1The idea in one paragraph

Final accounts are the financial statements a business produces at the end of its financial year. The IB uses two. The statement of profit or loss (also called the income statement, or profit and loss account) shows performance over a period: the revenue earned in the year, the costs taken from it step by step, and the profit left at the end. The statement of financial position (also called the balance sheet) shows the position on one date: what the business owns (assets), what it owes (liabilities), and what belongs to its owners (equity). Different stakeholders read them for different reasons, from a shareholder checking dividends to a bank deciding on a loan. Some of what a business owns cannot be touched, and these intangible assets are among the hardest things in the accounts to value. At HL you also learn how the cost of a long-lived asset is spread over its life, by depreciation.

2Why accounts exist: their purpose to stakeholders

Accounts exist because people outside the day-to-day running of a business need to know how it is doing, and people inside it need a record to manage by. Limited companies are required by law to prepare them, and in most countries they must be checked by independent auditors and filed publicly. Figure 1 shows who reads them and what each is looking for.

• Shareholders: profit, dividends and growth, compared with last year.
• Managers: which parts perform, and what to target, budget and invest in next.
• Lenders and banks: whether interest can be paid and loans repaid, and what assets could secure a loan.
• Suppliers: whether goods sold on trade credit will be paid for, and how quickly.
• Employees and trade unions: whether jobs are secure and a pay rise is affordable.
• Government: the tax due on profit, and whether reporting rules are followed.
• Customers: whether the business will survive to honour guarantees.
• Competitors and potential investors: how it compares, and whether it is worth investing in or buying.

Exam questions test exactly this: why would this stakeholder care about this figure? Applying it to the case (a supplier worried by a large overdraft, a union pointing to higher dividends) is where the marks are.

Accounts have limits. They are historical, describing the past year, not the next. They are a snapshot, which a business can make look better on the day by window dressing (collecting debts early, delaying payments to suppliers). And much of value never appears: the skill of the workforce, customer loyalty, a brand the business built itself.

3The statement of profit or loss

The IB presents it in a fixed layout, and in the exam you must use that layout and its names. Here is the one for an invented tile manufacturer, Tessera Tiles Ltd. Figures in brackets are deductions.

Read it from the top, one line at a time. Each bold line is what is left after the line above it is taken away.

• Sales revenue: the value of goods and services sold in the year, price × quantity (3.3).
• Cost of sales: the direct costs of the goods actually sold: materials, production wages, goods bought for resale.
• Gross profit = sales revenue − cost of sales: the profit on trading, before overheads.
• Expenses: the indirect costs or overheads: rent, administration, marketing, insurance and (HL) the year's depreciation.
• Profit before interest and tax = gross profit − expenses: the profit from operations, used for the profit margin and ROCE in 3.5.
• Interest: the cost of borrowing (3.2). Profit before tax is what remains.
• Tax: tax on the company's profit (Tessera pays 25%: 75 ÷ 300). Profit for period is what remains, and it belongs to the owners.
• Dividends: the part paid out to shareholders. Retained profit is what the business keeps, the internal source of finance from 3.2.

Figure 2 draws the same statement as a waterfall. It makes the logic of the layout visible: each deduction steps down, and every subtotal is what remains.

Non-profit entities (charities, many social enterprises) use the same layout with different words, because they make a surplus, not a profit, and have no shareholders. The lines become gross surplus, surplus before interest, surplus before tax, tax (usually 0, since charities are generally exempt), surplus for period and retained surplus, with no dividends line: the whole surplus stays in the organisation for its purpose.

4The statement of financial position

This statement answers a different question: on one date, what does the business own, what does it owe, and what is left for its owners? Here is Tessera's, in the IB layout.

The terms, in the order they appear:

• Non-current assets are kept and used for more than a year: the property, plant and equipment that capital expenditure buys (3.1). Accumulated depreciation, all the depreciation charged on them so far, is subtracted, leaving their net book value.
• Current assets are expected to become cash within a year: cash, debtors (customers who bought on credit and have not yet paid) and stock (materials, work in progress, finished goods).
• Current liabilities must be paid within a year: the bank overdraft, trade creditors (suppliers owed under trade credit) and other short-term loans.
• Non-current liabilities are due after more than a year: long-term borrowings such as bank loans and mortgages.
• Net assets = total assets − total liabilities: what would be left if everything owned paid off everything owed.
• Equity is the owners' stake: share capital (what shareholders paid for their shares) plus retained earnings (all the profit kept in the business over its life).

Total assets − total liabilities = net assets = total equity

The statement always balances. It is not a coincidence or a check you hope passes; it is built in. Every asset was paid for somehow: either with money that is owed to someone (a liability) or with money that belongs to the owners (equity). Figure 3 shows the two sides.

Because it must balance, an exam can hide one figure and ask you to find it. If retained earnings were missing, you would work out net assets (1,320), then subtract share capital (500) to get retained earnings of 820.

A non-profit entity uses the same layout, but its equity has no share capital: it is retained earnings alone, built up from the surpluses of past years.

5How the two statements link

The two statements are not separate stories. Figure 4 shows how they fit together.

The statement of profit or loss covers a period: "for the year ended 31 December 2025". The statement of financial position is a photograph on one date: "as at 31 December 2025". The link is the retained profit. At the start of the year Tessera's retained earnings were $685k. During the year it retained $135k. So at the end of the year:

Get the headings right. A statement of profit or loss says "for the year ended"; a statement of financial position says "as at". Swapping them shows a marker that you do not know what each statement is.

6Intangible assets

An intangible asset is a non-physical, non-current asset that the business owns and that has value because it will help earn revenue in the future.

You cannot touch it, but you can buy it, sell it, and defend it in court. Figure 5 shows six kinds.

• Goodwill arises when one business buys another for more than the value of its net assets. The extra is paid for things the balance sheet does not show: its reputation, its customers, its staff's know-how, its location. If Tessera buys a rival, Glaze & Co, for $900k, and Glaze's assets minus its liabilities are worth $650k, Tessera has paid $250k for goodwill.

• Brands are names customers trust and will pay more for. A brand bought with another business can appear in the accounts; one a business builds itself usually cannot, because there is no reliable price for it.
• Patents give the sole legal right to make, use and sell an invention for a limited period (commonly 20 years).
• Copyrights protect original work, such as writing, music, film and software, from copying. They last for decades.
• Trademarks are registered names, logos or slogans no rival may use, and can usually be renewed indefinitely.
• Licences and franchises are rights bought from another owner: to broadcast a sport, use a technology, or trade under a franchisor's name. Registered designs, protecting a product's appearance, belong in the same family.

Intangible assets sit under non-current assets. The IB's specimen statement of financial position has no separate line for them, so if an exam includes them it will give them a line in that section.

For many modern businesses (software, medicines, consumer brands) intangibles are worth far more than anything physical. But their value is a judgement, not a receipt: a brand can collapse in a week of scandal, a patent expires, and goodwill can turn out to have been an overpayment. Because the figures rest on estimates, they are one of the places where creativity in financial reporting can mislead, which is why the guide ties honest accounting to ethics.