Chapter 7
- Accounts can help:
keep track of how much money is owed
how much raw material needs to be ordered
keep a check on the money supply
calculate profit and loss
calculate how much tax is to be paid
tell about the performance of the company
tell about financial strength of company
calculate liquidity
estimate share/market value
- Final accounts are produced at the end of the financial year and give details of profit and loss as well as the worth of the business. They:
keep record of what has been bought and from which supplier
keep records of what been sold and to which customers
Financial Documents
| Purchase Orders | Requests for the goods or materials sent to the supplier |
| Delivery Notes | Used by the supplier to confirm the goods have been received by the purchaser |
| Invoices | Sent by the supplier to the customer as a request for payment for the goods delivered |
| Credit Notes | Credit provided if a mistake has been made |
| Statements of Account | Total value of deliveries made each month |
| Remittance Advice Slips | Indicate which invoice is being paid |
| Receipts | Given by the supplier when the purchaser pays an invoice |
Methods of Payment
- Cash
- Check
- Credit card
- Debit card
Who Uses the Final Accounts of a Business?
| Who? | Why? |
| Shareholders | to know the worth of the business |
| Creditors | to see if the company can pay them back |
| Government | to charge taxes accordingly and know how it will affect the economy |
| Other Companies/Competitors | to compare their own companies and to see if takeover or merger should be considered |
Components of a Final Account
| Account | Features | Calculation Method |
| Trading Account | Gross profit (does not include overhead costs or expenses) | Sales Revenue – Cost of Goods Sold |
| Profit and Loss Account | Net profit and retained profit (the net profit invested back into a company after deducting tax and dividends) | Gross Profit – Expenses (depreciation and taxes included) |
| Appropriation Account (Part of P&L Acc.) | Shows profit after tax is distributed | Profit- Tax |
| Balance Sheet | Value of the business’s assets and liabilities (owner’s wealth) | Total Assets – Total Liabilities |
Definitions
| Depreciation | fall in value of a fixed asset over a period of time |
| Retained Profit | net profit reinvested into a company after deducting tax and payments to owners |
| Liquidity | the ability of a business to pay back its short-term debts |
Formulae [Ratio Analysis]
| Cost of Goods Sold | Opening Stocks + Purchases – Closing Stocks |
| Owner’s Wealth | Total Assets – Total Liabilities |
| Debtor’s Days | [Debtors/ Sales Turnover] * 365 |
| Creditor’s Days | [Creditors/Cost of Sales] * 365 |
| Working Capital | Current Assets – Current Liabilities |
| Capital Employed | Shareholder’s Fund + Long-term Liabilities |
| Dividend Yield | Dividend per share/ market value of share |
Performance Ratios [Profitability Ratio] | |
| Operating Profit | Gross Profit – Expenses |
| Return on Capital Employed | Operating Profit / Capital Employed |
| Gross Profit Margin | Gross Profit / Sales Turnover |
| Net Profit Margin | Net Profit Before Tax / Sales Turnover |
| Share Yield | Dividend/ Market Price of Share |
Liquidity Ratio [Cash Position] | |
| Current Ratio | Current Assets / Current Liabilities |
| Acid Test Ratio | Current Assets- Stocks / Current Liabilities |
| Stock/Sales Turnover | Cost of Sales / Average Stock |
| Net Assets | Working Capital + Fixed Assets |
Disadvantages of Ratio Analysis
- May not indicate how a business will perform in the future
- Inflation is not considered
- Different companies use different methods of accounting
Business Studies IGCSE