3.4 Final accounts

Stakeholders and accounting information

Business managers

Workforce

Banks

Creditors (suppliers)

Customers

Government and tax authorities

Investors and potential investors in business

Local community

Limitations of accounting information to stakeholders

  1. One set of accounts is of limited use
  1. Accounts do not measure items which cannot be expressed in monetary terms
  1. The accounts of one business do not aloow for comparisons
  1. Business accounts will only publish the minimum information required by law
  1. Accounts are historic
  1. Window dressing

methods :

  1. Recording revenue expenditure as capital expenditure. Revenue expenditure like rent, is payable in the present year. Capital expenditure, e.g. spending on machinery, can be spread over several years through the process of depreciation.


  2. Selling assets just before the end of the financial year to make it appear that the business is more liquid than it is. For example, sale and leaseback where a company sells some property but rents it back.



3.Encouraging early debt payments by offering discounts before the end of the financial year, whilst delaying payment to creditors, to improve liquidity.


  1. Loans may be taken out just before the date of the accounts to improve the liquiity position, but may be repaid a few days later.


  2. Inflating the value of intangible assets, such as brand namees and patents owned by the business.

The principles and ethics of accounting practice

  1. integrity
  1. objective
  1. professional competence and due care

4 Confidentiality

  1. Professional behaviour

The main business accounts

Recent layout changes

The profit and loss account - income statement or statement of comprehensive income

3 sections of a profit and loss account


  1. Trading account


    this shows how gross profit (or loss) has been made from the trading activities of the business. Not all sales are for cash in most businesses, the sales turnover figure is not the same as cash received by the business.


  2. Profit and loss section


    This section of the profit and loss account calcuates both the operating profit and the profit before tax of the business.


  3. Appropriation account


    This final section of the profit and loss account (which is not always shown in published accounts) show how the profits after tax of the business are distributed between the owners - in the forms of dividends to company shareholders - and as retained profits

gross profit - equal to sales revenue less cost of sales



sales revenue (or sales turnover) - the total value of sales made during the trading period = selling price x quantity sold



operating profit (net profit or profit before interest and taxation - gross profit minus overhead expenses



profit after tax - operating profit minus interest costs and corporation tax



dividends - the share of the profits paid to shareholders as a return for investing in the company



retained profit - the profit left after all deductions, including dividends, have been made; this is 'ploughed back' into the company as a source of finance