3.4.2—Final accounts

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.