Final accounts give an idea about the profitability and financial position of a business to its management, owners, and other interested parties. All business transactions are first recorded in a journal. They are then transferred to a ledger and balanced. These final tallies are prepared for a specific period. The preparation of a final accounting is the last stage of the accounting cycle. It determines the financial position of the business. under this it is compulsory to make trading account, profit and loss account and balance sheet.
Contents
The term "final accounts" includes the trading account, the profit and loss account, and the balance sheet. Section 209 of the Companies Act 1956 makes it compulsory for companies to keep certain books of accounts.
Legal Provisions
Sections 209 to 220 of the Indian Companies Act 1956 deal with legal provisions relating to preparation and presentation of final accounts by companies. Section 210 deals with preparation of final accounts by companies, while section 211 deals with the form and contents of the balance sheet and the profit and loss account.
Trading Account
A trading account sheet shows the results of the buying and selling of goods. This sheet is prepared to demonstrate the difference between selling price and cost price. The trading account tally is prepared to show the trading results of the business, e.g. gross profit earned or gross loss sustained by the business.
Profit and Loss Account
This account is prepared to ascertain the net profit/loss of a business during an accounting period. The profit and loss account is a statement that summarizes the revenues and expenses of an accounting period so as to reflect the changes in various critical areas of a firm's operations.
Balance Sheet
The balance statement demonstrates the financial position of a business on a specific date. The financial position of a business is found by tabulating its assets and liabilities on a particular date. The excess of assets over liabilities represents the capital sunk into the business, and reflects the financial soundness of a company.