Final Accounts: Definition
The accounts prepared at the final stage of the accounting cycle to illustrate the profit or loss and financial position of a business concern are known as the final accounts.
Final Accounts: Explanation
Every businessman enters into business activities to make a profit. The role of accounting is to compile the financial records of a business in such a manner that yields its profit or loss. All transactions of a business are, in the first instance, recorded in the books of original entry.
These transactions are posted into ledgers in classified form and summarized before arithmetical accuracy is checked by means of a trial balance. After the preparation of the trial balance, the next step is preparing the final accounts.
These accounts consist of the following:
Objectives of Preparing Final Accounts
The objectives of preparing final accounts are:
1. To Ascertain the Results of Transactions
Final accounts show the profit earned or loss sustained by the business in a particular period. The preparation of a trading, profit, and loss account or income statement shows the profit or loss.
2. To Know the Financial Position of the Business
Besides determining 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.
Trial Balance: The Basis of Final Accounts
The basis of final accounts is the trial balance. The trial balance includes all the balances of the ledger accounts, including 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 and assets drawings that appear in the debit column of the trial balance. Credit balances represent revenue, capital, and liabilities: these appear in the credit column of the trial balance.
From the trial balance, expenses and revenues are transferred to the trading and profit and loss account. Assets, liabilities, and drawings are transferred to the balance sheet.
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