomes
COGS = opening stock + purchases – closing stock
COGS = – 1800 = $1200
If the stocks sell at 3x their costs (3x1200) this generates profits = $3600
Gross profits = sales revenue – cost of sales= 3600 – 1200 = $2400

8. How can this be presented?

9. b. Profit & Loss Account
Shows the net profit before interest and tax, net profit before tax, and net profit after interest and tax.
Net profit is the actual profit made from a firm´s normal trading activities.
Is the second part of the income statement.
Formulas used in this section are:
Net profit before interest and tax = gross profit – expenses
Net profit before tax= Net profit before interest and tax – interest
Net profit after interest and tax = Net profit before tax – corporation tax

10. How can this be presented?

11. c. The APPROPRIATION ACCOUNT
Shows how the company´s net profit after interest and tax is distributed.
Final part of the profit and loss account.
This distribution is in two forms:
Dividends – the share of the profit that must be paid to shareholders
Retained profit – companies can keep this (and reinvest into business)
Formula used in this section:
Retained profit = net profit after interest and tax - dividends

12. How can this be presented?

13. All in one – P&L account
The Trading, Profit and Loss and Appropriation Account are combined into one account. It is then simply called the Profit and Loss Account.

14. Exercise 3.11
oxford pg.196

15. 2. THE balance sheet ( STATEMENT OF FINANCIAL POSITION)
Outlines the assets, liabilities and equity of a firm at a specific point in time.
It is a snapshot of the financial position of a firm and is used to calculate a firm´s net worth.
Basic requirement:
Total Assets ( business owns) = Total Liabilities ( business owes)+ Equity ( how the assets are financed)

16. assets
Resources of value a business owns or are owed to it. They include fixed assets and current assets.
Fixed assets:Long-term assets that last in a business for more than 12 months. Example- Buildings, equipment, vehicles etc.
Current assets: Short-term assets that last in a business for up to 12 months. Example- Cash, debtors and stock/inventory.

17. liabilities
Firm´s legal debts or what it owes to other firms, institutions or individuals.
Long-term liabilities:Long-term debts or borrowings payable after 12 months by the business. Example: long- term bank loans and mortgages.
Current liabilities: Short-term debts that are payable by the business within 12 months. Example: Overdrafts, taxes.

18. liabilities
Working capital indicates whether the business can pay off its day-to-day bills or running costs.
Working capital = Net current assets
Working capital= Total current assets – Total current liabilities

19. liabilities
Total assets less current liabilities= ( fixed assets + current assets) – current liabilities
Total assets less current liabilities= fixed assets + working capital
Net assets= ( total assets less current liabilities) – long-term liabilities

20. equity Shareholders equity or funds.
Share capital:Original capital invested into the business through shares bought by shareholders.It is a permanent source of capital and does not include the daily buying and selling of shares.
Retained profit: Profit ploughed back into the business obtained from the profit and loss account. Also known as reserves, this is the money owed to the owners, which has been reinvested so as to purchase for example assets.

21. Equity= Share Capital + Retained profit
Net assets= Equity

22. How can this be presented?

23. Exercise 3.12
oxford pg.199

24. Intangible assets
Are fixed assets that lack physical substance or are non-physical in nature, but have the ability to earn revenue for a business.
Are legally protected by intellectual property rights.
Patents: Provide inventors with the exclusive rights to manufacture, use sell or control their invention of a product. Legal life of 20 years.
Goodwill: The value of positive or favorable attributes that relate to a business. It includes a good customer base and relations, strong brand name, highly skilled employees, desirable location and a good reputation.
Copyright laws: Laws that provide a creator with the exclusive right to protect the production and sale of their artistic or literary work years after death of the creator.
Trademarks: Recognizable symbol, word, phrase or design that is officially registered and that identifies a product or business. Can be sold for a fee and most last for a 15-year renewable period, depending on their use.