FINAL ACCOUNTS

FINAL ACCOUNTS

Welcome back to the next chapter of final accounts and all you have to know.

Continue from my last post, after all the account books have been maintained comes the FINAL ACCOUNTS which include: Income Statement, Balance Sheet, Owners’ Equity, and Cash Flow Statement. These four (4) reports helps you understand the financial health of your business.

In my last post, I mention profit and loss account as part of the final accounts, because many would like hear that name. Trading Profit and Loss account as it was called before, is the same thing as Income Statement.

1.?????INCOME STATEMENT: This is the statement of report, where all the revenue from sales or services and expense you made over a period of time is being reported. It is a report that shows the company’s income and expenditure, whether a business/company makes profit or loss in a given period of time. It is used to determine the profitability and efficiency of a business entity.

NOTE:

You can achieve this result by calculating your total revenue less (- ) cost of goods sold less ( - ) closing stock to get your gross profit (this is not your final profit) plus (+) other income less (-) operating expenses which include (Administrative expenses, Selling & Distribution expenses and Financial expenses) and tax= Net Income (which is your final income or loss).

A.?????Cost of Goods Sold: This the carrying value of goods sold during a particular period. That is your opening stock + Purchases – purchases return + carriage inwards = cost of goods sold.

B.?????Administrative expenses: These are cost that relate to regular business operations. Examples; rents, utilities, salary and wages, telephone & stationery, legal expenses, repairs, depreciation etc.

C.?????Selling & Distribution expenses: These are cost associated with selling and distribution of your product and services. Example; advertising, carriage outwards, discount allowed, storage and warehousing, transportation etc.

D.????Financial expenses: These are cost incurred from borrowing from lenders and financial transactions. Examples; bank charges, interest on loan.

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2.?????BALANCE SHEET: This is a statement that shows the financial position of the business at a specific point in time because, it shows what the business/company owns (Assets) and what it owes (Liabilities which takes money out of the business) and owners’ equity (Net worth) as at any given date. It is always;

Assets = Liability + Equity

If total assets do not equal liabilities and equity, the balance sheet is considered unbalanced.

You can achieve this result by summing up your total asset (fixed assets and current assets)?and tally them.??????????????????????????????????????????????????????????????????????????????????????????????????????????

Sum up your total liabilities (current liabilities and long term liabilities) + Owner’s equity.?????????????????????????????????????????????????????????????????????????????????????????

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A.?????Current assets

Assets that could likely be converted into cash within a year. Such as:

• Cash and cash equivalents?– This includes cash, checks, and money kept in your bank account.???
• Accounts receivable?– Money your clients owe that will be paid in the near future.??
• Prepaid expenses?– Valuables you’ve already paid for, such as insurance or rent.??
• Inventory?– stock, raw materials, work in progress and finished products.?

B.?????Long-term assets

Long-term assets are defined as “a company's value assets; property, plant, and equipment that can be used for more than 1 year, minus depreciation.” These include:??

• Fixed assets?– Property, buildings, equipment, and machinery.?
• Intangible assets?– Nonphysical assets such as patents, copyrights, licenses, and franchise agreements.?
• Long-term securities?– Investments that can't be sold off within a year such as bonds or real estate.

C.??????Liabilities?

The liability section of the balance sheet demonstrates what money you currently owe to others; this includes?various forms of debt. Liabilities are broken down into two subcategories. They are either long-term liabilities (also called non-current liabilities) or current liabilities.

• Current liabilities?– Accrued Utilities, taxes and rent, accounts payable, and payments toward long-term debt interest such as business loans or credit cards.
• Long-term liabilities?– Bonds payable and long-term debts, pension plan, and mortgages

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3.?????Owners’/Shareholder’s equity?

The owner's equity section of the balance sheet shows the value of funds that shareholders have invested in the company.?This is also known as the net worth of a company, and is use to determine if the value of the business were to be liquidated or closed. It includes capital contributed by investors/owners and the earnings or losses accumulated in the business. Owners’ capital + Net income - drawings

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?Owners’ Equity = Total Assets – Total Liabilities.

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• ?Owner’s equity is the portion of a company’s assets that an owner can claim; it’s what’s left after subtracting a company’s liabilities from its assets.
• Owner’s equity is listed on a company’s balance sheet.
• ?A negative owner’s equity often shows that a company has more liabilities than assets and can signify trouble for a business.
• ?Positive and increasing equity indicates a healthy, growing company.

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?Capital investments from the owner (increase)

Many business owners use their own money and assets (e.g., equipment or vehicles) to fund their businesses, especially when?establishing their business.

?Retained earnings generated by the business (increase)

Once a business is up and running, retained earnings contribute to positive equity growth and increase the overall value of the company. This is an important measure because it’s the capital available from the business’s operations that can be used for investment or paying down debt.

Money withdrawn by the owner (decrease)?

Owners often withdraw money from their business. But if they take too much, it can push a business’s equity into negative territory. Businesses can recover from negative equity, but long-term negative equity is unsustainable because the business will ultimately be unable to pay its liabilities.

4.??????CASH FLOW STATEMENT:?Cash flow statement?shows you how cash has changed in your revenue, expense, asset, liability, and equity accounts during the accounting period. cash flow statement is prepared last because it takes information from all of your other financial statements.

This is the statement that summarizes the amount of cash and cash equivalents entering and leaving a company. This includes all cash inflows a company receives from its ongoing operations and external investment sources. Incoming cash for a business comes from operating activities, investing activities and financial activities. The statement also informs about cash outflows, expenses paid for business activities and investment at a given point in time.?The information that you get from the cash flow statement is beneficial for the management to take informed decisions for regulating business operations.

A.????Operating activities:?Operating activities are those cash flow activities that either generate revenue or record the money spent on producing a product or service. Operational business activities include inventory transactions, interest payments, tax payments, wages to employees, and payments for rent.

B.?????Investment activities:?The second section on the cash flow statement records the gains and losses caused due to investment?in assets like property, plant, or equipment (PPE)?thus reflecting overall change in the cash position for a company.?Capital expenditure (CapEx) is another important line item under investment activities. CapEx is the money which a business invests on fixed assets like buildings, vehicles or land.

C.?????Financial activities:?The third section on the cash flow statement?records the cash flow between the company and its owners and creditors. Financial activities?include?transactions involving debt, equity, and dividends.?

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