The appropriation account
The final section of a P&L account and shows how the net profit after interest and tax is distributed
(i.e. dividends to shareholders and/or retained profit kept by the business)
Balance sheet
Contains financial information on an organisation’s assets, liabilities and the capital invested by the owners on one specific day, thus showing a ‘snapshot’ the firm’s financial situation
Book value
- The value of an asset as shown on a balance sheet
- The market value of assets can be higher than its book value because of intangible assets such as the brand value or the goodwill of the business
Cost of goods sold (COGS) (/cost of sales (COS))
Shown in the trading account and represents the direct costs of producing or purchasing stock that has been sold
Creditors
Suppliers who allow a business to purchase goods and/or services on trade credit
Current assets
The short-term assets that belong to a firm, which are expected to remain in the business for up to 12 months (e.g. cash, debtors and stock (inventory))
Depreciation
The fall in the value of fixed assets over time, from wear and tear (due to the asset being used) or obsolescence (outdated or out of fashion)
Final accounts
The published annual financial statements that all limited liability companies are legally obliged to report
(ie, the balance sheet and the P&L, accounts)
Fixed assets
Items owned by a business, not intended for sale within the next twelve months, but used repeatedly to generate revenue for the organisation
(e.g. land, premises and machinery)
Goodwill
Intangible asset which exists when the value of a firm exceeds its book value
(the value of the firm’s net assets)
Gross profit
The difference between the sales revenue of a business and its direct costs incurred in making or purchasing the products that have been sold to its customers
Historic cost
The purchase cost of a particular fixed asset
Intangible assets
Fixed assets that do not exist in a physical form
(e.g. goodwill, copyrights, brand names and registered
trademarks)
Long-term liabilities
The debts owed by a business, which are expected to take longer than a year from the balance sheet date to repay
Net assets
- Show the value of a business by calculating the value of all its assets minus its liabilities
- This figure must match the equity of the business in its balance sheet.
Net profit
Surplus (if any) that a business makes after all expenses have been paid for out of gross profit
Profit and loss account (/income statement)
Financial record of a firm’s trading activity over the past 12 months, consisting of three parts:
- the trading account
- the P&L account
- the appropriation account
Reducing balance method
- A method of depreciation that reduces the value of a fixed asset by the same percentage each year throughout its useful life
- This is the more realistic method to use
Residual value of an asset
An estimate of the scrap or disposal value of the asset at the end of its useful life
Retained profit
- The amount of net profit after interest, tax and dividends have been paid
- It is then reinvested in the business for its own use
Share capital
- The amount of money raised through the sale of shares
- It shows the value raised when the shares were first sold, rather than their current market value
Shareholders’ funds
Show the equity of the owners
ie. the share capital invested by the owners and the retained profit and reserves that have been accumulated
Straight line method
- Method of depreciation that reduces the value of a fixed asset by the same value each year throughout its useful life
- This is the relatively easier method to calculate
The trading account
The first section of the P&L account, showing the difference between a firm’s sales revenue and its direct costs of trading
(i.e. it shows the gross profit of a business)
