Final Accounts

True Tamplin

Written by True Tamplin, BSc, CEPF®
Updated on September 9, 2021

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:

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

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.

True Tamplin, BSc, CEPF®

About the Author
True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True contributes to his own finance dictionary, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, his interview on CBS, or check out his speaker profile on the CFA Institute website.

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