Michael Osodi

Unit 10: Final Accounts

Task 1

Depreciation

Depreciation is the term used when describing the decline in value of something. It also represents the ownership and consumption of something useful life. In accounting terms, this is limited to the value of a fixed asset during its useful life. Examples of fixed assets are fixtures & fittings, vehicles and equipment.

The reasons for depreciation are:

  • New models – in today’s modern world, there is new technology that compliment the new generation. This makes things more efficient.
  • Wear and Tear – equipment eventually gets worn out to an extent that it is no longer worth fixing and needs to be replaced (upgraded) in order to not be labelled as ‘old fashioned’.

Fixed assets are shown in the balance sheet and are valued as part of the business. To produce accurate accounts, a business must show that the value of fixed assets goes down over time.

The purpose of depreciation is to match the cost of a fixed asset that has a life of more than a year to the revenues earned from using the asset. The reason why depreciation is used is to spread the initial price of the asset over its useful life.

There are several methods that can be used when calculating depreciation. The calculations are normally based on either the amount of time passed or the amount of use of the asset. The first method is:

Straight-line depreciation – this is the most simple and frequently used method in businesses. This is calculated by taking the purchase price of an asset and subtracting it from an estimated scrap value. The result is then divided by the business’ estimate of the number of productive years the asset can be expected to benefit the company. The answer will give you the Net Book Value, which shows the annual depreciation amount (how much it will be worth every year.

METHOD

Straight line depreciation = Purchase price of asset – scrap value

                                           Estimated useful life of assets

A business buys new machinery for the business costing £5000. They estimate a scrap value of £200. The business then estimates a useful life of three years for the computers. Using that information, I put it into the formula:

£5,000 purchase price - £200 scrap value
-------------------------------------------------------
         3 years estimated useful life

The answer, £1,600, is the depreciation charges the business would take annually if they use the straight line method.

Reducing balance depreciation – this method is slightly more complicated than the straight line method. This method assumes that an asset loses more value at an early stage in its lifetime. This means that a set depreciation rate is used, e.g. 20%, which therefore results in less value lost every year.

METHOD

Reducing balance depreciation

Original cost of machinery - £50000

Year 1 depreciation (£50000 x 15%) = £7500

Value at end of year 1 (£50000 - £7500) = £42500

Year 2 depreciation (£42500 x 15%) = £6375

Value at end of year 2 (£42500 - £6375) = £36125

Year 3 depreciation (£36125 x 15%) = £5418.75

Value at end of year 3 (£36125 - £5418.75) = £30706.25

Task 2

 

Arsenal Football Club

Arsenal Football Club is an English professional football club, who most recently moved from Highbury & Islington and are now located in Holloway, North London. The club is run under its parent company, Arsenal Holdings PLC. They play in the Premier League and are the third most successful club in England, behind Liverpool and Manchester United respectively. Arsenal was founded in 1886 and started dominating English football in the 30s. After a barren period in the post-war years, they have become one of the most successful clubs in the country over the past twenty years – during this time, Arsenal have won the league on six occasions. Their most notable Premier League season was in 2003/2004, where they went the whole season unbeaten. They also became the first London club to the reach the Champions League final, which was in the 2005/2006 season. The club’s colours have always been red and white. Arsenal FC are one of the richest clubs in English football, worth over £600m and are also one of the top 10 richest football clubs in the world. The club recently left Highbury (capacity 38,419), their home from September 1913 – May 2006 and moved into the Emirates Stadium, a bigger stadium with a capacity of 60,432, which is located in Ashburton Grove, Holloway. They are also part of an exclusive organisation of European football clubs, the G-14 group.

        Arsenal has a range of products and services to satisfy their customers. They have an official sports shop, Arsenal World of Sport, located in Finsbury Park, where replica kits, hats, footballs and much more merchandise can be purchased. They have also set up ‘The Arsenal Membership’ for supporters of the club. Under the membership scheme, ‘The Arsenal’, the club provides a lot of benefits as well as opportunities to new members. The scheme is seen as crucial to the growth and development of the club. All season ticket holders are classed as Gold members. If you are a new member or a supporter renewing their membership (Red Membership & Silver Membership respectively), they have the option to receive a membership pack. This contains an official Access-All-Areas DVD, Building for Success magazine, an Arsenal bottle opener and a 2007/2008 Club Yearbook. Other benefits from the membership include:

  • Having the opportunity to attend Members Day at Emirates Stadium.
  • Access to Membership website and Monthly Newsletter - this includes an online ticket facility, all of the latest membership news and a members community message board. The newsletter features Arsenal highlights of the month and competitions.
  • Membership Magazine - each full member receives a limited edition Arsenal magazine at the end of every season. The magazine contains membership news, features and exclusive player interviews.
  • Access to match tickets - tickets go on sale to silver members approximately 8 weeks prior to a league fixture. If any tickets remain after being offered to silver members they are then made available to red members approximately 4 weeks prior to the fixture.
  • The ‘online box office’ allows members to purchase tickets, has a state of the art seat locator and a live ticket availability indicator.
  • At Emirates Stadium, membership cards double up as stadium access cards for gold, silver and red level members (where match tickets have been purchased).

Arsenal Football Club also runs its own community scheme, Arsenal in the Community. It has been running since 1985 and focuses on innovative sports development in the local community and the Arsenal community worldwide. The Community Department offer a range of sporting, social inclusion, educational and charitable projects. They have achieved unbridled success and have touched the lives of all Arsenal fans on a local, regional and global scale. Arsenal have recently launched their own TV channel, Arsenal TV Online, which is accessible on the Internet. You can subscribe to it through BT Total Broadband and can tune into eight channels that can show you:

  • The Best Of - The latest highlights, news and interviews packaged in a live continuous video stream.
  • Match Video - Highlights of EVERY Arsenal first team and reserve match.
  • Match Centre - LIVE text and audio commentary of EVERY competitive first-team game.
  • Talk - Exclusive interviews and every pre- and post-match press conference.
  • Gold - Enjoy classic Gunners moments and matches from the past.
  • The Club - Go behind the scenes at the club - enjoy footage from the training ground and more.
  • Live - A channel dedicated to live events — pre-season games, webcams, webchats etc.
  • Free Video - Watch free videos to get a taste of the content on offer.

Stakeholders are very important in today's modern society, as they can hold the key to the company's success. They have an interest in the financial issues and decisions made by and for the club. Arsenal Football Club’s stakeholders are the people who are affected by the actions of the business. Their stakeholders are, first and foremost, their shareholders. Their shareholders are the most important because they are the ones that pump money into the business and keep the business moving financially. Another of their stakeholders are their players. The players are the people that play for the club and market the club to the fans by achieving success on the football pitch. Another stakeholder in Arsenal FC are their fans. The fans are the people that buy tickets and watch TV to view their team play and support them, so they have a say in the football club as well. The managers and directors are also stakeholders in Arsenal FC because they run the club on a day-to-day basis and make decisions on behalf of the shareholders and must have their best interests at heart. The Club’s sponsors are also very important stakeholders because they are giving money to the club to market their business on the front of their shirts as well as sponsor them for other projects.

Accounting for limited companies is a very crucial function of businesses. It can assess how well the business is performing. This is important for a business internally as well as externally. Internally, managers want to see how much they are selling, the level of their costs and the level of profit they are making. From that information, they can set budgets and performance targets to plan for the next year. Accounting also shows managers where financial problems might be happening within the business. Externally, every business is legally required to keep records of their finances. A firm has to make its accounts available HM Revenue & Customs. Limited companies also have to publish their annual report and final accounts for the year, as they have a separate legal identity. Also, potential investors will want to know if a company is worth investing their money in and potential creditors will want to know if the business is capable of paying back any loans they may give to them.

Arsenal Holdings PLC does not have a trading account, as they do not trade. They only sell goods and services.

        A profit & loss account takes the gross profit of a firm and deducts all the expenses to find the final profit for the year, which results in the net profit. Components of Profit & Loss Account

Profit & Loss Account – the profit & loss account shows the true profit of the business and takes all general expenses into account. The account comprises of:

Expenses – amount that the business has to pay out such as wages, advertising etc.

Depreciation – a business’ assets do not retain value over time. Machinery loses each year. Businesses must show their reduction in depreciation when they finalise their accounts, otherwise the value of the business will be overstated. Depreciation is classed as an expense to the firm, therefore, appears on the profit & loss account.

Components of Appropriation Account

Appropriation account – the appropriation account is the statement of how net profit is distributed to various shareholders and partners. This type of account is only for partnerships and limited companies and is not done for sole traders, as the profits made are solely available to the owner. The account comprises of:

Corporation tax – this is tax charged on business profits and is the first thing that is accounted for in the appropriation account.

Interim dividends – these are dividends that are paid part-way through the company’s financial year before final profits are then calculated.

Proposed dividends – these are dividends that are paid at the end of the financial year, after all profits have been calculated.

Reserves – this is what is retained in some limited companies. They decide to keep some of the profits made instead of distributing it to shareholders. Reserves may be kept for different purposes, for example, to pay for the replacing of machinery in the future.

Retained profit – this is any profit left over after reserves are taken and kept for use for another time.

        A balance sheet is a statement that shows the comparison between its assets and liabilities and how the business is funded.

Components of Balance Sheet

The balance sheet is last in the set of final accounts drawn up and gives an overview of the company’s financial state on a certain date. The balance sheet comprises of:

Fixed assets – this is the first section on the balance sheet. It shows the items of value that the firm has bought and will use for a long time e.g. machinery, vehicles, equipment, buildings etc. These are known as tangible fixed assets. Fixed assets shown on the balance sheet will show the original prices paid for the assets, their depreciation value and the net current value for each asset.

Intangible fixed assets are items of value that cannot be touched but comes about when a new owner pays the previous owner the book value of the business to compensate for the good reputation of the business.

Current assets – this is second section and displays assets that are promptly available to the business when paying debts and can be converted into cash. This includes stock, debtors, cash in the bank and cash at hand.

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Current liabilities – this section shows amounts owed to the suppliers and lenders of the business and need to be paid back as soon as possible. This section normally includes creditors, bank overdrafts, VAT, loans, corporation tax and dividends.

Long-term liabilities – the fourth section shows debts that need to be paid back over a long period of time, for example, a mortgage, debentures and a long-term bank loan.

Financed by – the last section in the balance sheet shows where the money came from to run the business. It also shows the amount taken away from the business for the owner’s ...

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