Final Accounts - LGS 14

Question 1

Purpose of Profit and Loss Account and Balance Sheet

Answer 1

Summaries of money movements over last 12 months
Records:
- different type of transactions e.g sales, purchase
- money in and out
- assets and liabilities
Allows business to work out whether profit or loss is made.
Strategy for future product development/improvements, expansion.
Options for financing the business.
Help bankers/ accountants understand what’s happening to a business.
Interpret financial information

Question 2

Make-up of final accounts

Answer 2

1. Profits and loss account - shows net profits over 12 month period (end of ARD)
2. Balance Sheet - shows financial position of business at any given time.

Question 3

Profit and Loss account details

Answer 3

Income generated - expenses incurred = net profit

Question 4

Balance Sheet details

Answer 4

Summaries assets and liabilities.
Assets of business - Liabilities = total capital
Total capital + net profit - drawings = balance sheet.

Question 5

Income generated

Answer 5

What business is trying to produce:
- sales
- profit costs
- non-trading income

Question 6

Expenses incurred

Answer 6

Items purchased to provide a benefit exhausted or consumed in short period of time:
- utilities
- salaries
- rent paid
- bank loan interest

Question 7

Assets

Answer 7

Items purchased to provide a benefit over a longer period of time and increase earning capacity of business (expand business):
- Fixed assets - premises, fixtures and fittings, vehicles and machinery
- Current assets - cash, debtors, stock (more liquid)

Question 8

Liabilities

Answer 8

Amounts owed by the Business:
- Current liabilities - need to be repaid within 12 months
- Long term liabilities - repayment over 12 months
e.g loans, overdraft, amounts owed to trade creditors.

Question 9

Type of Businesses

Answer 9

Professional - starts its P&L by listing profits costs and other sources from professional charges.

Trading business - first work out its gross profit (deducting cost of sales from income generated.)

Question 10

Net profit

Answer 10

profit made by owner is Return on Capital
- must be added to balance sheet under capital information.

Question 11

Preparing the Balance Sheet

Answer 11

• state date sheet is prepared
• split BS sheet into 2 parts: employment of capital and capital employed.
• assets divided into: fixed (more permanent) and current (more liquid) = in order of increasing liquidity e.g stock, WIP, debtors, cash.
• current liabilities then long term liabilities

Question 12

Capital Employed

Answer 12

-capital
-opening balance
-plus net profit
-less drawings