Unit 3.4: Final Accounts - IB Business Management

Unit 3.4 — Final Accounts

Final accounts summarize a firm’s financial performance and position. The video covers two accounts:

1. Statement of profit or loss (P&L): Records revenue and costs over a period.
2. Statement of financial position (balance sheet): Shows the firm’s assets, liabilities, and equity at a point in time.

Different stakeholders use the accounts for different reasons. Shareholders may assess returns and dividends, while managers and employees may be interested in business performance or bonuses. Understanding final accounts is also useful for later topics, including financial ratios.

1. Statement of profit or loss

The P&L is built up through these steps:

• Calculate sales revenue: Price × quantity.
• Subtract cost of sales: The direct costs of production, typically raw materials and direct labour.
• Find gross profit: Sales revenue − cost of sales. This indicates how well the firm controls its direct production costs.
• Subtract expenses: These are indirect costs of production.
• Find profit before interest and tax (PBIT): Gross profit − expenses. In the course, “profit” generally refers to PBIT, including when using total revenue minus total costs.
• Subtract interest, tax, and dividends to calculate retained profit:
  • Interest is paid to lenders on business loans.
  • Tax is paid to the government on profits.
  • Dividends are payments to shareholders, as decided by the board of directors.
• Retained profit is what remains after costs, interest, tax, and dividends. It can be kept in the business as an internal source of finance, for example, to fund capital expenditure or expansion.

2. Statement of financial position (balance sheet)

The balance sheet presents what the business owns and owes, and how it is financed.

Assets

Assets are items the business owns.

• Non-current assets are intended for use for more than a year. Examples include property, plant, and equipment.
  • These assets lose value through depreciation, which must be accounted for when calculating their value.
• Current assets are intended to be used within a year. Examples include:
  • Cash
  • Debtors: Customers who have received goods or services but have not yet paid
  • Stock, or inventory
• Total assets = current assets + non-current assets.

Liabilities

Liabilities are amounts the business owes.

• Non-current liabilities are generally amounts due after more than a year, such as long-term loans.
• Current liabilities are due within a year. Examples include:
  • Overdrafts
  • Creditors: Suppliers or other businesses the firm owes for goods or materials received
  • Other short-term loans
• Total liabilities = current liabilities + non-current liabilities.

Net assets and equity

• Net assets = total assets − total liabilities.
• The equity section indicates the firm’s value and how it is financed. The two main components in the course are share capital and retained profits.
• The balance sheet’s key check is: net assets must equal equity. If they do not, the figures or calculations should be checked.

3. HL extension: Depreciation

The HL section explains two methods for calculating depreciation of non-current assets:

• Straight-line method: Allocates the asset’s total depreciation equally across the years it is used. The depreciation charge is the same each year. It is simpler, but may be less representative of real-world asset usage.
• Units of production method: Calculates depreciation according to how many units the asset actually produces. The amount can therefore vary from year to year. It is more complex but may better reflect usage.

The video notes that students often find the units of production method harder, so it recommends extra practice with this method.

Study and exam preparation

• Practise constructing both final accounts from case information. Knowing the concepts alone may not be enough, as students are assessed on the format.
• Use case studies to practise applying the concepts, since school tests and the final exam are case-study based.
• The video recommends a study routine and says to pay particular attention to steps two and three, but the steps themselves are not included in the subtitles.
• HL students should practise depreciation calculations, especially the units of production method.

Speakers or sources featured

• Unidentified narrator/presenter: Explains the final-account concepts and study advice.
• Diplomaly: The channel/source identified in the video context; no individual presenter is named.