3.

4 Final
accounts
Part 1
Andrea Tatiana Rodríguez Sotto
The purpose of accounts to
internal stakeholders
Shareholders Employees
• Sales revenue • Profits after tax
01 • Profit 02 • Financial security
• Retained profits • Possible pay rises
• Dividends

Managers
03 • Revenue and profits
• Retained profits
• Decision-making
The purpose of accounts to
external stakeholders
The government
• Tax liabilities
Pressure groups
01 • Standards and regulations 04 • Issues such as ethics
• Decisions by managers and sustainability

Suppliers
02 Investors
• Cash position
• Trends in revenue and profits 05 • Historical financial
performance
• Financial security
Customers
03 • Profits as a proportion of revenue
• Financial security
Activity
Learner profile: Inquirers
Approaches to learning: Research skills (information literacy)

Using the internet and your own knowledge, identify one business that had
a positive financial performance in the most recent year, and one whose
performance was not so good.

1. Identify some internal and/or external factors that impacted the

business (see SWOT analysis in Section 1.1.5 in Kognity).
2. Identify how some stakeholders were affected by the positive or
negative financial performance of the business.
Profit and loss accounts - steps
1. Calculate the gross profit
Cost of sales = opening stock + purchases - closing stock
2. Calculate profit before interest and taxes
Gross profit - expenses
3. Calculate profit for period
Profit before interest and taxes - taxes
4. To show how profits are used
Dividends and retained profits
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 Non-profit organization
Terminology: They do not use the terms
profit and loss. Instead:
● Surplus = Profit ● Deficit = Loss.
Dividends: Non-profit organizations do not
have owners and do not pay dividends.
Any surplus funds are retained within the
business.
Taxation: In many countries, non-profit
organizations such as charities do not pay
tax on their surpluses as these are intended
to be used for the benefit of the public.
STATEMENT OF FINANCIAL POSITION
Key statement of financial position relationships:

1 Assets = liabilities
This is the fundamental relationship which helps to explain
why the balance sheet or statement of financial position
‘always balances’
2 Total assets = current assets + non-current assets
Businesses need to invest in a range of assets if they
are to operate efficiently
3 Liabilities = share capital + borrowings + retained profits
Assets
Non-current assets: These are assets owned by a business that it expects
to retain for one year or more. Such assets are used regularly by a business
and are not bought for the purpose of resale. Examples of non-current
assets include land, property, production equipment and vehicles.
Current assets: This category of asset is likely to be converted into cash
before the next statement of financial position is drawn up. Less than one
year. There are three major types of current asset:
● Cash held within the business itself or in its bank accounts.
● Stocks of raw materials and components as well as unsold finished
goods.
● Debtors (people and organizations that owe the business money).
Liabilities
● Current liabilities: They represent debts owed by the business due
for payment within one year or less. We can identify three examples
of current liabilities:
● Overdrafts are short-term flexible loans that businesses negotiate
with banks to help them to manage their payments on time.
● Creditors are organizations such as suppliers to which the
business owes money.
● Other short-term loans which the business expects to repay
within twelve months.
Liabilities
● Non-current liabilities: These are debts that a business does not
expect to repay within the period of one year. Long-term borrowing
in the forms of mortgages and bank loans repayable over several
years are common examples of this type of liability.
● Equity: It may seem strange that the money invested into the
business by its owners (shareholders in the case of a company) is a
liability. However, if the company ceased trading, shareholders
would hope for the repayment of their investment. Thus, these
funds (also called total equity) are liabilities. This element of the
statement of financial position also includes the company’s
accumulated retained profit, which is termed retained profit or
retained earnings.
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The relationship between statement of financial
position and statement of profit and loss

● The statement of profit and loss summarizes a business’s

revenues and costs over a certain period of time and
shows the resulting profit or loss for that trading period.

● The statement of financial position gives a snapshot of

the business’s financial position on a given day. It doesn’t
show day-to-day transactions or the current profitability of
the business.
Different types of assets

Tangible Intangible
Have a physical existence. Do not take a physical
01 ● Land and property. 02 form.
● Machinery and ● Patents and other
equipment. rights.
● Goodwill.
● Brads.