Finalization of Accounts

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Concept of Finalization of Accounts

The most crucial function of financial accounting is to ascertain the financial position of the business and the profitability of the business. The trading and profit and loss account shows the net profit and net loss of the business, while the balance sheet shows the financial position of the business. 

Finalization of the accounts means the preparation of the profitability statement and the positional statement of the business. Hence, accounts that are required to be prepared are as follows:

  • Trading Account

  • Profit and Loss Account

  • Balance Sheet

These accounts are needed to be prepared according to the rules of financial accounting.


Finalization Accounts in Tally

In tally, different procedures are involved in the finalization of accounts. The steps are as follows:

  1. Go to Tally > Audit and Compliance > Audit Journals > F7: Audit Journal.

  2. Select the ledger and then specify the required amount in dr. field and then press enter.

  3. Select the ledger required for Cr, field and then press enter.

  4. Specify any narration if required, and press enter.

  5. Press Y or enter to accept the transaction. 

  6. The voucher is required to be selected.

  7. Press enter to provide audit details for the selected voucher.

  8. Click the enter for display voucher or press Alt+Enter to view the voucher.

  9. Click next on CTRL Enter: Alt Voucher or press CTRL Enter to Alter the Voucher. 

  10.  Press CTRL to final audit.


Finalization Accounts Process

Finalization of the accounts is the process of preparation of profitability and position the statements of a particular business. These are the accounts which the concern needs to prepare according to the rules of financial accounting:

A. Trading Concerns prepare these accounts:

  • Trading Account

  • Profit and Loss Account

  • Balance Sheet

B. Manufacturing and Trading Concerns prepare these accounts:

  • Manufacturing Account

  • Trading Account

  • Profit and Loss Account

  • Balance Sheet


Manufacturing Account

The manufacturing concerns are those who convert the raw materials into the finished processed goods, preparing this account. Manufacturing account ascertains the cost of the finished goods produced or that is manufactured. 

This includes the cost of raw materials that is consumed and the cost of procuring or making them, the expenses such as GST, customs duty, carriage and freight inwards, landing charges, insurance charges etc.


Trading Account

A trading business prepares this kind of account who ascertains the gross profit or loss from its own trading activities. These activities include - purchase and sale of goods in an accounting year. 

Also, the items that appear on the debit side are the opening stock, purchase return, and direct expenses. While, the items appearing on the credit side are the sales return and the closing stock. 

The excess of credit side over the debit side is the gross profit and conversely the excess of debit side over the credit side results in gross loss.

 

Profit and Loss Account

Whether manufacturing or trading, every business to ascertain the net profit or loss from all the business activities during the accounting year prepares profit and loss accounts. 

Then items that appear on the debit side are the indirect expenses like the administrative and the selling and distribution expenses. While the items appearing on the credit side are the incomes which arise in the day to day functioning of the business, such as commission, discount, etc. Other incomes such as the interest, dividends are also here.

The excess of credit side over the debit side is Net profit while the excess of debit side over the credit side is the net loss.


Balance Sheet

Balance Sheet depicts the financial position of the firm that is confirmed at the end of the accounting year. 

This shows the balances of the real and the personal accounts of the business at the date of preparing the final accounts. The debit side being the liabilities side, shows the Capital, reserves and surplus, also the long-term and current liabilities. The credit side is known as the assets side which shows the fixed assets, investments and the current assets of the firm. The total of both sides must be at last equal.

FAQ (Frequently Asked Questions)

1. What Do You Mean by Financial Accounting?

Ans. Financial accounting is the sector of accounting that is concerned with the summary, analysis and reporting of the financial transactions which are related to a business activity. Financial Accounting involves the preparation of financial statements which are available for the public use.

These statements are: Income Statement, the Balance Sheet, the Cash flow Statement and the Statement of Retained Earnings.

2. What Picture of the Company Does Trading and Profit and Loss Account and the Balance Sheet Shows?

Ans. The final accounts are formed with these three accounts that are – Trading Account, Profit and Loss Account and Balance Sheet. These accounts show the financial condition of the business.

The trading account and the profit and loss account displays the ‘financial performance’ of the business while the balance sheet displays the ‘financial position’ of the business.

3. What is a Trading Concern?

Ans. Trading Concern is an entity which derives the products for sale, after generating the revenue, through the purchasing products for sale from other manufacturers for resale to their own customer base.

4. What are Insurance Charges?

Ans. The insurance charge is defined as the amount of money which the insurance company is going to charge for the insurance policy that is being purchased.