3.4

• The purpose of final accounts
• The purpose of accounts to different stakeholders
• All businesses need to keep records of their financial statements
• Proper accounting allows managers to have better financial control and planning
• Proper accounting can also be a legal requirement
• Where there is a separation of ownership and control, much of a firm's sources of finance may have come from shareholders
• Financial reporting is a way to account for the money of the business, whether it belongs to the owner, investors, or lenders
• Producing final accounts ensures that all payments and receipts of a business have to be officially accounted for
• All companies must provide a set of final accounts to their various stakeholder groups
• Final accounts consist of

  • The profit and loss account
  • The balance sheet
• Profit and loss account

  Reports the revenue and expenses of a business at the end of a specified accounting period
• Balance sheet


  Reports the value of assets and liabilities of a business at a particular point in time
• It is a legal requirement in most countries for companies to have their final accounts audited by independent and chartered accountants
• Auditors certify the financial statements to be accurate and truthful
• Incorporated businesses are legally obliged to produce final accounts
• Producing final accounts ensures transparency in the use of a company's funds
• There is no universal method to present the final accounts
• There is some degree of flexibility in reporting the financial position of a company as long as the final accounts are produced in line with the rules and regulations of the country
• Internal stakeholders


  • Executives
  • Directors
• External stakeholders


  • Shareholders
  • Employees
  • Managers
  • Competitors
  • Government
  • Financiers
  • Suppliers
  • Potential investors
• Shareholders


  Owners of a company interested in where their money is spent and the return on their investments
• Employees


  Staff interested in assessing the likelihood of or presenting a case for a pay rise
• Managers


  Use financial accounts to judge the operational efficiency of their organisation
• Competitors


  Rival businesses interested in comparing their financial performance
• Government


  Tax authorities examining final accounts to ensure correct tax payment
• Financiers


  Financial lenders scrutinising accounts before approving funds
• Suppliers


  Examine final accounts to determine the extent of trade credit
• Potential investors


  Use final accounts and ratio analysis to assess investment worthiness
• The profit and loss account or income statement is a financial statement of a firm's trading activities over a period of time, usually one year
• Most businesses that operate in the private sector aim to make a profit
• Even for non-profit organisations and those in the public sector, it is important to make a financial surplus in order to survive
• Purpose of profit and loss account

  Shows the value of profit or loss for a business during a particular trading period
• Profit


  The positive difference between a firm's revenues and its costs
• Revenues


  Inflows of money from ordinary trading activities
• Costs


  Outflows of money from a business arising from its operations
• Gross profit


  Sales revenue - cost of goods sold
• Cost of goods sold (COGS)

  Direct costs of the goods that are actually sold
• Calculating COGS


  Opening stock + Purchases - Closing stock
• Net profit


  Financial surplus from sales revenue after all costs and expenses are accounted for
• Sections of the statement of profit or loss


  • Trading account
  • Profit and loss account
  • Appropriation account