Final Accounts

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.


What Constitutes Final Accounts?

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:

  • Customer billings.

  • 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.


What are the Common Constituents of Final Accounts?

Most companies and corporations across the world use primarily 3 types of final accounts:

  • Trading account.

  • Profit and loss account.

  • Balance sheet.


Examples of Final Accounts

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.


Trading Account

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.


Here is a Sample Trading Account

Particulars

Amount

Amount

Particulars

Amount

Amount

To opening stock


XX

By sales

xx


To purchases

xx


(Less returns inward)

(xx)

XX

( Less returns outward)

(xx) 

XX

By closing stock


XX

To wages (Adjust O/S and prepaid)


XX

By gross loss (transfer to P & L A/C)


XXX

To carriage inwards


XX




To freight and octroi, among other transportation


XX




To direct expenses


XX




To fuel and power


XX




To gross profit (transfer to P & L A/C)


XXX





Profit and Loss 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. 


Here is a Sample P & L Account

Particulars

Amount

Particulars

Amount

To gross loss (brought from trading account)

XXX

By gross profit (brought from trading account)

XXX

To salaries (adjust O/S and prepaid)

XXX

By rent received

XXX

To rents and taxes

XXX

By discounts earned

XXX

To travelling expenses

XXX

By interests earned

XXX

To stationary/printing expenses

XXX

By bad debts recovered

XXX

To postage

XXX

By commissions earned

XXX

To audit & legal charges

XXX

By dividends received

XXX

To telephone expenses

XXX

By income from other sources

XXX

To insurance premium (prepaid adjusted)

XXX

By Net Loss (transferred to Capital A/C)

XXX

To marketing/advertisement

XXX



To interest paid

XXX



To interest paid

XXX



To discount allowed

XXX



To sundry expenses

XXX



To carriage outwards

XXX



To bad debts

XXX



To depreciation

XXX



To loss by fire/theft

XXX



To any other expenses

XXX



To net profit (transferred to Capital A/C)

XXX




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.


Balance Sheet

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.


Here is a Sample of the Balance Sheet of a Fictitious Company

Liabilities

Amount

Assets

Amount

Capital

(Less drawings-85000-10000)

75000

Land and building

1,00,000

Reserves and surplus

25000

Plant and machinery

10000

Outstanding expenses

5000

Furniture

3000

Loans

25000

Stock

10000

Trade creditors

10000

Sundry debtors

6000

Bills payable

10000

Bills receivable

9000



Misc. investments

2000



Cash in hand

10000

Total sum

1,50,000

Total sum

1,50,000


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.

FAQ (Frequently Asked Questions)

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.