Unit 3 – Finance and Accounts
3.4 – Final Accounts
Final Accounts are the annual financial statements prepared by a business at the end of an accounting period. They are essential for stakeholders and managers to assess the financial performance and position of the business.
- Income Statement (Profit & Loss Account): Shows revenue, expenses, and profit or loss over a period.
- Balance Sheet (Statement of Financial Position): Details assets, liabilities, and equity at a specific point in time.
Key Purposes of Final Accounts:
- Inform owners, shareholders, and managers about financial health
- Meet legal and regulatory requirements for reporting
- Provide information for decision-making (e.g., investments, expansion)
- Enable calculation of important ratios: profitability, liquidity, efficiency
Types of Intangible Assets
Intangible assets are non-physical assets that have value to a business. These appear on the balance sheet and can be crucial for long-term success.
- Goodwill: Value from brand reputation, loyal customers, and employee expertise
- Patents: Legal rights over inventions, designs, and processes
- Copyrights: Protection for original works (books, music, art, software)
- Trademarks: Brand names, logos, symbols
- Franchises & Licenses: Rights to sell products/services or use technology of others
- Software & Databases: Purchased or developed proprietary systems
Intangible assets are often amortized over their useful life.
Depreciation
Depreciation is the allocation of the cost of tangible fixed assets over their useful lives, to reflect usage, wear, or obsolescence.
- Matches the cost of an asset to the periods that benefit from its use
- Affects the value shown on the balance sheet and the profit figure on the income statement
- Does not involve cash outflow after asset purchase
Straight Line Method
Definition: Spreads the cost of an asset evenly over its useful life.
\[ \text{Annual Depreciation} = \frac{\text{Cost} - \text{Residual Value}}{\text{Useful Life}} \] Example: Machine costs $10,000, residual value $2,000, useful life 4 years:
\[ \text{Annual Depreciation} = \frac{10,000 - 2,000}{4} = \$2,000 \]
- Annual Depreciation Expense = (Cost − Residual Value) ÷ Useful Life (years)
\[ \text{Annual Depreciation} = \frac{\text{Cost} - \text{Residual Value}}{\text{Useful Life}} \] Example: Machine costs $10,000, residual value $2,000, useful life 4 years:
\[ \text{Annual Depreciation} = \frac{10,000 - 2,000}{4} = \$2,000 \]
Units of Production Method
Definition: Depreciation expense is based on actual usage or output of the asset, ideal for machinery or vehicles.
\[ \text{Depreciation Per Unit} = \frac{\text{Cost} - \text{Residual Value}}{\text{Total Estimated Production}} \] \[ \text{Depreciation Expense (period)} = \text{Depreciation Per Unit} \times \text{Units Produced} \] Example: Cost $44,000, residual value $4,000, total output estimate 20,000 units. In year 1: produced 7,000 units.
\[ \text{Depreciation Per Unit} = \frac{44,000-4,000}{20,000} = \$2 \] \[ \text{Year 1 Expense} = \$2 \times 7,000 = \$14,000 \]
- Depreciation Per Unit = (Cost − Residual Value) ÷ Total Estimated Production
- Depreciation Expense = Depreciation Per Unit × Number of Units Produced in Period
\[ \text{Depreciation Per Unit} = \frac{\text{Cost} - \text{Residual Value}}{\text{Total Estimated Production}} \] \[ \text{Depreciation Expense (period)} = \text{Depreciation Per Unit} \times \text{Units Produced} \] Example: Cost $44,000, residual value $4,000, total output estimate 20,000 units. In year 1: produced 7,000 units.
\[ \text{Depreciation Per Unit} = \frac{44,000-4,000}{20,000} = \$2 \] \[ \text{Year 1 Expense} = \$2 \times 7,000 = \$14,000 \]
Summary Table: Final Accounts and Depreciation Methods
| Concept | Description | Example Formula |
|---|---|---|
| Final Accounts | Summarize financial results for a period: Income Statement, Balance Sheet | |
| Intangible Assets | Non-physical assets: goodwill, patents, copyrights | N/A |
| Depreciation (Straight Line) | Even allocation of asset cost | \( \frac{\text{Cost} - \text{RV}}{\text{Useful Life}} \) |
| Depreciation (Units of Prod.) | Based on actual use/output | \( \frac{\text{Cost} - \text{RV}}{\text{Total Production}} \times \text{Units This Period} \) |