Final Accounts

Introduction of final account
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, The profit and loss
account and balance sheet. The term "final accounts" includes the
trading account, the profit and loss acc
ount, and the balance sheet. 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.
It consist of two different accounts and one statement as follows:
 Trading account
 Profit and loss account
 Balance sheet
1. Trading account
Meaning
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. It records the direct expenses of a business firm.
Purpose of trading account
The preparation of Trading account fulfills the following objectives:
 While fixing the selling price of merchandise, trader adds a fixed

percent of cost as profit to the cost and later on by preparing the
trading account verifies whether the projected profit has been earned
or not.
 It gross profit is found to be less than the projected profit its reasons
are analyzed and proper control is exercised in future.
 It Gross profit is more than projected profit, efforts are made to
maintain it in future.
 It Trading Account discloses loss then it will be prudent to close down
the business may be temporarily till the conditions improve,
otherwise, it is possible that losses may exceed.
 Trading account also helps to ascertain the percentage of direct
expenses over sales.
 Trading account also provides the percentage of gross profit to sales.
Format of trading account
2. PROFIT AND LOSS ACCOUNT

Meaning
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 revenue's and expense's of an accounting period so as to
reflect the changes in various critical areas of a firm's operations. It records
the indirect expenses of a business firm.
Purpose of profit and loss account

 To shows the operating results of company in terms of net
profit and net loss.
 To facilitates to compares the profit of a current year with
theat of last year and thus helps to knows whether the company
is running effectively or not not.
 To help in controlling indirect expenses and in improving
profitability.
 To provide relevant information for determining bonus for
worker. Commission to manager and tax payable to the
government.
Format of profit and loss account

3. Balance sheet
Meaning
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. Now its known as the statement of
financial position.
Purpose of balance sheet
The main objectives of preparing a Balance Sheet is to ascertain the

financial position of the business on a particular date. While ascertaining the
financial position, we also obtain the following additional information:
1. Nature and Value of the assets:
A balance sheet contains various assets in classified, from with their

respective values and as such it gives a clear picture about the nature and the
value of different assets Comprising fixed assets, current assets etc.
2. Nature and extent of liabilities and actual capital:
Like assets, a balance sheet also contains different liabilities in a classified

form and shows the amount of liabilities the business owes to different types
of creditors. It also shows the actual capital of the business at the end of
trading period, representing the excess of assets over liabilities.
3. Solvency of the business:
If the assets exceed the liabilities the business is considered as solvent.

Greater is the difference, stronger is the financial position. On the other
hand, if liabilities exceed the assets, the business is considered as insolvent.
4. Over-trading and under-trading:
If the total creditors exceed assets – Cash, Bank, Investments, Debtors etc.,
the position of the business is financially unsound, indicating over-trading.
For sound financial position, a business must have sufficient working
capital. On the other hand, under-trading indicates excess liquid assets over
current liabilities, showing idleness of the funds.
Format of balance sheet
Sample problem and solution of final account

Final Accounts

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Introduction of final account

Purpose of trading account

The preparation of Trading account fulfills the following objectives:

 While fixing the selling price of merchandise, trader adds a fixed

Format of trading account

2. PROFIT AND LOSS ACCOUNT

Purpose of profit and loss account

Format of profit and loss account

The balance statement demonstrates the financial position of a business on a

Purpose of balance sheet

The main objectives of preparing a Balance Sheet is to ascertain the

1. Nature and Value of the assets:

A balance sheet contains various assets in classified, from with their

2. Nature and extent of liabilities and actual capital:

Like assets, a balance sheet also contains different liabilities in a classified

3. Solvency of the business:

If the assets exceed the liabilities the business is considered as solvent.

4. Over-trading and under-trading:

Format of balance sheet

Sample problem and solution of final account

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