3.4 Final accounts

Accounts are structured records that summarise a business’s financial performance and position. They help managers, owners, lenders and other stakeholders judge what has happened, what resources and obligations exist, and what decisions are affordable.

The purpose is not merely compliance: accounts support planning, financing and control. Revenue, costs, profit, liquidity and asset values answer different questions, so the useful statement depends on the decision and the reliability of the underlying records.

A business seeking a loan may need to show stable operating performance and enough liquid resources to service debt. A manager deciding whether to expand also needs forecasts and cash timing, not only last year’s profit figure.

Profit is not cash, and one statement cannot answer every stakeholder question. Historical accounts may also be outdated, aggregated or shaped by accounting judgments, so compare periods and use forecasts or non-financial evidence when the decision concerns future performance.

Final accounts present a period’s financial performance and the business’s position at a point in time. The statement of profit or loss focuses on revenue, expenses and profit; the statement of financial position shows assets, liabilities and equity.

Capital expenditure creates or improves a non-current asset used over more than one period, while revenue expenditure supports day-to-day trading. Depreciation allocates an asset’s cost over its useful life and reduces reported profit without being a cash payment in that period.

A company can report a profit while struggling to pay suppliers if cash is tied up in inventory or receivables. Read the statements together and ask whether the business’s purpose is measuring performance, solvency, liquidity or resources.

A balance-sheet total is not a market valuation, and profit is not the same as cash generated. Read both statements consistently, check the reporting period and accounting policies, and avoid judging liquidity from profit alone.

An intangible asset is a non-current resource without physical substance, such as a patent, licence, brand or development-related right. Its value comes from expected future benefits, not from its material form.

Recognition depends on control, identifiable rights and evidence that future benefits are probable and measurable. The asset may be amortised over its useful life; uncertain internally generated reputation is not automatically recorded as an asset.

A purchased licence used for five years can be allocated as an expense across that period, reducing the carrying amount as benefits are consumed. A valuable idea that cannot be separately controlled may remain an expense rather than a balance-sheet asset.

Intangible does not mean imaginary, and a strong reputation does not automatically become a recorded asset. Goodwill normally arises when one business acquires another for more than the fair value of its identifiable net assets; internally generated reputation may be valuable without meeting recognition criteria.

Depreciation records the falling carrying value of a non-current asset through time, use or obsolescence. Straight-line depreciation spreads depreciable cost evenly; units-of-production depreciation follows measured use.

Straight-line annual depreciation is (historic cost − residual value) ÷ useful life. Under units of production, first calculate depreciable cost per expected unit, then multiply by the units or hours used in the period.

For a €280,000 balloon with €52,500 residual value and a seven-year life, straight-line depreciation is €32,500 per year and the year-one book value is €247,500. A heavily used machine may be better represented by usage-based depreciation.

Depreciation is not a cash payment and it does not necessarily equal current market-price change. Keep historic cost, residual value, useful life and the selected method consistent throughout the calculation.

Method suitability asks whether an asset loses usefulness mainly with time or with use. Straight-line is simple and predictable when decline is even; units of production is more informative when wear tracks output or operating hours.

Straight-line supports stable budgeting but can misstate a vehicle or machine used intensely early and lightly later. Units of production matches usage better but requires reliable activity data and produces less predictable yearly expense.

A pizza oven expected to last 12,000 hours should use usage data if hours drive wear: depreciable cost per hour multiplied by first-year hours gives the expense. A low-use office asset with steady obsolescence may suit straight-line instead.

The method is not chosen only because a formula is easy. Consider obsolescence, usage pattern, materiality, data quality and reporting rules; depreciation still does not prove the asset’s market value.