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All limited (Ltd.) companies must compile final accounts

Small businesses, (non Ltd.), are not required to do it but is still in their interests to do it.



Deciding whether they want to invest in or stay with the company.


Job security check. Motivational practice. Share incentive program?


Decisions being made for the business are successful.


See how the business is doing and where the expenditure is on.


Tax purposes. Where the profits are being made and if the businesses are returning to
the economy adequately.


Determine if the business is trustworthy to lend.

Potential investors

See how the business is faring.

Trading Account/Income Statement or Profit & Loss Statement

Appropriation Account

How a firms profits have been utilised usually to the business (retained profits),
shareholders and the tax office.

Balance sheet

Trading Account/ P&L is a record of a businesses trading activity over a period of time

Usual time frame is 12 months but can also be viewed as a progressive document

Trading account is the top section of the P&L and results in a Gross Profit figure
Gross profit = sales revenue cost of goods solved (COGS)

Cost of goods sold = opening stock levels + purchases closing stock

Profit and Loss Statement

Subtract expenses from the gross profit to give you the operating or net profit

Net profit = gross profit expenses

Capital and Revenue expenditure

To calculate profit, must identify costs: Two types

Revenue Expenditure: The costs associated with producing the goods or service

Capital Expenditure: The costs associated with fixed asset purchases

Capital costs are not subtracted from sales to get profit: use instead depreciation

Depreciation is the estimate of the amount in loss of value of fixed

assets over a specified period of time. Why fixed assets depreciate:

Passage of time as assets get older, value drops

Wear and tear as assets get older, things go wrong

Obsolescence equipment gets out of date

Balance sheet

What is a balance sheet?

Shows what a business owns = assets

Shows what a business owes = liabilities

It is a snapshot at a particular time

It is one of 3 key financial statements

Used by

Lenders, shareholders, potential investors and competitors

Ultimately tells us

Where money comes from = what it is spent on

Capital (owners money) + loans = assets

Assets = a resource that has some value

Either owned by the business or

Owed to the business by someone else (debtor)

Long term and short term

Fixed assets

Resources that will be used and re-used over more than 1 year. Can be

Tangible assets (land, building, equipment, fixture)

Intangible assets (brand names, goodwill, patents, copyrights)

Financial assets (investment, shares held in other companies)

Current assets- resources likely to be sold or turned into cash. Include:

Stocks (raw materials, work in progress and finished goods)

Debtors (value of money owed to the business by customers

Cash (deposits held in the bank account)

Liabilities a business debts. Two types;

Current liabilities (must be paid in <1 year)

Trade creditors

Bank overdraft

Taxation and dividends

Long term liabilities debts due > 1 year

Bank loans


Capital, i.e. finance which is not borrowing (share capital provided by owners
or shareholders)

Value is when they were first issued not todays price

Retained profit (reserves) not a pot of money will have been spent on possets