Key Idea: Final accounts show how a business did over the year and what it owns and owes at the end of it. This topic is how to read and build them, and who reads them and why.
Profit and loss account
- Sales revenue, less cost of sales, gives gross profit.
- Less expenses gives profit before interest and tax; then interest and tax.
- Profit for the period, less dividends, gives retained profit.
Balance sheet
- Non-current assets plus current assets, less current liabilities.
- Less non-current liabilities gives net assets.
- Net assets equal equity: share capital plus retained earnings.
Who reads them
- Shareholders: profit and dividends. Banks: can the loan be repaid?
- Suppliers: will we be paid? Employees: is the job safe, is a pay rise possible?
- Managers use them to plan; the government to collect tax.
Depreciation (HL)
- Straight line: (cost − residual value) ÷ years of life, the same each year.
- Units of production: the charge follows how much the asset is used.
- Straight line suits steady use; units of production suits uneven use.
The words to know
| Word | Means | Do not confuse with |
|---|---|---|
| Gross profit | sales revenue − cost of sales | profit for the period, which is after all costs, interest and tax |
| Profit before interest and tax | gross profit − expenses | profit before tax, which is after interest |
| Retained profit | profit for the period − dividends | retained earnings, the total kept over all the years |
| Non-current asset | something the business owns and keeps for more than a year | a current asset, such as cash, debtors or stock |
| Current liability | an amount owed that must be paid within a year | a non-current liability, such as a long-term loan |
| Debtors | customers who owe the business money | creditors, whom the business owes |
| Intangible asset | a non-physical asset, such as a brand, a patent or goodwill | a current asset |
| Depreciation | the fall in value of a non-current asset over its life | a cash payment: no money leaves the business |
| Net book value | cost − accumulated depreciation | the price the asset would sell for today |
Construct in the exact layout: a heading with the name, the period and $, every line named, deductions in brackets, and every subtotal shown. For a Comment, say which way the figure moved, by how much, and what that means for this stakeholder.
Exam-style question
For the year ended 31 December 2025 Lena's Bakery Ltd had sales revenue of $1,600,000, cost of sales of $480,000, expenses of $1,035,000 and interest of $10,000. Tax was $15,000 and dividends were $30,000. Construct the profit and loss account for Lena's Bakery Ltd.
Model answer plan
See the mark-by-mark plan — for / against / judgement, with marking guidance — in study mode.
Important: Cash, debtors, stock and loans go on the balance sheet; revenue and costs go on the profit and loss account. Before you construct either, sort the figures in the table into the two lists.
Tap each card to check yourself.
Gross profit at Lena's in 2025? $1,600,000 − $480,000 = $1,120,000.
Current or non-current: the vans? Non-current. They are kept and used for several years.
Debtors or creditors: the cafés that owe Lena $40,000? Debtors. They owe the business money.
Net assets at Lena's, and what they equal? $350,000, equal to equity: $200,000 share capital + $150,000 retained earnings.
Name two intangible assets. Any two: a brand, goodwill, a patent, a copyright, a trademark.
Why does a bank read the balance sheet? To see what the business owes already and whether it could repay another loan.
A $36,000 van, $12,000 residual value, four years. Straight-line charge? (HL) ($36,000 − $12,000) ÷ 4 = $6,000 a year.
Exam tips
- Construct in the exact layout, with a heading, named lines and every subtotal.
- Profit for the period is after interest and tax; retained profit is after dividends.
- Sort the figures into the two statements before you start.
- Net assets always equal equity: check your balance sheet with it.
- For a stakeholder question, say what that group wants to know and which figure tells it.