Final accounts are an essential financial component of any accounting year for every company. Simply put, it is the full and final accounting procedure which is carried out at the end of an accounting year, resulting in the preparation of relevant accounts. It derives reference from the final trial balance, which is itself a reference to the ending balance in every ledger account.
The final accounts for all companies must be produced on or by the 31st of March every year as it marks the end of a financial year.
The final account of every company comprises the journal entries necessary to complete the accounting books for that specific financial year. Thus, some of the components of any entity’s final accounts are the following:
Allocation of overheads for the following financial year.
Writing downs of any assets which may be necessary.
Income tax accruals.
Wages and any accruals on payroll tax.
Additional adjustments for obsolete inventory, bad debts or return of goods sold.
Amortisation and depreciation of asset value.
The final account balance depends on the final trial balance and the financial statements of each year. The importance of final accounts lies in the fact that they help a company analyse its annual financial standing.
Most companies and corporations across the world use primarily 3 types of final accounts:
Profit and loss account.
The compilation of final accounts must be done at the end of the financial year by book-keepers of an entity. They are subject to audits by either external or internal auditors, who are mostly Chartered Accountants.
It is of utmost importance that the accounts are drawn up in a fair and transparent manner.
This is often the first final account to be tabulated. This account is used to determine the gross profit or the gross loss that is incurred by a corporation at the end of a financial year. On the left-hand side (LHS), all debited sums, including direct purchases, opening stock and direct expenses, are recorded.
A company will have a gross profit scenario when the credit side (RHS or right-hand side) is greater than the value represented on the LHS. The gross profit is later transferred to the credit side of a profit and loss account, which is drawn up after the completion of a trading account.
A company will have a gross loss scenario when the debit side is greater than the credit side or when LHS > RHS. Should there be a gross loss incurred, it will then be transmitted to the debit side of the P & L account.
Once a trading account is finished, the profit and loss account is readied. This final account is also known as an income statement in some companies. It is started as soon as the gross profit or gross loss from the table made earlier is transferred.
All indirect expenses, including salary, office and administrative expenses, rent, wages and costs on marketing and advertising, are mentioned on the debit side.
All indirect incomes, including dividends received on shares, interests earned, profits earned on asset sales and recovered debts go to the credit side.
A Profit and Loss Account may have certain other essential information too. For a further and detailed study, refer to Vedantu’s online resources. Such information can help you become a more adept student of commerce.
Since this is, by definition, a sheet of information and not a statement, there are no elements of ‘to’ and ‘by’ as in the other accounts. The balance sheet consists of a company’s total assets, liabilities and capital as on the last day of a financial year.
All LHS elements of a balance sheet are liabilities. All RHS elements of a balance sheet are assets. During Balance Sheet preparations, the liabilities must equal the assets.
The Balance Sheet is the most important financial tool for any enterprise to assess its financial position and where it stands for future planning and implementation.
Balance Sheet also helps identify areas where the company is facing hurdles and difficulties. The management can then plan accordingly. With these final accounts examples, you would now be able to better grasp its intricacies. To have a better understanding of final accounts and learn how to prepare them accurately, find more study material with Vedantu online.
1. What are Final Accounts?
The Balance Sheet, Profit and Loss Account and Trading Account of any company at the end of a financial year are collectively known as final accounts. It determines the financial strength, or lack thereof, of an enterprise’s financial position.
2. How to Prepare Final Accounts?
All assets and liabilities of an entity are taken, analysed and tabulated as shown above. Once the process is completed, the accountants of that enterprise prepare the final accounts based on rigorous accounting standards that currently exist. There might be scrutiny of its accuracy later by auditors, external or internal. As adjustments are an essential part of any final account, you must also check final accounts with adjustments examples to better understand the concept.