3.5 Financial Accounts
What we will study?
By the end of this unit you should be able to:
- Explain the purpose of accounts
- Construct and amend accounts from information given
- Evaluate the importance of final accounts to each stakeholder group
- Identify and understand the main components of an income statement
- Identify and understand the main components of a balance sheet
- Calculate depreciation and stock valuations
- Understand what intangible assets are and understand the difficulties of valuing them
Final accounts may seem like the most boring thing about business but actually are extremely vital for any manager to understand. Also, if one is interested in investing in the stock market, it is essential to be able to analyze final accounts. There are internal and external stakeholder users of accounts. The managers, as internal users, will have access to much more detailed and up-to-date data than other groups. External users include banks, government employees and shareholders and other stakeholders of the business.
The three main accounts that businesses have to prepare and you as IB Business students have to feel comfortable using are the:
- Income statement
- Balance sheet
- Cash-flow statement
Khan Academy explains the income statement
Key terms to remember
The income statement is the most important final account to most shareholders as it shows whether the firm made a profit or loss. It takes all the revenue (including debtors) and subtracts all expenses in order to show the net income for the period.
What is the balance sheet?
The balance sheet displays a firms assets, liabilities and owner's equity (capital and reserves). It offers a snapshot of the firm's net worth on one given day. Net worth is the difference between assets and liabilities and mathematically, net worth = assets - liabilities.
Depreciation is the concept that assets decrease in value over time. This decrease in value needs to be shown on the balance sheet, otherwise the net worth of the company would not be accurate. In order to do this there are two different depreciation methods that can be applied.