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Final Account

Final Accounts
• Final Accounts is the last step in the accounting
process.
• Trial Balance is prepared at the end of all the
accounting year to know the balances of all the
accounts & to test the arithmetic accuracy of accounts.
• But the basic objective of accounting is to determine
whether the business has earned profits or suffered
losses and to know about the financial position of
business
• These are also known as FINANCIAL
STATEMENTS
Definition
• ‘Final accounts are the financial statements
prepared at the end of the financial year to
disclose the financial position of the business
concern.’
Type /Steps to prepare Final
account
Final Accounts includes the following steps
to preparation of:
• Trading Account and
Profit &loss account
(Income statements)
• Balance sheet
Trading Account
• Trading account is prepared by trading concerns i.e., concerns
which purchase and sell finished goods, to know the gross profit
or gross loss incurred by them from buying and selling of goods
during a particular period of time.
Gross profit= Sales – Cost of good sold
• Gross profit is difference between sale proceeds of a particular
period and cost of good sold.
• If the sale proceeds exceed the cost of goods sold , gross profit is
made. Otherwise, gross loss is made.
• The main objective of preparing the trading account is to ascertain
gross profit or gross loss of a business during an accounting year.
Advantages/Uses of Trading Account
• Ascertainment of gross profit/gross loss:
With the help of trading account, we can determine gross
profit or gross loss of the business.

• Speaks about stock figures:


Trading account tells us the figures of opening and closing
stock and also increase or decrease in the stock .High figures
of closing stock are dangerous because it means that good
are not selling.

• Trends of sales:
Comparison of currents years sales figure with
previous year’s figures tell us the trend of sales..
• Fixation of selling price:
cost of goods sold is determined with the help of
trading account ,which helpful to fix fair selling
price for future.
• Ascertainment of direct expenses:
we can ascertain the figure of direct expenses
from trading account .All the direct expenses are
written on debit side of trading account
Profit and loss Account
• Profit and loss account is prepared to ascertain in net profit
or net loss of a business during an accounting year.
• It is prepared after the preparation of trading account.
• The balance of trading account is transferred to profit and
loss account and ,thus, it is starting point for preparation of
profit and loss account.
There are two sides of profit and loss account:
Debit side ( All indirect expenses)
Credit side (All Indirect Income)
• Profit & Loss Account is prepared to find out net profit
or net loss on the basis of indirect expenses or indirect
income of the business.
Advantage /Uses of Profit and loss
Account
• Net profit/Net loss:
Profit and loss account helps us to determine net profit r net loss of
the business for a particular period.
• Basis for preparing balance sheet:
Profit and loss account becomes the basis for preparing balance
sheet because it is only after preparing profit ,we can prepare
balance sheet.
• Net profit or Net loss is transferred from profit and loss account
to balance sheet.
• Tax revenue for government: Government’s main
source of revenue is income tax which is determined
from the net profit as disclosed by profit and loss
account.
• Easy comparison :profitability can be compared for
current year with that of previous years.
• With the help of comparison we can also know that our
expenses are increasing or decreasing.
• Steps to control expenses: The reason for decline in
profit is normally increase in expenses. So management
can take steps to control expenses if they are increased
.
Balance sheet
• A balance sheet is a statement of financial position in the form
of assets and liabilities of an enterprise at a given date.
• In the balance sheet, only those balance are written which have
not been closed by transferring to trading and profit loss
account.
Features of Balance sheet:
• It is a statement and not an account.
• Balance sheet is always prepared at a particular date and time.
• It shows only the assets and liabilities of the business. Left
hand side liabilities are shown whereas right hand side Assets
are shown.
• It is prepared only after preparation of trading and profit and
loss account .
Advantages/uses of balance sheet
• It provides the information of assets ,liabilities and capital
of the business.
• Financial Position: It helpful in ascertaining the financial
position of the business by showing assets and liabilities of
the concern on a specific date.
• Solvency position: It disclose the solvency of business by
showing how much assets are available for payment of
liabilities.
• Value of the business: is determined on the balance sheet.
• It helps for selling the business by presenting the true value
of assets and liabilities.
• Borrowing power: Every business has to face
shortage of funds for which it has to borrow from
some outside organizations. These lending
organization provide loans on the basis of soundness
of the balance sheet.
• Calculations of ratio: various ratios can be
calculated from the balance sheet which are helpful
for management.
Limitations of Balance sheet
• Qualitative Factors are Ignored

The first and foremost of limitation of balance sheet is that it does not take into account qualitative factors
into consideration. Qualitative factors like health of director or chairman of the company, working
conditions of employees in the company

• Dependent on Books of Primary Entry

Second limitation of balance sheet is that it is dependent on data entered in Journal and ledger
because balance sheet is prepared from ledger books and hence if there is any mistake at the
time of entry in journal and ledger then balance sheet will also carry these mistakes and hence

will not reflect the true picture about the financial position of the company .

• Window Dressing

In balance sheet chances of manipulations are high because there are so many things which can be
adjusted in the balance sheet so for example fixed asset are shown in the balance sheet at historical cost
and not at market price