3.5 Financial Accounts
Chapter 22
What are ACCOUNTS?

Financial records of business
transactions which provide information to
groups within and outside an
organization.

Accounts help keep track of assets,
liabilities, revenue, and expenses.
ACCOUNTS

Accounts can help up answer business
questions:
• How much did we buy from a supplier?
• Have they been paid yet?
• How much profit did we make last year?
• Can the business repay a loan?
• How much did we pay in wages last week?
• What is the value of our fixed assets?
Who uses Financial Accounts?

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





Business Managers
Banks
Creditors (Trade Suppliers)
Customers
Governments
Investors
Workforce
Community
Stakeholders Require Account
Information

Business Managers
• Measure performance of the business and
•
•
compare it to last year, last quarter, or to a
budget.
Help make decisions…do we invest in a new
product or close branch offices.
Set performance goals for the future and
compare to actual performance in order to
remain on target.
Stakeholders Require Account
Information

Banks
• Decide to lend money
• Increase a line of credit
• Decide whether to continue a loan or line
of credit
Stakeholders Require Account
Information

Creditors (Trade Suppliers)
• Can the company pay off its debts?
• Is the company a good credit risk?
• Should it collect its outstanding debt early?
Stakeholders Require Account
Information

Customers
• Is the business stable?
• Will I be able to continue buying product in the
•
future? Will it be of same quality?
Is there be spare parts or service facilities?
Stakeholders Require Account
Information

Government/Taxing Authorities
• Calculate tax due
• Will the company expand and create more
•
•
jobs?
Is the business in danger of closing?
Is the business adhering to laws and
regulations?
Stakeholders Require Account
Information

Investors (Shareholders)
• Is the business becoming more or less
•
•
•
•
profitable?
What share of the profits are the investors
receiving?
Can the business grow?
Potential investors compare businesses to
make an investment decision.
Investors will decide if they should sell their
investment or continue their investment.
Stakeholders Require Account
Information

Workforce
• Is the company capable of paying wages?
• Is the business likely to expand or reduce in
•
•
•
size?
Are jobs secure?
If profits are increasing, can higher wages be
paid?
How do wages compare with wages paid to
company executives?
Stakeholders Require Account
Information

Local Community
• Can the company expand?
•
Good for local
economy.
Is the company losing money? Bad for local
economy if the business closes.
Financial Statements

Income Statement
• Records the revenue, costs, and profit (or
loss) of a business over a period of time.

Balance Sheet
• Records the values of a assets, liabilities, and
shareholder’s equity in the business.

Cash Flow Statement
• Cash inflows and outflows of the business
used to estimate cash needs.
Income Statement

Detail statements are produced
frequently for internal management
• Typically once per month

Summary statements are produced for
external users. Detail is omitted to avoid
revealing strengths and weaknesses.
• Typically produced annully
Income Statement
Sales
Cost of Sales
Gross Profit
3060
(1840)
1220
Overheads
(580)
Net Profit before taxes and interest 640
Interest
(80)
Pre-Tax Profit
560
Tax @ 20%
(112)
Profit After Tax
448
Trading Accounts
Shows gross profit/loss from trading
activities of the business. **Sales is the
not the same as CASH RECEIVED.
Profit and Loss Accounts
Calculates the Net Profit/Net
Loss and calculates the
Profit/Loss after taxes are paid.
Dividends to Shareholders (200)
Appropriation Accounts
Retained Profit
Shows how profits after tax are
distributed (appropriated) to the
owners or shareholders.
248
Income Statement
Sales
Cost of Sales
Gross Profit
3060
(1840)
1220
Overheads
(580)
Net Profit before taxes and interest 640
Sales:
Hand made candy bars
Cost of Sales:
Chocolate,
caramel, nuts,
graham crackers
Overhead: rent, wages, utilities
Sales: Revenues generated
by the business (also known
as sales turnover)
Cost of Sales: Direct costs
required to produce the
product to sell (also known as
cost of goods sold)
Gross Profit: Sales revenue
less the cost of sales.
Overhead: Expenses not
directly related to producing
the item sold.
Income Statement

Dividends
• Share of profits paid to shareholders as a
return for investing in the company.

Retained Profits
• The profit left after all deductions have been
made (including dividends). This is returned
to the company as a source of finance.
Income Statement Limitations

Values can be made to look “better” than
they really are. Values can be made to
look “worse” than they really are.
• Low-quality profit:
•
profit that cannot be easily
repeated or sustained (including a large sale
that won’t be repeated)
High-quality profit: profit that can be repeated
and sustained.
Balance Sheet


Records the wealth of a business or
shareholder equity at one moment in
time. (This wealth belongs to the
shareholders.)
Shareholder equity is created 2 ways:
1. capital invested by the purchase of stock by
the shareholder
2. Retained earnings of the company that have
accumulated over time
Balance Sheet

Contains the following categories:
•
•
Assets
Things the company owns.
• Fixed Assets
• Current Assets
Liabilities
inventory, accts receivable, cash
Items that are seen
as liquid.
Money the company owes.
• Current Liabilities
• Long-Term Liabilities
•
•
land, buildings, vehicles Tangible items that will be
owned for at least 1 year.
Working Capital
Shareholder’s Equity
accts payable, loans, unpaid taxes
long-term loans, mortgages, debentures (bonds)
Items that will take longer than 1 year to pay.
Current Assets-Current Liabilities
Money paid into company by shareholders
Retained Profits
Balance Sheet
ASSETS
Fixed
Property
Vehicles
Equipment
Total Fixed Assets
300
45
67
442
Current Assets
Stocks (inventories)
Debtors (Accts Rcvbl)
Cash
34
28
4
Long-Term Liabilities
Long-Term Loans
Total Long-Term Liabilities
125
Current Liabilities
Creditors (Accts Pyble)
Short-Term Loans
42
31
200
110
Net Current Assets
(7)
SHAREHOLDER’S EQUITY
Share Capital
Retained Earnings
Total Shareholder’s Equity
NET ASSETS
435
CAPITAL EMPLOYED
125
310
435
Balance Sheet
ASSETS
Fixed
Property
Vehicles
Equipment
Total Fixed Assets
Current Assets
Stocks (inventories)
Debtors (Accts Rcvbl)
Cash
Current Liabilities
Creditors (Accts Pyble)
Short-Term Loans
Fixed Assets: Assets to be kept and used for more than 1
year
300
45
67
442
Current Assets: Assets that are liquid and likely to be cash
by the next balance sheet date
Stocks/Inventories: items ready for sale
Debtors/Accounts Receivable: value of payments to be
received from customers who purchased goods on credit
34
28
4
Current Liabilities: Debts that will usually be paid within
1 year
42
31
Net Current Assets
(7)
NET ASSETS
435
Creditors/Accounts Payable: value of debts for
goods bought on credit from suppliers
Net Current Assets: Current Assets - Current Liabilities
also known as “working capital”
Balance Sheet
Long-Term Liabilities: Value of debt that will take more than one year to pay
Long-Term Loans: commercial loans, debentures
Capital Employed: Balances with
NET ASSETS
Long-Term Liabilities
Long-Term Loans
Total Long-Term Liabilities
125
SHAREHOLDER’S EQUITY
Share Capital
Retained Earnings
Total Shareholder’s Equity
200
110
CAPITAL EMPLOYED
125
310
435