Final accounts are a summary of financial statements representing the performance of a business for a certain period. They include the Trading Account, Profit and Loss Account, and Balance Sheet. These accounts facilitate businesses to measure their profitability and financial position, thereby facilitating easy decisions on the part of the stakeholders. Whether you are a small businessman or a big corporate house, final account preparation is a means through which financial transparency and accountability may be managed.
Final accounts will depict not only a clear picture of profits but also reveal the financial health of any firm. In this article, we are going to analyze the meaning, components, and importance of final accounts in detail.
Final accounts refer to a set of financial statements prepared at the end of an accounting period. These statements include the trading account, profit and loss account, and the balance sheet. The final accounts can be divided into three distinct parts.
The trading account is the first part of the final accounts and focuses on determining the gross profit or loss during the accounting period. It contains all the direct expenses and revenues relating to the production and sale of goods.
Where,
COGS = (Opening Stock + Purchases + Direct Expenses) – Closing Stock.
Having arrived at the gross profit, the next step is preparing the profit and loss account. It is seeking to determine net profit or net loss considering the costs and revenues of both operating and nonoperating natures.
The result provides a complete picture of a business’s financial performance.
The Balance Sheet forms the last constituent of the final accounts and offers a summary of the company’s health at a point in time. It consists of assets, liabilities, and equity.
A Balance Sheet must always balance, following the formula:
The primary objectives of preparing final accounts include:
Final accounts are essential for several reasons:
Despite their importance, final accounts have certain limitations:
Final accounts consist of financial statements prepared at the end of an accounting period, including the Trading Account, Profit and Loss Account, and Balance Sheet.
The Trading Account helps in calculating the gross profit or loss of a business by comparing sales and the cost of goods sold.
It determines the net profit or loss by considering both direct and indirect incomes and expenses, providing a clear view of the business’s financial performance.
A Balance Sheet provides a snapshot of the company’s financial position, detailing its assets, liabilities, and equity at a given point in time.
Final accounts are based on historical data and do not consider non-monetary factors or predict future performance. There’s also the risk of data manipulation.
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