Final Accounts

Prof. Sweety .O. Sharma

What is 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
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.
Trading Account :
Trading account is a statement which is prepared by a business firm. It shows
the gross profit of business activities during a specific period. It is a part of
the final accounts of the entity. In other words, the trading account gives
details of total sales, total purchases and direct expenses relating to purchase
and sales. Trading account format for the year contains Particulars, Amount,
Dr., Cr.
Items of Income (Cr.) side
• Total sales of goods fewer Sales returns
• Closing stock of goods.
Items of expenditure (Dr.) Side
• Opening stock of goods
• Total purchases of goods Less purchase returns
• All direct expenses like Carriage inward & Freight expenses, Rent for
godown or factory, Electricity and Power expenses, wages of workers and
supervisors, Packing expenses, etc.
Profit & Loss Account :
A profit and loss (P&L) account shows the annual net profit or net loss of a
business. It is prepared to determine the net profit or net loss of a trader.
The P&L account is a component of final accounts.

On the debit side:

• Gross loss (transferred from trading account)
• All indirect expenses
• On the credit side:
• Gross profit (transferred from trading account)
• All indirect revenues
Balance Sheet
The balance sheet is a statement which states the assets and liabilities of a
firm as at a certain date. As even a single transaction can make a difference
in assets or liabilities, so the balance sheet is true only at a particular period
of time. This is the significance of “asset” in the balance sheet. It is based
on the accounting equation that is:
Total assets = Total liabilities + Capital
As balance sheet is a statement and not an account so there is no debit or
credit side. So, Assets are shown on the right-hand side and liabilities on the
left-hand side of the balance sheet.