Preparing the Final Accounts (Junior Cert Business Studies): Revision Notes
📚Revision Notes
Preparing the Final Accounts
Understanding the process
Preparing final accounts is a systematic process that transforms your trial balance into professional financial statements. These final accounts consist of two main documents: the income statement (showing profit or loss) and the statement of financial position (showing what the business owns and owes).
The process begins with examining your trial balance and determining where each item belongs in the final accounts. This requires understanding the purpose and structure of both financial statements.
Note
Key Financial Statements Overview
The two main financial statements serve different purposes:
- Income Statement: Shows business performance over a specific period
- Statement of Financial Position: Shows the business's financial position at a specific date
Key abbreviations
When preparing final accounts, accountants use standard abbreviations to identify where items should be placed:
Note
Standard Abbreviations Reference
- IS1 - Income statement (trading section)
- IS2 - Income statement (expenses section)
- SFP - Statement of financial position
- FA - Fixed assets
- CA - Current assets
- CL - Current liabilities
- App - Appropriation account
The step-by-step preparation process
Step 1: Examining the trial balance
Your starting point is always the trial balance extracted from your business records. This lists all account balances at a specific date, with total debits equalling total credits.
Each item in the trial balance needs to be allocated to its correct position in the final accounts. For example, if you're preparing accounts for Murphy's Electronics Ltd:
- Sales revenue → Income statement (IS1)
- Equipment → Statement of financial position as fixed assets (SFP-FA)
- Bank overdraft → Statement of financial position as current liabilities (SFP-CL)
- Wages → Income statement as expenses (IS2)
Step 2: Making adjustments
Important
Adjustments are changes made to trial balance figures to show the true financial position. Common adjustments include depreciation, accruals, and prepayments.
Adjustments are crucial because they ensure your accounts reflect reality. For instance, depreciation shows that your fixed assets lose value over time through use and age.
Important
Critical Rule: Adjustments appear twice in your final accounts - once in the income statement and once in the statement of financial position. This maintains the accounting equation balance.
Example adjustments might include:
- Depreciation on buildings at 2% per year
- Depreciation on vehicles at 15% per year
- Depreciation on equipment at 12% per year
Step 3: Preparing the income statement
The income statement shows how much profit (or loss) your business made during a specific period. It follows a standard format:
Trading section (IS1):
- Start with sales revenue
- Calculate cost of sales using: Opening stock + Purchases + Carriage inwards - Closing stock
- Calculate gross profit: Sales - Cost of sales
Expenses section (IS2):
- List all business expenses including depreciation
- Calculate net profit: Gross profit - Total expenses
- Show appropriations (like dividends paid)
Example
Worked Example: O'Brien's Garden Centre Income Statement
Sales: €89,000 Less: Cost of sales: €52,000 Gross profit: €37,000
Less: Total expenses: €28,000 Net profit: €9,000
Step 4: Preparing the statement of financial position
Important
The statement of financial position shows what your business owns (assets) and owes (liabilities) at a specific date, plus how it's financed.
Structure:
Fixed assets: Long-term items used in business operations
- Show cost, accumulated depreciation, and net book value
- Examples: buildings, vehicles, equipment, machinery
Current assets: Short-term assets or those easily converted to cash
- Examples: cash, closing stock, debtors
Current liabilities: Debts payable within one year
- Examples: bank overdraft, creditors, wages due
Key calculations:
- Working capital = Current assets - Current liabilities
- Total net assets = Working capital + Total fixed assets
Note
Financing Section Structure
The financing section shows:
- Share capital (authorised and issued amounts)
- Reserves (including retained profits)
- Long-term liabilities (debts payable after one year)
Essential definitions
Important
Working capital represents the money available to cover daily running costs. It's calculated as current assets minus current liabilities.
Important
Fixed assets are long-term resources used in business operations, such as premises, equipment, and vehicles.
Important
Current assets are short-term assets, including cash or items expected to be converted to cash within one year.
Important
Reserves refer to money set aside by the business for future needs, including retained profits.
Share capital concepts:
- Authorised share capital - the maximum amount of share capital a company can issue
- Issued share capital - the amount actually sold to shareholders
Key relationships:
- Total net assets must equal total financing
- The statement of financial position must balance
- Working capital indicates business liquidity
Practical example: Kelly's Bakery Ltd
Example
Worked Example: Kelly's Bakery Ltd Statement of Financial Position
Given information:
- Fixed assets (equipment and premises): €180,000
- Current assets (cash and stock): €25,000
- Current liabilities (creditors): €15,000
- Long-term loan: €40,000
Calculations: Working capital = €25,000 - €15,000 = €10,000 Total net assets = €10,000 + €180,000 = €190,000
Result: This must equal financing of €190,000 (share capital + reserves + long-term loan).
Remember!
Summary
Key Points to Remember:
- Start with your trial balance and identify where each item belongs using standard abbreviations
- Adjustments appear in both the income statement and statement of financial position
- The income statement shows profit/loss over a period, while the statement of financial position shows the position at a specific date
- Working capital indicates whether you can meet short-term obligations
- The statement of financial position must always balance - total net assets equals total financing