Final Accounts

These are financial statements that the business create at the end of the year.

The profit and loss a/c is use to indicate the net profit of the business. In some ownerships, appropriation a/c is included to distribute profit to the owners.

The balance sheet shows the business equity and worth as well as our assets, liabilities and capital.

Sole Trader

In sole trader businesses, the profit & loss a/c is very simple. We include sales revenue at the top and minus cogs (opening +purchases-closing) to get the gross profit for the trading a/c part. Finally, we subtract gross profit with expenses to find net profit. In more complicated cases, there will be returns inwards, carriage inwards, commission and etc. The example below will give us a good idea of that.

Afterwards, we create the balance sheet with fixed asset on top like premises. We also include depreciation to find the net book value. Below fixed asset, we are required to find working capital (net current asset) by deducting current asset with current liabilities. Then, we add long term liabilities if necessary. To find the net asset value at the end, we add all of the assets together and minus all of the liabilities.

Most importantly, the end of the balance sheet should have a financed by section that indicate the capital the sole trader put into the business as well as any drawings and profit(calculate from profit & loss) made. This is used to ensure that the capital employed balances with net asset.

Partnership

In a partnership, the trading a/c in profit and loss a/c is exactly the same as sole trader businesses. The real difference is the addition of appropriation a/c. An appropriation a/c shows interest on capital, interest on drawings, salary and most importantly, share of profits. The business will distribute money to each owner according to the deed of partnership, which is an agreement in case there are conflicts in a partnership. The deed of partnership might state things like what percentage of profits the owner receive. For example, after calculating all of the interest and salary, there are $30000 left. Partner A and Partner B gain profits in a ratio of 2:3 respectively. This means that Partner A receive $12000 while Partner B receive $18000. Unfortunately, this works the same way if there are share of losses.

Current a/c

Balance Sheet

The partners also have a personal bank a/c in a partnership called the current a/c. This account indicate the money that they owe to the business in the debit side such as drawings and interest on drawings. In contrast, the credit side indicate the money they gain from the business. This includes, interest on capital, salary and share of profits. The information from the current a/c is very essential because they will be needed for the balance sheet.

In the balance sheet, we order things like things like the image above. As we can see, it is similar to sole trader balance sheet except the financed by section. We are required to add the capital and current a/c of the partners instead of share capital or retained profit. Instead of making it unnecessary complicated, we can just only include the balance of current a/c without drawings or any interest. As always, the net assets should balance with capital employed.

Limited Companies

Limited companies can either be private(Ltd.) or public(plc.). Still, the accounting aspect work the same for both of them.

The main thing that make limited companies unique are shares. Firstly, there are authorised shared capital which is the maximum capital that the limited company can raise. Secondly, there are issued share capital which is the amount the company actually raised.

There are two types of shares. They are the following:

Preference Shares- These shares are special and they are usually for VIP. Therefore, they are a top priority and shareholders with these shares are paid first with a fixed amount of money. This depends on the equation below.

Ordinary Shares- Preferences shares are uncommon unlike ordinary shares that are included in every limited companies. The profit shareholders received depends on the profit the company made alongside directors decision. Furthermore, they also have voting rights which preference shareholders don't normally have.

The example for appropriation a/c can help to clarify equations.

Look carefully and you will see "fully paid" besides issued share capital. This is due to the fact that the company can sell shares in installments. These installments are called-up share capital while the paid amount make paid-up share capital.

Percentage%

Issued Share Capital

Percentage% or amount per share

Issued Share Capital

Appropriation a/c

The profit & loss a/c is pretty much the same as sole trader and partnerships. The only difference is the appropriation a/c. The appropriation a/c of a limited company shows the dividends of preference and ordinary shareholders as well as any transfer to general reserve. After we subtract the profit of the year with dividends and general reserve, the less becomes retained earnings. Furthermore, we must add it with retained earnings from previous years. Retained earnings are money that owners use to fund and expand the business in the future.

Balance Sheet

The balance sheet of a limited company distinguish itself from others through some of it's unique features. For example, there are some changes in liabilities. We now include dividends in current liabilities and there is an addition of debentures. To put it simply, debentures are a long term loan for limited company with fixed rate of interest. It must be paid no matter what and if a company wound up or cease trading, the debentures holder are repaid first followed by preferences shareholders then ordinary shareholders.

The share and reserves section is similar to capital for sole trader and partnerships but it uses shares instead. The authorised share capital segment is for your information. Therefore, it is unneccessary to include it so we can only include the issued share capital segment. To find the capital employed or total equity, we add the issued share capital with retained earnings and general reserves.

Clubs & Societies

Clubs & Societies are non-profit organisations. This means that they aim to provide benefits for their members instead of trying to gain profit. This difference in objectives cause this kind of ownership to have unique financial accounts that doesn't exist in other ownerships.

Instead of a cash book, there will be a receipts & payments a/c instead which is basicly a simplified cash book.

Instead of a profit or loss a/c or income statement that aims to find net profit, an income & expendiure exist instead which indicate surplus (profit) or deficit (loss).

Finally, a balance sheet is still called a balance sheet but it uses accumulated fund instead of capital employed.

Receipts & Payments a/c

Subscriptions a/c

Income & Expenditure a/c

As we can see in a receipts & payments a/c, the debit side lists all of the income and money that enter the business while the credit side lists any liabilities or expenses that the business must pay.

At the end, closing cash or leftover cash is carried down. Due to the fact that this only aims to show how money enter or left the business, it is vastly different from income & expenditure a/c which we will explore later on. Anyways, the information from cash a/c is crucial to create something like suscription a/c.

Subscriptions are one of clubs & societies main income. It is important to create a subscription a/c so that we can keep track of subscriptions as well as finding the subscriptions figure for the income & expenditure a/c.

In order to create a subscriptions a/c, we must find the subscriptions figure from receipts & payments a/c then credit it to the subscriptions a/c due to doubble entry. Afterwards, we find any accruals and prepayments from our members. Accruals b/d will be on debit side while the c/d will be on credit side.

On the contrary, prepayments b/d eill be on credit side while the c/d will be on debit side. Finally, after we record down all of this information, we can find the income & expenditure figure by subtracting everything on the credit side with the debit side. In the end, we put the income & expenditure figure on the debit side.

This account might look familar to profit & loss a/c to you. Income are just like sales. However, there are more than one source of income. For example, there are donations, drink sales and donation in the example. For the expenditure, it is just like expenses. We use information from the subscriptions a/c for the subscription figure and the rest of information can be found through the receipts & payments a/c and additional information.

Now, there will often be an exam question about the difference between receipts & payments and income & expenditure a/c. To answer this question, we can state that the income & expenditure a/c follow the accrual concept while the receipts & payments a/c record the actual amount. The subscription figure can be use as an evidence. In addition, the income & expenditure find the surplus and deficit while the receipts & payments a/c find the closing cash.

Balance Sheet

There are some differences from other balance sheets that we must look out for. This includes:

Subscriptions due is a current asset because it is similar to debtors. They owe the organisation money.

Subscriptions received in advance is a current liability because we receive money before we are supposed to so we can't get this amount next financial year.

Accumulated fund is used instead for non-profit organisations. It shows the balance from previous year as well as surplus or deficit. When added together, it should be equal to net assets. There is also no drawings in a non-profit organisation.

While prepayment and accrual exist in every type of business ownerships, it is easy to overlook so remeber to include prepayment in current assets and include accruals in current liabilities.

Manufacturing

Manufacturers accounting system includes final accounts like income statement, appropriation a/c and balance sheet that many other businesses include. However, it includes a new account as well that only exist in manufacturing company, called the manufacturing a/c.

Manufacturing a/c

Instead of merely using a 'purchases' figure for the income statement, manufacturer must find the cost of producing goods not the 'purchases' cost. To find the cost of production, we must find the prime cost and factory overheads first.

Prime cost-The costs that are directly involved in the process of production. For example, direct wages for the factory workers are prime cost because they literally work inside the factory to produce goods. Each goods can be linked to the worker who produce it. This also applies to raw materials that add with direct wages and direct expenses to form prime cost.

Factory overheads-The costs that are indirectly involved in the production. This cannot be allocate easily like supervisors wages because they didn't produce any products but rather supervise the production process to ensure the quality of it instead. Other factory overheads includes rent, insurance, depreciation and etc.

Direct costs

-Raw materials

-Direct Wages

Indirect costs

-Insurance

-Rent

-Indirect Wages

-Repairs

Prime Cost

Factory Overheads

Cost of Production

Cost of raw materials consumed is similar to COGS (opening+purchases-closing).

Be careful! People often mistake manufacturing a/c as an income statement. Prime cost plus factory overheads equal cost of production, not prime cost minus factory overheads.

Work in progress-In certain cases, you will need to include unfinished work or work in progress at the end of the financial year above cost of production (add work in progress and subtract closing work in progress).

Income Statement

Like any other income statement, we find gross profit by subtracting sales revenue with COGS. However, we use cost of production and finished goods figures instead.

Expenses in the income statement are not associated with the factory, they are often associated with the office and finance department. In more complicated cases, there will be a split between things like rent and insurance that we must calculate. We can see this in the example.

Balance Sheet

The balance sheet of a manufacturer has only one major difference that we need to worry about, which is the fact that inventories are split into three figures:

1.Raw materials

2.Work in progress

3.Finished Goods