Understanding Final Accounts And their Objectives

Understanding Final Accounts And their Objectives

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Chanchal
Chanchal Aggarwal
Senior Executive Content
Updated on Nov 30, 2023 14:11 IST

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. 

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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?

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.

Difference Between Balance Sheet and Financial Statement
Difference Between Balance Sheet and Financial Statement
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Difference Between Balance Sheet And Income Statement
Difference Between Balance Sheet And Income Statement
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Difference Between Balance Sheet and Trial Balance
Difference Between Balance Sheet and Trial Balance
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Explore- The Difference Between Assets and Liabilities

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.

Disadvantages of Final Accounts

  1. The preparation of final accounts mostly relies on past financial and accounting operations. Users and the general public are only given the presentation and status of the financial transaction; no information regarding the entity’s workplace or customer satisfaction with the company’s services and items is provided.
  2. The audit of the financials has intrinsic constraints that prevent a 100% guarantee that the financials are error-free. As a result, it is impossible to confirm that the financials are fully free of misstatements.
  3. There is a good likelihood that the accountant’s or management staff’s individual judgment will impact the financials.

FAQs

What are final accounts in accounting?

Final accounts, also known as financial statements, are comprehensive reports summarizing a company's financial performance and position at the end of a specific period, typically a fiscal year.

What is the purpose of preparing final accounts?

The primary purpose of final accounts is to provide stakeholders with insights into a company's financial health, profitability, and financial stability. They aid in decision-making, compliance with regulations, and strategic planning.

What are the key components of final accounts?

Final accounts typically include the balance sheet (statement of financial position), income statement (profit and loss statement), and cash flow statement. These components provide a holistic view of a company's finances.

How often are final accounts prepared?

Final accounts are typically prepared at the end of each financial year to assess the company's performance and position during that period. They may also be required for interim periods or special reporting occasions.

About the Author
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Chanchal Aggarwal
Senior Executive Content

Chanchal is a creative and enthusiastic content creator who enjoys writing research-driven, audience-specific and engaging content. Her curiosity for learning and exploring makes her a suitable writer for a variety ... Read Full Bio