Final Accounts

Final Accounts – Definition

The accounts which are prepared at the final stage of the accounting cycle to know the profit or loss and financial position of a business concern are called Final Accounts.

Explanation

Every businessman enters into business activities to earn profit. It is the accounting that shows profit or loss of a business concern. The role of accounting is to compile the financial record of a business in such a manner that yields the profit or loss of the business. We have already learned that all the transactions of a business are in the first instance recorded in the books of the original entry. Then these transactions are posted into ledgers in classified form.
These transactions are then summarized and arithmetical accuracy is checked by means of a “Trial Balance”. After the preparation of “Trial Balance”, the next step is the preparation of “Final Accounts”. The accounting cycle begins with the recording of transactions in the books of original entry and ends with the preparation of “Final Accounts”. As these accounts are prepared at the final stage of the accounting cycle that’s why these are called “Final Accounts”. These accounts consist of the followings:

1. Trading Account
2. Profit and Loss Account
3. Balance Sheet.

Objectives of preparation of Final Accounts

The objectives of preparing final accounts are:-

1. To ascertain the results of transactions:

Final Accounts are prepared to know the profit earned or loss sustained by the business in a particular period of time. In order to determine the profit and loss of business, trading and profit and loss account or Income Statement is prepared.

2. To know the financial position of the business:

Besides the determination of profit and loss, the financial position of the business is measured through final accounts. The financial position of the business is shown with the help of a balance sheet.
Also Check: Asset management idea

Trial Balance: The basis of Final Accounts

The basis of Final Accounts is the Trial Balance. The trial balance includes all the balances of ledger accounts. It includes the account balances of expenses, revenue, assets, liabilities, capital and drawings. A trial balance has two columns, debit and credit. Debit balances usually represent expenses, assets drawings and these appear in the debit column of trial balance.
Credit balances generally represent revenue, capital and liabilities and these appear in credit column of trial balance. From trial balance Expenses and revenues are transferred to Trading and Profit and Loss Account while assets, liabilities and drawings are transferred to Balance Sheet.