New

Published on:

July 29, 2024

Viraaj Vashishth

Blog |

FAQs

Small businesses

What is Final Account: Definition and Adjustments

When an accounting period ends, a series of financial statements called final accounts are prepared to summarize the financial performance and condition of a company. These accounts provide accurate financial information to stakeholders and ensure compliance with legal requirements.

What is the Final Account

The trading account, Profit and Loss Account, and Balance Sheet all form part of the final account. It gives detailed information about a business's financial activities for a specific duration, usually one year. The main reason for having final accounts is to determine the business’ financial soundness, thus facilitating informed decision-making by stakeholders.

Purpose of Final Accounts

Final accounts have several purposes:

1. Summarizing Financial Performance: These present figures for revenues, expenses, profits and losses in a standardized manner that facilitates comparison across companies.

2. Decision-Making: Investors as well as management and creditors rely on these to make sound decisions regarding investments.

3. Compliance: They facilitate conformity to both regulation and professional accounting standards on matters related to statement presentation.

Final Accounts Format

Trading Account

The Trading Account is the first step in preparing final accounts. It calculates the Gross Profit or Loss by taking into consideration all direct expenses and revenues related to core business activities.

1. Beginning Stock: The value of inventory at the start of each accounting period.

2. Purchases and Return Outwards: All purchases made less any goods returned to suppliers.

3. Chargeable Expenses: Costs directly incurred in production, such as raw materials and labour.

4. Sales and Return Inward: Total sales minus returns received from customers.

5. Closing Stock: The value of inventory at the end of each accounting period.

The formula for calculating Gross Profit is:

Gross Profit = (Sales−Sales Returns) − (Opening Stock + Purchases + Direct Expenses − Closing Stock).

Profit and Loss Account

A Profit and Loss Account is prepared after a trading account has been completed, to ascertain net profit or loss after considering indirect incomes and expenses.

1. Indirect Incomes: Non-operating incomes like interest earned, dividend received or rent income

2. Indirect Expenses: Non-operating expenditures such as administrative costs, salaries, depreciation etc.

The formula for calculating Net Profit is:

Net Profit = Gross Profit + Indirect Incomes / Indirect Expenses

The Balance Sheet

The Balance Sheet is like a photograph of the business’s financial position at the end of the accounting period. This would show all assets, liabilities and equity.

1. Assets: Classified into current (cash, inventory) and non-current (property, machinery).

2. Liabilities: Classified into current (accounts payable) and non-current (long-term loans).

3. Equity or Capital: The owner’s investment in the business plus retained earnings.

Balance Sheet Equation:

Assets = Liabilities + Equity

Final Accounts Proforma

The proforma for final accounts typically includes the Trading Account, Profit and Loss Account, and Balance Sheet. Below is a detailed layout of each component:

Trading Account Proforma

For the year ended [Date]

Particulars	Amount (Rs.)	Particulars	Amount (Rs.)
To Opening Stock		By Sales
To Purchases		Less: Sales Returns
Less: Purchase Returns
To Direct Expenses		By Closing Stock
To Gross Profit c/d
Total		Total

Profit and Loss Account Proforma

For the year ended [Date]

Particulars	Amount (Rs.)	Particulars	Amount (Rs.)
To Gross Loss b/d		By Gross Profit b/d
To Indirect Expenses		By Indirect Incomes
- Salaries		- Interest Received
- Rent		- Discount Received
- Depreciation		- Commission Received
To Net Profit c/d
Total		Total

Balance Sheet Proforma

As at [Date]

Liabilities

Particulars	Amount (Rs.)	Particulars	Amount (Rs.)
Capital		Assets
- Opening Capital		- Fixed Assets
- Add: Net Profit		-- Land and Building
- Less: Drawings		-- Plant and Machinery
Reserves and Surplus		Current Assets
Long-term Liabilities		-- Cash in Hand
Current Liabilities		-- Cash at Bank
- Creditors		-- Debtors
- Bills Payable		-- Closing Stock
- Outstanding Expenses		Investments
Total		Total

Final Accounts Examples

Example of Final Accounts Performa

To illustrate the preparation of final accounts, let's consider a hypothetical business named ABC Enterprises for the financial year ending March 31, 2024.

Example: Trading Account

ABC Enterprises Trading Account for the year ended March 31, 2024

Particulars	Amount (Rs.)	Particulars	Amount (Rs.)
To Opening Stock	50,000	By Sales	500,000
To Purchases	300,000	Less: Sales Returns	-10,000
Less: Purchase Returns	-5,000
To Direct Expenses		By Closing Stock	70,000
- Wages	40,000
- Carriage Inwards	10,000
To Gross Profit c/d	185,000
Total	580,000	Total	580,000

Example: Profit and Loss Account

ABC Enterprises Profit and Loss Account for the year ended March 31, 2024

Particulars	Amount (Rs.)	Particulars	Amount (Rs.)
To Gross Loss b/d		By Gross Profit b/d	185,000
To Indirect Expenses	105,000	By Indirect Incomes	15,000
- Salaries	60,000	- Interest Received	5,000
- Rent	30,000	- Discount Received	3,000
- Depreciation	10,000	- Commission Received	7,000
- Miscellaneous Expenses	5,000
To Net Profit c/d	95,000
Total	200,000	Total	200,000

Example: Balance Sheet

ABC Enterprises Balance Sheet as at March 31, 2024

Liabilities

Particulars	Amount (Rs.)	Assets	Amount (Rs.)
Capital	400,000	Fixed Assets	250,000
- Opening Capital	310,000	- Land and Building	150,000
- Add: Net Profit	95,000	- Plant and Machinery	100,000
- Less: Drawings	-5,000
Reserves and Surplus	50,000	Current Assets	335,000
Long-term Liabilities	100,000	- Cash in Hand	20,000
Current Liabilities	85,000	- Cash at Bank	50,000
- Creditors	50,000	- Debtors	125,000
- Bills Payable	20,000	- Closing Stock	70,000
- Outstanding Expenses	15,000	- Prepaid Expenses	20,000
Total	635,000	Total	635,000

The alterations

1. Accrued Income: This is the interest of Rs.5,000 that has been received but not yet recorded in the books and adjusted in the Profit and Loss Account.

2. Prepaid Expenses: In other words, this relates to advance rent payment of Rs.5,000 which is adjusted in the Profit and Loss Account.

3. Outstanding Expenses: Salaries Payable amounting to Rs.10,000 when adjusted in the Profit and Loss Account as well as Balance Sheet.

4. Depreciation: The depreciation summing up to Rs.10,000 for plant and machinery was adjusted in the Profit and Loss account.

5. Provision for Bad Debts: An adjustment made was the provision of Rs.5,000 for doubtful debts in the P & L A/c..

Final Accounts With Adjustments

In accounting, the preparation of final accounts with adjustments is vital in order to show a clear reflection of the financial situation of a firm. Adjustment ensures that all revenue and expenses are recorded during the period they occur so as to give an accurate representation of the financial performance as well as position. These include adjustment for depreciation, accruals, prepayments and provision for doubtful debts.

The final accounts basically consist of a trading account, profit and loss account and balance sheet. adjustments are made for outstanding expenses, accrued incomes, prepaid expenses, unearned incomes ,depreciation of assets and bad debt etc. Well adjusted final accounts impressively show the overall picture of how healthy or unhealthy the business is financially thus enabling stakeholders to make proper choices according to their interests.

Preparation of Final Accounts

Step-by-Step Process

1. Collection and Verification of Financial Data: Gather all financial records and verify their accuracy.

2. Preparation of Trial Balance: Ensure that total debits equal total credits.

3. Recording of Adjustments: Make necessary adjustments for accrued income, prepaid expenses, outstanding expenses, depreciation, provision for bad debts, and closing stock.

4. Preparation of Trading Account: Calculate Gross Profit or Loss.

5. Preparation of Profit and Loss Account: Calculate Net Profit or Loss.

6. Preparation of Balance Sheet: Present the financial position by listing assets, liabilities, and equity.

Importance of Final Accounts

The significance of final accounts lies in their ability to encapsulate a company’s financial performance and its position at the close of an accounting period. They are essential for management to make wise strategic choices; they enable investors to measure whether their investment is viable or beneficial and allow lenders to ascertain the firm’s creditworthiness.

Also, final accounts help maintain conformity with accounting principles and legal requirements; thereby revealing open financial positions of that particular enterprise for all parties involved. The accurate presentation and adjustment of final accounts are important aspects of ensuring credibility and trustworthiness in financial reporting.

Conclusion

In conclusion, final accounts play a crucial role in summarizing the financial performance and position of an enterprise. They are very important for decision-making, compliance, and financial planning purposes. However difficult it may be to prepare them, their advantages make them a must-have for any business. With improvements in accounting technology, preparing final accounts has become more efficient leading to accurate and timely financial records in firms.

FAQs

1. What is the final account?

A final account refers to a detailed statement of finances made at the end of each fiscal period showing how profits or losses were arrived at by trading account, profit and loss account as well as a balance sheet.

2. How do I format final accounts?

Whereas a Trading Account details specific business outcomes associated with revenues and costs incurred; a Profit and Loss Account deals with gains from ordinary activities while a Balance Sheet states the liabilities of an organization.

3. Why do we need final accounts?

Because they provide concise summaries of businesses’ financial positions and performances that assist in decision-making, compliance monitoring as well as financial management measures across organizations.

4. What is the distinction between the trading account and the profit and loss account?

The trading account calculates gross profit or loss emanating from main business operations while the profit and loss account determines net profit or loss by incorporating indirect incomes and expenses.

5. What is a credit note?

A credit note is a document issued by a seller to a buyer to reduce the amount that is owed by the buyer, usually because of returned goods or mistakes in billing systems.

6. What is the purpose of the balance sheet in final accounts?

At a specific time in history, this statement shows what an organization owns (assets), what it owes (liabilities) and its owner’s share (equity).

7. What does the proforma of final accounts consist of

Proforma of final accounts includes; Trading Account, Profit and Loss Account and Balance Sheet with necessary adjustment entries where needed.

8. Can you provide me with a few examples of final accounts?

Final accounting examples consist of financial statements from different businesses, showing how to prepare Trading Accounts, Profit and Loss Accounts, and Balance Sheets.