SHORT NOTES

ACCOUNTING FOR BUSINESS

Final accounts

These are accounts prepared at the end of the year to show whether the business made profit or loss how much the business is worth.

Users of Final Accounts

i) Managers These are senior employees appointed to run the business on daily basis.

They need final accounts in order to manage the business efficiently and effectively. They also need the information so as to be able to make the right decisions for the business.

ii) Shareholders/owners They own the business and therefore need the accounts to find out if management is taking care of the business effectively and efficiently by using the business resources to generate further wealth.

iii) Providers of finance They include the banks and non bank financial institutions.

They need final accounts to assess the firm’s ability to pay back loans as well as interest on loans.

iv) Employees These are the workers of the company.

They need Information to assess how stable the firm is in terms of the firm’s ability to provide remuneration, retirement benefits and employment opportunities.

v) Suppliers These are persons/institutions who supply goods to the business

They need information to know if the firm will be able to pay for the goods supplied on credit

vi) Tax authoritiesThey will need the financial statements so at to ascertain the appropriate amount the business will have to pay as tax.

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What Final Accounts Containi. Trading Accountii. Profit and Loss Accountiii. Appropriation Account

Trading Account

This account is prepared to show if the business has made Gross profit or loss. Gross profit is

made when sales revenue is greater than cost of goods sold.

Gross profit = Sales -Cost of goods sold. Cost of goods sold is the cost of producing or buying the

goods actually sold.

Figo Enterprise during the year 2008 bought goods worth $4968 and sold them for $7842. Stock

at 1st January 2008 was $180 while stock at end of the year 31st December 2008 was $50. You

are to prepare trading account for the year ending 31 st December 2008 to show the gross profit

of Figo Enterprise. [Answer: Gross profit is $2744]

NB: Gross profit is not the final profit of the business. This is because gross profit does not make

allowance for business expenses or overhead costs.

Profit and Loss Account

This is the account that is prepared to show the net profit or loss of a business. Net profit is

made when gross profit is greater than expenses or overhead costs.

Net profit = Gross Profit – Expenses.

Figo Enterprise made a gross profit of $2744 for the year ending 31 st December 2008. During

that same period, the business made the following expenses which have not been considered;

wages and salaries $600, electricity $240, rent $120, selling and advertisement $80. Draw a

profit and loss account for the year ending 31st December 2008.

Figo Enterprise

Profit & Loss A/C for the year ending 31st December 2008

$ $

Gross profit 2744

Less expenses:

Wages and salaries 600

Electricity 240

Rent 120

Selling and Advertisement 80 1040

Net profit 1704

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