Accounts and Finance

3.4 Final Accounts

Ms. Elaine B Gili

[email protected]
August 2015
 Extract from syllabus
Paul Hoang Ed 2 – unit 3.5
YOU NEED YOUR CALCULATOR
What are final accounts?
Any ideas?
 Final accounts:
• Final accounts are a summary of all the
transactions that happened in a business over a
period of time, usually a year.

• Transactions – anything that happens in a

business that has a money value attached to it
e.g. Bought goods for resale, paid wages, sold
goods, bought machinery, paid a creditor.

• Every transaction needs to be recorded.

 Why do businesses keep accounting records?

• To have proper records and be able to

function and plan better as a business e.g.
more likely to chase debtors and get paid.

• For some it is a legal requirement especially in

companies due the STEWARDSHIP FUNCTION

What was that?

 Company legal requirements
There are 2 main documents/parts:

1. Profit and loss account

2. Balance Sheet

Aka FINAL ACCOUNTS

and they need to be AUDITED!!
WE are now going to move to a
Financial Accounting Section
Financial Accounting aims at external users

Management Accounting aims at internal users

Who will use these
Final Accounts?
 Who will use the Final Accounts?
• Shareholders
• Employees
• Managers
• Competitors
• Government
• Banks and lenders
• Potential Investors
• Any other interested STAKEHOLDER

In each case make sure you know why!

The principles and ethics
of accounting practice
NEW!
 The principles and ethics of accounting practice

• Accountants need to follow common rules

• These rules are set by an accounting body
• The ACCA is a global regulatory body
• ACCA = association of chartered certified
accountants
• Why are accounting rules needed?
– To avoid fraud
– To improve the reputation of the profession
– To have a consistent practice - be able to compare
– To protect users of this information
 The principles and ethics of accounting practice

There are 5 main guiding principles in the

ACCA’s code of ethics and conduct.
1. Integrity
2. Objectivity
3. Professional competence and due care
4. Confidentiality
5. Professional behaviour
 The principles and ethics of accounting practice

1. Integrity – fair, honest, truthful behaviour

2. Objectivity – no bias and conflict of interest

3. Professional competence and due care – keep up to date

on knowledge and skills an act diligently

4. Confidentiality – not using confidential information for

personal gain, keep confidentiality unless it is illegal to do
so.

5. Professional behaviour – comply to laws and regulations.

Avoid situations that could jeopardise the profession.
The Accounting Equation
The Accounting Equation
 The Accounting Equation

O O
W W
N E
E D
D
Equity (companies) OR
Capital (soletrader, partnerships)

Capital: any amounts invested in the business by the

owner/s. These amounts can be in cash or in kind (property,
a machine, a car).

We need to seperate what the business owes to its owner/s

from amounts that it owes to other external people
(liabilities).

The initial capital in a company is also called share capital.

 This is my board to open up the accounting equation

Start from.............. A = L + C
 This is my board to open up the accounting equation

A=L+C
A–L=C
FA + CA – (CL + LTL) = C
FA + CA – CL – LTL = C
That is Version 1 for the Balance sheet

OR

FA + CA – CL = C + LTL
That is Version 2 for the Balance sheet
 The Balance Sheet – a clip to get
into the idea of double entry and
the balancing of the equation.
http://www.youtube.com/watch?v=i
xCPM5HznRU
 The Balance sheet
• It is a PICTURE of all the assets, liabilities and
capital of a business at ONE POINT IN TIME

In fact the Title is....

The Balance Sheet

of ABC Ltd as at 31
December 2004
New
one !
!!
Syllabus
May 2016
Page 90
heading

Assets
less
Liabilities

57-42 =15
480+15 =495

495-300 =195

Capital
 CW

Work:
Crawford Ltd
Brincat Ltd

Can also try

Ashley Nov 2003 SL P2 Q5 – next slide
GPPB page 97 HW
As at 31st January $000
2002
Machinery 360
Stock 12
Cash at bank 22
Land and buildings 420
Fixtures and fittings 53
Debtors 38
Creditors 68
Share capital 600
Reserves 237

1. From the data given, construct a Balance Sheet for Ashley Gardner (6)
2. Explain why organisations such as Ashley Gardner need working capital (2)
Exercise 1
The information below was extracted from Brincat's LTD books
Draw up a Balance sheet as at 31 Dec 2012 for her.
$ Group
Write whether these items are:    
FA, CA, CL, LTL, Capital    

loan from Mr Bugeja 2500  

creditors 4685  
stock 13700  
premises (another term for Land & buildings) 20000  
debtors 6155  
motor van 5175  
cash 147  
bank overdraft 1890  
reserves 6102  
share capital 30000  
     
Exercise 2
The information below was extracted from Crawford's Ltd books
Draw up a Balance sheet as at 31 Dec 2012 for him.
$ Group
Write whether these items are:    
FA, CA, CL, LTL, Capital    

Fixed assets 80000  

Debtors 2000  
Creditors 6000  
Stock 15000  
Cash 500  
Debentures 25000  
Reserves 5000  
Share capital ? OOPS  
 
     
 Short term loans NEW
If you have a loan of $10,000 being paid at $100
per month. How much of it will you pay in the
upcoming year?

• $100 x 12 months = $1200 short term loan

• $10,000-1200 = $8800 long term loan

 Short term borrowings
• For now it will include bank overdrafts
(later at Uni you will add more items)

• If it is given to you as a figure, just include it as

Current liabilities.

• Definition – amounts of money due in less

than a year
 The profits remaining after paying
Retained interest, tax and dividends.
Profits
These are profits that over the years
were not distributed as dividends.

We use this term in companies.

For sole traders and partnerships we

use the term: accumulated profit or
simply profit.

They are kept in the business as

FEEDBACK.
 You might meet: RESERVES

Reserves – these are amounts belonging to the

owners of the business (in a company).

These are profits set aside from previous years

but rather than being called retained profits they
are kept separate as a RESERVE.

There can be specific reserves e.g. an asset

replacement reserve or a general reserve.
 Fixed assets
TANGIBLE INTANGIBLE
• Physical assets • Non physical assets

•Reputation
•Good Location
•Brands
•Loyal Workers
 INVESTMENTS
• They are medium or long term financial
investments that the business has. Businesses
can hold shares or debentures in other
companies. This will generate some short term
income such as dividends or interest
receivable.
 New terms checklist
• Tangible fixed assets
• Intangible fixed assets
• Investments
• Net current assets or working capital
• Net assets
• Retained Profit or accumulated profit/loss
• Reserves
• Share capital or capital
• Shareholders funds or equity
• Short term borrowing
* For soletraders or partnerships
 Want some extra work:
Some reinforcement
• GPPB page 36 part B
• GPPB page 87 part A
All the above are copied on this presentation

• HL – no such simple examples I am afraid!

GPPB page 36
GPPB page 87 with some INTERESTING new aspects/terms
2000 2001
$m $m
Fixed assets 1.6 1.7
Share capital 2.24 1.01
Long term Liabilities 1.44 1.44
Cash in hand 0.02 0.01
Bank Overdraft 0.23 0.15
Creditors 0.24 0.43
Debtors 0.7 0.6
Accumulated profit/(loss) (1.43) (0.52)
Stock 0.4 0.2
Sales Revenue 0.832 1.08
Cost of sales 0.477 0.49
Overheads 0.41 0.442

1. Calculate the working capital for 2000 and 2001 (2)

2. Produce a Balance Sheet for 2000 and 2001 (6)
Why is a Balance Sheet used?
 Why is a Balance Sheet used?
• It shows the assets and liabilities
• It shows its working capital
• It shows the asset structure
• It shows the capital structure
• It shows the capital employed

All the above can aid users of accounts in

decision making.
Balance Sheet Limitations
Are there ANY
you can think of?
 Balance Sheet Limitations:
• It is static - a picture at one point in time

• Linked to the above is the fact that it is historic

• The figures on it may not be 100% accurate...think of fixed

assets or debtors

• It does not include intangible assets

• It may be window dressed

• Ignores non quantitative aspects

 STUDY THE BALANCE SHEET
FORMAT BY HEART

THOUGH….it is easier if you can reason it out

using the accounting equation.

The format is not given to you in the exam.

http://www.bbc.co.uk/news/business-19716923
Me TOO!!
do not use slides 46-62
 The Profit and Loss account
• Whereas the Balance sheet is the document that
shows what a business owns and owes, the profit
and loss account is an income statement showing
what the business earned and spent over a period
of time, usually a year, in carrying out its main
trading activity.

• Usually you first prepare the P&L account and

then the Balance sheet. I switched them in this
PPP to make things easier.
Trading and Profit and Loss account

Part 1 - includes the Part 2 - includes all

main trading the (other income)
activity. It compares and expenses that
what we bought are not directly
and what we sold related to the main
and the profit trading activity.
thereon.
 The Trading Account
Its components are:
Sales / Revenue
Cost of sales
• Opening stock
• Purchases
• Closing stock

Gross Profit
 Revenue
• Revenue or Sales or Turnover (in companies)
• It is found by taking the selling price per unit
(SP) x the number of units sold.

SP/unit x units sold

$4 x 100 units = $400

You might have to find it or it is given!

 The Cost of Sales
• This is at COST PRICE as the name suggests.

• We try to answer the following: What was the cost of

the items sold this year? It is also what the title
suggests.

• In this section, we keep track of:

– what stock we had when we started the year,
– what stock we bought during the year,
– What stock we had at the end of the year
 The Cost of Sales

Opening Stock + Purchases – Closing Stock

Opening stock - We started with $ 2000
Purchases - We bought another $ 14000
Closing stock - At the end we had $ 3000

So the items we sold during the year cost.....

 The Trading Account

Sales - Cost of sales = Gross Profit

 Example 1
Example:
• Purchases 10 units at $10
• Sales 10 units at $15

EASY!

Use the excel file: trading account examples for format

 Example 2
Example:
• Opening stock 5 @ $10
• Purchases 8 units at $10
• Sales 13 units at $15
 Example 3
Example:
• Opening stock 5 @ $10
• Purchases 8 units at $10
• Sales 12 units at $15

• Closing stock 1 unit

The closing stock VALUE???? @$10 each
 Example 4
Example:
• Sales $4560
• Purchases $3210
• Opening stock $1259
• Closing stock $853
Example – Paul Hoang page 393 Box 3.5.2

From the information below draw up a trading

account for the year ending 31 Dec 2011:

– 3,000 bags were sold at $35 each

– The closing stock was $20,000
– We bought 2,000 units at $25 each
– Stock at 1 Jan 2011 was $15,000
 Extra note
• Sometimes you have to find the cost of sales,
but sometimes it is given by the examiner
(YIPEE – example 4).

• Look at the examples from the GPPB done

earlier on (page 36 and page 87).

• Try their Trading accounts

 The profit and loss account
Gross profit
Less expenses ..

Net profit before interest and tax

Expenses a.k.a. as overheads

Expenses include an exhaustive list e.g. wages, postage,

stationery, rent, water and electricity, subscriptions, telephone bills,
insurance, administration expenses, accountancy fees, repairs etc.....
EXCEPT: taxes, interests and dividends...those come later
 The profit and loss account
Turnover 1000
Less cost of goods sold .. 700
Gross profit 300

a.k.a cost of sales (Cost price per unit sold)

how much did it cost to produce a product or to buy it

Turnover = Total Revenue = Total Sales = SALES

TR = SP x units
 The
Appropriation
Account
So far we are up to Net profit....
we have to move on to
the Appropriation account
WHAT WILL WE DO WITH THE
NET PROFIT?
Where does the Net Profit GO?

TAX
NET
$2000
PROFIT
$10,000
Bank
Interest
$1000
Retained profits
(feedback =
balance)
Dividend $4000
$3000
 Appendix 2:

you already have

a copy on the
back of the
Balance Sheet
 Try the following example:
Details $ 000s
Dividends 10
Sales 500
Cost of sales 200
Taxation 48
Expenses 100
Interest payable 10

(a) What is the retained profit for the year?

 Example: Paul Hoang page 395 Box 3.5.3

Data for Masks Ltd for the period 31st August 2012
Sales turnover 15,000 units @ €8 each
Opening stock € 9,000
Purchases € 40,000
Closing Stock € 8,000
Overhead/Expenses € 18,000

1. Construct a Trading and Profit and Loss account for Masks

Ltd for the period ended 31 August 2012 (5 marks)
Answer
 Example:

Data for RSS Ltd for the period ended 31st August
2012
Turnover 15,000 units @ €8 each
Interest € 900
Cost of sales 15,000 units @€3.50 each
Taxation € 2,000
Dividends 40% of NP after int and tax
Overheads € 48,000

1. Construct Profit and Loss account for RSS Ltd for the period
ended 31 August 2012 (5 marks)
TRY COLIN BUCKLEY
NON OPERATING INCOME

What is this?
 ADD non-operating Income
Income that is not part of the normal trading
activities but it is extra, examples:

• Bank interest receivable

• Discounts received
• Rent received

Non operating income is added to gross profit

Gemel Ltd had it !!!!!

 NON OPERATING INCOME!

ADD the
non XXX

operating
income
here
What are the limitations of
the Trading, Profit and Loss
and Appropriation account:
 Limitations of
the Trading, Profit and Loss
and Appropriation account:

• Based on historical values

• The past is no guarantee for the future
• There could be window dressing e.g. Sales cut off
• One needs to compare with previous years, with
other businesses and with budgets.
• Ignores non quantitative aspects.
 The finance manager, Colin Buckley, has drawn up draft accounts for the year ended 31
May 2007. The main figures from these accounts are given below.
 
$000
Gross profit
Net profit 190
525 1. TICK THE
Interest
Tax
35
25
ITEMS USED
Dividends 100
Turnover 2750
Fixed assets
Creditors
1250
450
2. WORK
Debtors
Cash
350
50
BACKWARDS
Short-term borrowing
Net assets
135
2570
or use A-L=C
Share capital 350
Loan capital 550
 
Q. Use the figures above to construct a full profit and loss account and balance sheet for the
year ended 31 May 2007 (N.B. Use the same layout for the accounts as in Appendix 1).
[10 marks]

TIP - stock is missing!

 The finance manager, Colin Buckley, has drawn up draft accounts for the year ended 31
May 2007. The main figures from these accounts are given below.
 
$000
Gross profit 525 TR
Net profit 190 P/L
Interest 35 App
Tax 25 App
Dividends 100 App
Turnover 2750 TR
Fixed assets 1250 FA
Creditors 450 CL
Debtors 350 CA
Cash 50 CA
Short-term borrowing 135 CL
Net assets 2570 BS
Share capital 350 Cap
Loan capital 550 Cap
 
Q. Use the figures above to construct a full profit and loss account and balance sheet for the
year ended 31 May 2007 (N.B. Use the same layout for the accounts as in Appendix 1).
[10 marks]

TIP - stock is missing!

 
 Try also:

May 13 SL P2 Q2 - printouts
Nov 2010 HL P2 Q2 - printouts

uploaded on MB - Try the IB

question bank for unit 3.4
 Budgets!!
1. BPPB page 69/70 and question on page 87
Could try it!
COPIES!!
HL extension
Depreciation
 Balance Sheet Extract
ABC s Balance Sheet
as at 31 December 2011
Fixed assets $ooos notes
Land and Buildings 1,000 Bought in 1980
Machinery 500 Bought in 1990
Motor vehicles 200 Bought in 2000
Computer Equipment 10 Bought in 2005

ANY COMMENTS?
Is it true and fair?
 Appreciation
• Property and land are expected to increase in
value over time.

• This is referred to as appreciation.

• We do not record appreciations in Final

Statements unless professionals were involved
in the valuation
 Depreciation
• All other assets (other than land and buildings),
fall in value over time.

• It is not fair to keep showing them in the Balance

Sheet at their Historic Value (the value they were
bought for).

• We need to reflect that their value is falling over

time so that the Balance Sheet truly reflects the
value of the assets of the business.
Why do fixed assets depreciate?
•Wear and tear – they fall in value after being used
over and over. They rust and break down beyond
repair!

•They become Obsolete – they become out of date as

new products are invented
 Depreciation as a ‘rent’ expense
Business A Business B
It needs a car &……… BUYS It needs a car & ……….
Expenses = 0 RENTS
Profit HIGHer Rent expenses = $100
Tax HIGHer Profit LOWer
Tax LOWer

NOT FAIR!!!!
If business A charges depreciation, its expenses
will increase by $100 and its profits and tax will
fall to match business B
 Depreciation
• The balance sheet is adjusted for depreciation.
• This is an accepted accounting practice.
• The value of the fixed assets in the balance
sheet should be lower than the historical
value.
• This adjustment helps investors when they are
using the balance sheet.
• This adjustment helps the management to
think about replacing those assets.
 The depreciation and final accounts:
• The TRP&L a/c – expenses increase
• The Balance Sheet – fixed assets decrease

How does this show up on the accounting equation?

FA + CA – CL = LTL + Cap
Fixed assets fall by $100 Expenses increase by $100
Profit falls by $100
Retained profits fall by $100
The accounting equation still holds if depreciation is recorded
in both the TRP&L and BS. Doing otherwise is wrong!!!
The tax department allows depreciation as an
expense, following certain rules obviously!
 Depreciation methods

STRAIGHT REDUCING
LINE BALANCE
METHOD METHOD
 Straight line method
• COST – the historic value

• Residual value – how much the asset is worth

when you stop using it (what you expect to
sell it for. Aka scrap value or disposal value)

• Life span – the number of years it will be used

for (aka the useful life)
 Example 1: straight line method
Details $

Cost 10,000

Residual value 2,000

Useful life 4 years

Annual depreciation rate?

How much did we use every year?
 Example 1:
Formula = (cost – residual value) / useful life

$10,000 - $2,000 = $ 8,000 / 4 = $ 2,000 p.a.

Cost Working Accumulated NET BOOK
depreciation VALUE

Year 1 10,000 (10-2)/4=2 (2,000) 8,000

Year 2 10,000 (10-2)/4=2 (4,000) 6,000
Year 3 10,000 (10-2)/4=2 (6,000) 4,000
Year 4 10,000 (10-2)/4=2 (8,000) 2,000
 Example 2:
A motor vehicle was bought in the year 2000
for $25,000. The firm expects to use it for 5
years after which it will have a scrap value of
$2,900.
• What is the annual depreciation?
• Draw up a depreciation schedule to show the
accumulated depreciation and NBV at the end
of each year.
 Example 2:
Formula = (cost – residual value) / useful life

$25,000 - $2,900 = $22,100 / 5 = $ 4,420 p.a.

$ Cost Accumulated
depreciation
NET BOOK
VALUE

Year 1 25,000 (4,420) 20,580

Year 2 25,000 (8,840) 16,160
Year 3 25,000 (13,260) 11,740
Year 4 25,000 (17,680) 7,320
Year 5 25,000 (22,100) 2,900
 Example 3
ABC bought a machine for $13,000. It is to be depreciated
at 25% (like a 4 year useful life).

$13,000 x 25% = $3,250 depreciation p.a.*

or

($13,000 - 0) / 4 = $ 3,250

With this method, you are not usually given a scrap value,
as the deprecation is worked out as above*.
TRY the fixed asset schedule:
Example 3: fixed asset schedule
 Straight line method
• Simple and easy to calculate
• Based on a lot of estimates: scrap value,
depreciation rate
• Assumes the asset is used at a constant rate
which is not usually the case. Usually we get
the most from an asset from its first years of
use!
 The
Reducing Balance
Method
 Example 1:Reducing balance method
Details $000s
Cost 10,000
Residual value 2,000
Useful life 4 years or 25%

Rule 1: Always use a % for this method.

Rule 2: IGNORE any scrap.

Usually the examiner would give you a %, but if not change it e.g.

4 years = 25%
5 years = 20%
10 years = 10%

He would be really mean to give you 3 years = 33.333%

Reducing balance method working
Workings:
Reducing balance method working
Cost 10,000
Dep. yr 1 (10,000x25%) = (2,500)
Net book value after year 1 7,500
Dep. Yr 2 (7,500x25%) = (1,875)
NBV after year 2 5,625
Dep. Yr 3 (5,625x25%) = (1,406)
NBV after year 3 4,219
ETC…..
 Example 4
• Cost $ 47000
• Depreciation rate – 15%

Show the your workings for 4 years.

 Example 4
cost 47000
dep yr 1 -7050 47000*15%
NBV end yr 1 39950
dep yr 2 -5993 39950*15%
NBV end yr 2 33958
dep yr 3 -5094 33957*15%
NBV end yr 3 28864
dep yr 4 -4330 28864*15%
NBV end yr 4 24534
 Reducing Balance method
• A bit more complicated to calculate than the straight
line method.

• Based on a lot of estimates: scrap value, depreciation

rate.

• It is regarded as more realistic because it assumes the

asset depreciates a lot more in its first years to reflect
that in the first years it is of most benefit to the
business (competitive edge/innovative aspect). This
helps to MATCH* the extra income with extra costs.
* Matching concept
 The Maltese Tax allowances
http://www.3a.com.mt/taxation/asset-depreciation-in-malta.html
http://www.worldwide-tax.com/malta/mal_reduction.asp

Asset depreciation in Malta

Minimum number of year over which assets may be depreciated for tax purposes:
ASSET USED IN PRODUCTION DEPRECIATION (years)
• Air-conditioners 6
• Aircraft 12
• Cable Infrastructure 20
• Catering Equipment 6
• Communication and Broadcasting Equipment 6
• Computer software 4
• Computers and Electronic Equipment 4
• Electrical and Plumbing Installations and Sanitary Fittings 15
• Equipment mainly designed or used for the production of water or electricity 6
• Equipment used for construction of buildings and excavation 6
• Furniture, Fixtures, Fittings and Soft Furnishings 10
• Lifts and Escalators 10
• Medical Equipment 6
• Motor Vehicles 5
• Other machinery 5
• Other plant 10
• Pipeline Infrastructure 20
• Ships and vessels 10
 Reinforcement
IB Q bank 3.5 Final accounts
• WATCH OUT FOR GEMEL Q6

Then try:
• May 2014 HL P2 Q1
• May 2017 HL P2 Q2
Gemel Limited
 Gross profit/Net profit margins
IB question bank unit 3.5 final accounts:
• Corner store Q 13
 AMORTISATION
• Depreciation is for tangible fixed assets.
• Amortisation is for intangible fixed assets.
• They are just the same thing.

• Goodwill is not shown in the balance sheet unless

it has been really paid for (remember?)

• If it is recorded in the balance sheet, it has to be

amortised over time (prudency concept).
 Business terms in this section
REVISION
Assets
Balance Sheet Liabilities
Net Book value aka net Current assets
fixed assets
Capital employed Fixed assets
Cost fo goods sold Short term borrowing Current assets
aka cost of sales
Depreciation Net assets Long term Liabilities
Final Accounts Net current assets Accumulated
aka published accounts aka working capital depreciation
Goodwill
Intangible assets
Turnover Overheads aka
expenses
Gross profit Capital
Net profit Amortisation