11/14/21, 4:02 PM Final Accounts (Definition, Examples) | Objectives & Features

Final Accounts
Article by Reviewed by
Madhuri Thakur Dheeraj Vaidya, CFA, FRM

What are Final Accounts?

Final Accounts is the ultimate stage of accounting process where the different
ledgers maintained in the Trial Balance (Books of Accounts) of the business
organization are presented in the specified way to provide the profitability and
financial position of the entity for a specified period to the stakeholders and
other interested parties i.e., Trading Account, Statement of Profit & Loss,
Balance Sheet.

Explanation
Initially, the transactions are recorded in the Journal of the company, which is
then reflected in the individual ledgers maintained for the relative transaction
type & party. The closing balance of this ledger is maintained in the Trial
Balance, which shows equal debit and credit side for the period. Then for
providing the status & performance of the business organization for the specified
period (i.e., a year, half-year, quarter, etc.), Final accounts are prepared which
included Trading Account for calculation of Gross profit (now generally inclusive
with the statement of profit & loss), Statement of Profit & Loss for net profit
earned during the period and Balance Sheet which provide the Assets &
Liabilities of the entity at the period end.

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Features
1. The final account is legally required for the entities. The financial accounting
 and preparation Financial statements are obligatory for the entities as well as
getting those accounts audited.
2. These accounts are prepared for presenting and providing the financial
performance and status of the entity to the stakeholders, users, investors,
promoters, etc.
3. The presentation of comparable figures of the current period from the
previous period increases the utility of the statements of accounts.
4. It presents the accurate & fair view of the organization’s financial
performance by providing accurate & full information regarding the business
with proper notes and disclosures of the real facts.

Objectives of Final Accounts

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1. They are prepared for the calculation of Gross profit & net profit earned by
the organization for the relevant period by presenting the Statement of
Profit & Loss.
2. The Balance sheet is prepared for providing the correct financial position of
the company as on the date.
3. These accounts use the bifurcation of direct expenses to obtain the gross
profit & loss and bifurcation in indirect expenses to ascertain the Net profit
& loss for the organization.
4. These accounts through the Balance sheet bifurcate the assets & liabilities as
per the holding & usage periods of the same.

Example of Final Accounts

ABC Inc. shows the following balances in its ledger:

Particulars Amount

Opening Stock of Inventory $5,000

Closing Stock of Inventory $2,000

Purchases $4,000

Sales $10,000

Direct Expenses $1,000

Indirect Expenses $3,500

Other Income $4,000

Assets:

Fixed Assets $17,500

Other Assets $5,000

Liabilities:

Loan $3,500

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Particulars Amount

Other Liabilities $2,500

Capital $10,000

Reserve $4,000

Prepare the final accounts based on the given data.

Solution:

Importance
As the size and the business of the organization grows, it becomes necessary
for the management of the organization to take proper steps to maintain the
growth of the organization as well as creating the appropriate 
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internal control in the organization for the prevention of fraud & errors. It
helps the management to find the possible weak areas of the entity and also
identifying the major areas which need special attention.
Final Accounts is the source for the external components like shareholders
and investors to study the status of the entity and the entity’s business. Based
on the entity, the investors decide whether to invest their funds in the same
business industry or not.
It provides the authenticated information to the public, who is the judge for
the company based on who the company’s future lies. Ultimately the
company aims to satisfy its consumers. Final Accounts provide just enough
data and information to the users to assess the worth of the entity.

Advantages
The preparation of Final Accounts increases the accuracy as well as the
effectiveness of the accounts.
During the preparation, any innocent mistakes or fraud can be discovered
and could be rectified quickly.
This account shows the status of the entity and business for the period, and
the audit of the same create a check on the entity and its processes, which
reduces the risk of the fraud and misstatement.
Provide the information for the valuation of the business and evaluation of
the real worth of the business.

Disadvantages
Final accounts are mainly prepared based on historical & monetary
transactions. This only provides the presentation and status of the money
transaction to the users and public but does not provide the information
relating to the work environment of the entity, customer satisfaction for the
services & goods supplied by the company.
It cannot be assured that the Financials are entirely free from any
misstatements as there are inherent limitations in the audit of the financial,

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which cannot ensure the 100% guarantee that the financials are free to form
any inaccuracies.
There are substantial chances that the financials are influenced due to the
personal judgment of the accountant or the judgment from the management
personnel.

Conclusion
The final accounting is the final step of the accounting process. Final accounting
includes the Statement of Profit & Loss and Balance Sheet, which provide the
presentation of the financial status and position of the entity. They are prepared
for the specified period and are legally obligated. The financial statement is the
basis for the shareholders and investors to decide on the investment of their
funds in the securities of the entity.

Recommended Articles
This article has been a guide to what is final accounts, its definition, and meaning.
Here we discuss features, objectives, and practical examples of final accounts
along with advantages and disadvantages. You may learn more about Accounting
from the following articles –

Financial Accounting Objectives

Creative Accounting
Accounting Terminology
Rules of Accounting

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