Final Accounts

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What are Final Accounts?

Final Accounts is the ultimate stage of the 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.

What are Final Accounts?

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.

Features

The final account is legally required for the entities. The financial accounting and preparation of Financial statements are obligatory for the entities and getting those accounts audited.
These accounts are prepared to present and provide the entity's financial performance and status to the stakeholders, users, investors, promoters, etc.
The presentation of comparable figures for the current period from the previous period increases the utility of the statements of accounts.
It presents an 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

They are prepared to calculate Gross profit & net profit earned by the organization for the relevant period by presenting the Statement of Profit & Loss.
The Balance sheet is prepared to provide the company's correct financial position as of the date.
These accounts use the bifurcation of direct expenses to obtain the gross profit & loss and bifurcation in indirect expenses to ascertain the organization's net profit & loss.
Through the Balance sheet, these accounts 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
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 organization's management to take proper steps to maintain the growth of the organization and create the appropriate internal control in the organization for the prevention of fraud & errors. It helps the management find the possible weak areas of the entity and identify the major areas that 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 authenticated information to the public, which is the company's judgment based on who its future lies. Ultimately the company aims to satisfy its consumers. Final Accounts provide just enough data and information to the users to assess the entity's worth.

Advantages

The preparation of Final Accounts increases the accuracy and 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 creates a check on the entity and its processes, which reduces the risk of 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 financials, 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 of 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 entity's securities.