Financial Accounting

What are the final accounts? and how to prepare them?

Final Accounts

By final accounts, we mean manufacturing and trading account (only trading accounts in the case of non-manufacturing entities), profit and loss accounts, and balance sheet and cash flow statements.

After passing journal entries for events and transactions, posting them to ledgers, and preparing trial balances, the final step is to prepare final accounts.

Other reports may also form part of final accounts depending upon the nature of the business entity and requirements of the statute; for example, certain entities engaged in mining and natural resource abstraction are required to include the statement of cost. Final accounts are popularly known as financial statements.

Financial statements are the systematically organised summary of all the ledger accounts heads presented so that it gives complete information about the entity’s financial position. The entity’s performance is judged based on income earned during the year. In financial accounting, profit is computed at the following two levels:-

  1. Gross profit
  2. Net Profit

For the computation of profit, Income Statement is prepared. For financial measurement, the position of the business enterprise and assets, liabilities and capital of the enterprise statement of the financial position are prepared.

From the above explanation, one can conclude that final accounts are the next step after the

Preparation of trial balance is mainly divided into the following two parts:

  1. Income Statement
  2. Position Statement

Now we shall discuss in detail these terms

1. Income Statement

The amount of profit or loss is arrived at is disclosed in the Income Statement, prepared at the end of the year. The Income Statement finds out the net profit of the business after adjusting the income earned during the year and all the expenditures of the business incurred in that particular year.

The various items of income and expenditure, which took place during the accounting period, are sorted therein and grouped under significant heads. The main objective of the Income Statement is to present the details of various items of income or expenditure, which are attributable to the making of the profit or loss.

The income Statement is sub-divided into the following two parts for a non-manufacturing concern:

(i) Trading account; and

(ii) Profit and Loss account

2. Position Statement

The position statement mainly comprises of Balance Sheet, which exhibits the assets and liabilities of the business as of the close of the year. For proper information on the business’s financial position, sometimes additional statements are also prepared, like the cash flow statement. These additional statements are prepared for a better understanding of the financial position of the users.

Preparation of Final Accounts

For determining the different aspects of transactions, a record should be kept in a proper manner and under different heads of account under which various items of income and expenditure should be accumulated, are stated below:

  • All personal income and expenses must be segregated from corporate revenue and expenses since the purpose of the final statements of account are to demonstrate the firm’s profitability, not that of its owners.
    There should be a distinction between capital and revenue and revenues and expenditures. Different forms of revenue and expenses should be grouped under distinct headings.
    Assets should be reflected in the Balance Sheet at the value derived using the previous year’s valuation methodology. Similarly, a provision for accumulated but unpaid revenue and costs should be made based on estimates or on the same basis as the prior year.
  • Every piece of information deemed relevant to determining a corporation’s profitability or financial status must be reported.
  • Although a continuous record of transactions must be kept, at the conclusion of each accounting period, the transactions of the preceding period must be separated from those of the subsequent period.
  • Only the impact of transactions that happened before the end of the accounting period has been adjusted in the year-end financial statements.
  • For instance, if a sale of products is contingent upon the buyer’s examination of the items and the inspection has not occurred by the end of the year, it should not be recorded as a sale in the year-end financial statements.

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