Understanding Final Accounts And their Objectives

Final accounts in accounting refer to the financial statements prepared at the end of a company's financial year. These include the Balance Sheet, which shows the company's financial position, and the Profit and Loss Account, which details the company's revenues and expenses to display profit or loss. 

Final accounts, also known as financial statements, are pivotal summaries of a company’s financial performance and position at the end of a specific period, typically a fiscal year. These reports, including the balance sheet, income statement, and cash flow statement, offer stakeholders a comprehensive view of the firm’s profitability, assets, liabilities, and equity. Final accounts are essential for assessing a business’s financial health, making informed decisions, and meeting regulatory requirements. They provide a snapshot of the company’s financial well-being and help in strategic planning and analysis.

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Table of Content

• What is Final Account?
  • Trading Account
  • Profit and Loss Account
  • Balance Sheet
• Objectives of Final Accounts
• Importance of Final Accounts
• Limitations of Final Accounts

What is a Final Account?

The various ledgers maintained in the Trial Balance (Books of Accounts) of the organization are presented in the Final Accounts stage of the accounting process in the prescribed way to demonstrate to stakeholders and other interested parties the profitability and financial position of the entity for a given period, i.e., Trading Account, Statement of Profit & Loss, and Balance Sheet.

Trading Account

Trading account displays the outcomes of the purchasing and selling of goods. This sheet aims to illustrate the distinction between selling and cost prices. The trading account is set up to display the business’s trading outcomes, such as gross profit made or gross loss incurred. It keeps track of a company’s direct costs.

Profit and Loss Account

This account determines a company’s net profit or loss and costs over an accounting year.

It keeps track of a company’s indirect costs, such as rent, staff pay, and advertising expenditures. Profit and loss accounts incorporate costs and gains in commercial ventures other than creating goods and services and income and gains.

Balance Sheet

The balance statement shows the company’s financial situation as of a given date. The company’s financial situation can be determined by adding up a company’s assets and liabilities as of a specific date. The difference between assets and liabilities reflects the capital invested in the company’s operations and its financial stability.

Objectives of Final Accounts

• Accountants prepare Statements of Profit & Loss to compute the organisation’s Gross profit and net profit for the pertinent period.
• The balance sheet provides an accurate picture of the company’s financial situation at the time of the report.
• To calculate the gross profit and loss, these accounts divide direct and indirect expenses in half to determine the company’s net profit and loss.
• These accounts divide the assets and liabilities on the balance sheet according to their holding and usage periods.

Importance of Final Accounts

1. Final accounts let shareholders assess their investments so they may make informed decisions. The organization’s liquidity position and the amount of earnings and dividends that shareholders will get are of greater interest to them.

2. The tax department needs these accounts to ensure the company pays all applicable taxes and other fees on schedule and without delays. As a result, the creation of final accounts (Income statements) is crucial for tax computation.

3. Final accounts give crucial information on an enterprise’s performance, liquidity, development, and deposition. This assists internal management in making future decisions on numerous business areas with speed, knowledge, and accuracy.

4. They allow creditors and lenders to assess the organization’s financial stability. Creditors use the following data to evaluate the risk, credibility, and ability to collect the debt on the predetermined date.

5. Employees can learn about the company’s profitability and how it affects job security, compensation, transfers, pay increases, incentives, and other bonuses from the final accounts.

6. They are crucial in assisting the company in achieving constant growth and development by implementing various approaches and plans for enhancing revenue, building a solid clientele, and enhancing job prospects.

Limitations of Final Accounts

Final accounts, including the balance sheet and profit and loss account, are crucial for assessing a company's financial performance, but they have limitations:

Historical Data: They reflect past performance and may not accurately predict future financial conditions or trends.

Not Comprehensive: They don't account for all aspects of business performance, such as market conditions or employee morale.

Subjectivity: Certain elements, like asset valuation, involve subjective judgments, which can affect accuracy.

Limited Insight: They provide a snapshot of financial health but may not reveal underlying issues or detailed operational insights.

Fraud Risk: There is potential for manipulation or errors, which can misrepresent the true financial position.

Conclusion

Final accounts are crucial for assessing a company's financial performance. They consist of the balance sheet, profit and loss account, and cash flow statement, which collectively offer a comprehensive view of financial health. Accurate final accounts enable stakeholders to make informed decisions, ensure regulatory compliance, and guide strategic planning for future growth and stability.