3.

4 FINAL
ACCOUNTS
P&L ACCOUNT
▪ The first section of the Profit and Loss
account is known as the trading
account.
▪ The trading account calculates the
Gross Profit
Gross profit is the difference between
the sales revenue and the direct costs
incurred in making or purchasing the
products that have been sold to
consumers.
 Work out the gross profit
Heading
Two columns

+ -
Heading -
THE PROFIT AND LOSS
ACCOUNT
▪The profit and loss account
shows the Net Profit or Net
Loss of an organization.
Net profit = Gross Profit – Expenses
▪Expenses are the indirect or
fixed costs of production.
Work out the gross and net profit

+
-
UNIQUE EXPENSES - INTEREST
AND TAX
Interest and Tax are not included in the
expenses section
▪ The government sets the tax rate and
central banks decide on the interest rate.

▪ By excluding interest and tax from the

expenses section we allow the
organization to compare accounts over
time without the impact of government
policies.
-

-
-
-
APPROPRIATIONS ACCOUNT
Lets divide up that net profit
Appropriation account: They are
an extension of the profit and
loss statement, e.g. showing how
the profits of a firm are
allocated to shareholders
BALANCE SHEET
A balance sheet reveals where a
firm’s money has come from and
what it has been spent on.
A balance sheet contains three
essential parts;
1. Assets
2. Liabilities
3. Equity
CURRENT LIABILITIES
FINANCED BY

Loan capital 0
 LIMITATIONS OF PROFIT AND
LOSS ACCOUNT
▪ P&L account shows historical performance – there is no
guarantee that future performance is linked to past
performance.
▪ As there is no international standard for producing P&L
accounts it can be difficult to compare between countries and
between industries.
▪ Legal manipulations can occur to boost Profit figure (put off
large expenses until next accounting period, Recording
revenue prior to product shipment, Amortizing costs too
slowly, depreciating items too slowly, not writing off depleted
assets)
LIMITATIONS OF BALANCE
SHEETS
▪It is a static documents and only shows one moment
in time.
▪Figures are only estimates. (Market value ≠ book
value) True value of an asset not know until an asset
is sold.
▪Detailed breakdown of firms assets generally not
shown (E.g., total value of all motor vehicles)
▪Not all assets are included on the balance sheet.
(intangible assets and the value of human capital)
DEPRECIATION
HL
REDUCING BALANCE
METHOD
▪ Reduces the value of an asset by a larger amount in the earlier years.

▪ The asset is reduced by a certain percentage each year. We use the net book value to
calculate the depreciation charge (not the historical cost)
A machine is bought for $25000. using the
reducing balance method calculate
Year 1 depreciation – 25,000 x 25% = depreciation if an annual rate of 25% is
$6,250 applied.
Year 2 depreciation – (25,000 – 6,250) x 25% =
$4,687
Year 3 depreciation – (18,750 – 4,687) x 25% =
$3,516
Year 4 depreciation – (14,063 – 3,516) x 25% =
$2,637
Year 5 depreciation – (10,547 – 2,637) x 25% =
$1,977
DEPRECIATION
Reasons why depreciation needs to be calculated
▪ Better reflect the true value of the business on the balance sheet.
▪ Realistically assess the value of fixed assets over time.
▪ Plan for the replacement of assets in the future.

How is depreciation recorded in the accounts.

▪ The current year’s depreciation is recorded as an expense in the P&L account.
▪ The total depreciation figure is deducted from the fixed assets in the balance sheet.