Final Accounts

What are Final Accounts?

Final Accounts is the ultimate stage of accounting process where the different ledgers maintained in the Trial Balance (Books of Accounts) of the business organization are presented in the specified way to provide the profitability and financial position of the entity for a specified period to the stakeholders and other interested parties i.e., Trading Account, Statement of Profit & Loss, Balance Sheet.

Explanation

Initially, the transactions are recorded in the Journal of the company, which is then reflected in the individual ledgersLedgersLedger in Accounting, also called the Second Book of Entry, is a book that summarizes all the journal entries in the form of debits & credits to use for future reference & create financial statements. read more maintained for the relative transaction type & party. The closing balance of this ledger is maintained in the Trial Balance, which shows equal debit and credit side for the period. Then for providing the status & performance of the business organization for the specified period (i.e., a year, half-year, quarter, etc.), Final accounts are prepared which included Trading Account for calculation of Gross profit (now generally inclusive with the statement of profit & loss), Statement of Profit & Loss for net profit earned during the period and Balance Sheet which provide the Assets & Liabilities of the entity at the period end.

Final-Account

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For eg:
Source: Final Accounts (wallstreetmojo.com)

Features

  1. The final account is legally required for the entities. The financial accountingFinancial AccountingFinancial accounting refers to bookkeeping, i.e., identifying, classifying, summarizing and recording all the financial transactions in the Income Statement, Balance Sheet and Cash Flow Statement. It even includes the analysis of these financial statements.read more and preparation Financial statements are obligatory for the entities as well as getting those accounts audited.
  2. These accounts are prepared for presenting and providing the financial performance and status of the entity to the stakeholders, users, investors, promoters, etc.
  3. The presentation of comparable figures of the current period from the previous period increases the utility of the statements of accounts.
  4. It presents the accurate & fair view of the organization’s financial performance by providing accurate & full information regarding the business with proper notes and disclosures of the real facts.

Objectives of Final Accounts

  1. They are prepared for the calculation of Gross profit & net profit earned by the organization for the relevant period by presenting the Statement of Profit & Loss.
  2. The Balance sheet is prepared for providing the correct financial position of the company as on the date.
  3. These accounts use the bifurcation of direct expensesDirect ExpensesDirect costs are costs incurred by an organization while performing its core business activity and can be attributed directly in the production cost, such as raw material costs, wages paid to factory staff, power & fuel expenses in a factory, and so on, but do not include indirect costs such as advertisement costs, administrative costs, etc.read more to obtain the gross profit & loss and bifurcation in indirect expensesIndirect ExpensesIndirect expenses are the general costs incurred for running business operations and management in any enterprise. In simple terms, when you want to buy grocery from a supermarket, the transportation cost to get you to the supermarket and back is the indirect expenses.read more to ascertain the Net profit & loss for the organization.
  4. These accounts through the Balance sheet bifurcate the assets & liabilities as per the holding & usage periods of the same.

Example of Final Accounts

ABC Inc. shows the following balances in its ledger:

ParticularsAmount
Opening Stock of Inventory$5,000
Closing Stock of Inventory$2,000
Purchases$4,000
Sales$10,000
Direct Expenses$1,000
Indirect Expenses$3,500
Other Income$4,000
Assets:
Fixed Assets$17,500
Other Assets$5,000
Liabilities:
Loan$3,500
Other Liabilities$2,500
Capital$10,000
Reserve$4,000

Prepare the final accounts based on the given data.

Solution:

Final Accounts Example 1-1
Final Accounts Example 1-2
Example 1-3 (Balance Sheet)

Importance

Advantages

  • The preparation of Final Accounts increases the accuracy as well as the effectiveness of the accounts.
  • During the preparation, any innocent mistakes or fraud can be discovered and could be rectified quickly.
  • This account shows the status of the entity and business for the period, and the audit of the same create a check on the entity and its processes, which reduces the risk of the fraud and misstatement.
  • Provide the information for the valuation of the business and evaluation of the real worth of the business.

Disadvantages

  • Final accounts are mainly prepared based on historical & monetary transactions. This only provides the presentation and status of the money transaction to the users and public but does not provide the information relating to the work environment of the entity, customer satisfaction for the services & goods supplied by the company.
  • It cannot be assured that the Financials are entirely free from any misstatements as there are inherent limitations in the audit of the financial, which cannot ensure the 100% guarantee that the financials are free to form any inaccuracies.
  • There are substantial chances that the financials are influenced due to the personal judgment of the accountant or the judgment from the management personnel.

Conclusion

The final accounting is the final step of the accounting process. Final accounting includes the Statement of Profit & Loss and Balance SheetBalance SheetA balance sheet is one of the financial statements of a company that presents the shareholders' equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner's capital equals the total assets of the company.read more, which provide the presentation of the financial status and position of the entity. They are prepared for the specified period and are legally obligated. The financial statementThe Financial StatementFinancial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more is the basis for the shareholders and investors to decide on the investment of their funds in the securities of the entity.

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