Final accounts are financial statements prepared at the end of a trading year to show whether a business made a profit and to evaluate its overall financial strength. Junior Cycle exam questions ask you to complete an Income Statement and a Statement of Financial Position from a trial balance, assess performance, and recommend practical improvements.
The Trial Balance and Income Statement
Every final accounts question begins with a trial balance and year-end notes. Sorting these figures correctly is the first step:
- Debit balances are purchases, expenses, assets, and debtors.
- Credit balances are sales, loans, creditors, share capital, and reserves.
- Closing stock and depreciation rates are never in the trial balance; they are found in the notes underneath.
The Trading and Profit and Loss Layout
| Line | How to calculate |
|---|---|
| Sales | Trial balance credit figure |
| Less cost of sales | Opening stock + purchases + carriage inwards − closing stock |
| Gross profit | Sales − cost of sales |
| Less expenses | Routine running costs (wages, rent, advertising, insurance) |
| Less depreciation | Cost of asset × rate (e.g. €20,000 at 10% = €2,000) |
| Net profit | Gross profit − total expenses |
| Closing reserves | Net profit − dividends paid + opening reserves |
Carriage inwards is the delivery cost of bringing goods into the business, so it is always added to purchases.
The Statement of Financial Position
The Statement of Financial Position shows everything the business owns (assets) and owes (liabilities) on a specific date.
| Section | Contents and calculation |
|---|---|
| Fixed assets | Long-term resources shown at cost − depreciation = net book value |
| Current assets | Short-term resources (closing stock, debtors, bank) |
| Current liabilities | Debts due within a year (creditors, overdraft) |
| Working capital | Current assets − current liabilities |
| Total net assets | Total fixed assets (net book value) + working capital |
| Financed by | Issued share capital + closing reserves + long-term loan |
| Capital employed | Total long-term funding |
Total net assets must always equal capital employed. Authorised share capital is only the legal maximum the company is allowed to sell, so never add it into your totals.
Evaluating Performance and Recommending Action
Exam questions reward evidence-based evaluations. Follow three simple checks:
- Profitability: State clearly whether the enterprise made a net profit. To evaluate it, compare net profit against sales: Net Profit ÷ Sales × 100.
- Liquidity: Check whether working capital is positive. If current liabilities exceed current assets, the business risks running out of cash to pay immediate bills.
- Recommendations: Always tie recommendations to a specific figure from the accounts. If wages are €16,000 (18% of sales), recommend reviewing staff rosters before taking on extra workers. If debtors are high, offer cash discounts to speed up debt collection.
Key terms
- Cost of Sales
- The direct purchase and delivery cost of the goods actually sold during the year.
- Gross Profit
- Sales revenue remaining after deducting the cost of sales.
- Net Profit
- Final profit remaining after all operating expenses and depreciation are deducted from gross profit.
- Depreciation
- The fall in value of a fixed asset each year through wear and tear or going out of date.
- Net Book Value
- The original cost of a fixed asset minus its total accumulated depreciation.
- Working Capital
- Current assets minus current liabilities, representing the day-to-day operating funds of a business.
Check yourself
In a trial balance, is a loan a debit or a credit balance, and where does it go in the final accounts?
A loan is a credit balance and is placed under long-term liabilities in the Statement of Financial Position.
What is the formula for calculating cost of sales?
Cost of sales = Opening stock + purchases + carriage inwards − closing stock.
Where does closing stock appear across the final accounts?
Subtracted in cost of sales in the Income Statement, and listed under current assets in the Statement of Financial Position.
What does negative working capital indicate about an enterprise?
Current liabilities exceed current assets, warning that the business may struggle to meet its short-term debts.
Which two summary totals must always equal each other in the Statement of Financial Position?
Total net assets must equal capital employed.