final accounts

• Final accounts

  Two types: 1) Balance sheet - shows how much the organization is worth if it was to be sold 2) Profit and loss account - shows how well the firm is trading, including different kinds of profit (net profit and gross profit)
• Stakeholder groups interested in final accounts

  • Shareholders/owners
  • Managers
  • Employees
  • Government
  • Competitors
  • Creditors/suppliers
  • Customers
  • Pressure groups
• Shareholders/owners interested in final accounts

  To know how much dividends they are getting and how well the company is performing
• Managers interested in final accounts

  As evidence of their work in controlling expenses and organization's performance
• Employees interested in final accounts

  To see how secure their jobs are and assess the organization's performance
• Government interested in final accounts

  To ensure tax is being paid on time and fully, and the organization is not involved in any illegal accounting practices
• Competitors interested in final accounts

  To see their relative success or failure, industry benchmarks, and their relative market standing and power
• Creditors/suppliers interested in final accounts

  To see how likely their debtors are to pay back their trade credit
• Customers interested in final accounts

  Some well-educated customers may look at how ethical the organization is and how it spends its profits
• Pressure groups interested in final accounts

  To see how ethical the organization is and if it distributes profits in a way that harms the environment or society
• Profit and loss account shows the organization's trading activity over a year and its purpose is to show whether the organization is making a profit or loss
• Parts of profit and loss account

  • Trading account (shows gross profit)
  • Profit statement (shows net profit)
  • Appropriation account (shows retained profits and dividends)
• Gross profit

  The difference between revenue and cost of sales (cost of purchasing or producing the products sold)
• Cost of sales


  Direct cost of products sold, calculated as: opening stock + purchases - closing stock
• Example calculation of cost of goods sold (cogs) for Ivan's fruit stall
• Gross profit = Revenue - Cost of sales
• Net profit


  The difference between gross profit and expenses (indirect and/or fixed costs)
• Example calculation of net profit before and after interest and tax for Ivan's fruit stall
• Appropriation account


  Shows how much profit is retained and how much dividends are paid
• Format of profit and loss account required by IB for for-profit and non-profit entities
• Profit and loss account

  • Advantage: Breaks down trading activity into key elements, easy to understand, good indicator of trading activity

  Disadvantage: Backwards-looking, potential for window dressing (legal manipulation of accounts)
• Balance sheet


  A financial statement of an organization's assets, liabilities and capital at a particular point in time
• Balance sheet, like profit and loss account, has three parts: assets, liabilities and equity
• The main drawback of the profit and loss account is that it's not perfect, it still has some room for unethical practices and some manipulation with numbers
• Balance sheet


  • It's a picture or snapshot at a point in time, not dynamic
  • It's a requirement for all companies
• Parts of a balance sheet

  • Assets
  • Liabilities
  • Equity
• Why balance sheet is called "balance sheet"


  Net assets (all assets minus all liabilities) should balance with equity (sources of finance)
• Balance sheet is a wonderful accounting tool to show how much an organization is worth and to make sure net assets balance with equity
• Balance sheet is a snapshot, not representative of the dynamic business environment and change
• Balance sheet values are based on estimation, leaving room for manipulation and unethical practices