Final accounts are those accounts that are prepared at the final stage of an accounting period. These accounts show the financial position of a business and in addition to that also help in determining the profitability of the business. Trial balance is used to prepare the final accounts of an organisation.
There are three types of accounts which constitute the final accounts:
- Trading Account
- Profit and Loss Account
- Balance Sheet
Let us know more about these accounts in the following lines:
- Trading Account: Trading account is the first account that is created when preparing final accounts. It shows the gross profit or gross loss that has taken place in an accounting period.
- Profit and Loss Account: A profit and loss account is the second type of account that is created after the trading account. The purpose of creating a profit and loss account is to determine the net profit or loss of business during an accounting year. It begins with the gross profit or gross loss that is transferred from the trading account.
- Balance Sheet: The purpose of both trading and profit and loss account is to determine the profitability of the business. A balance sheet is very useful for determining the financial position of a business on any particular day. For this reason, it is also known as a Position statement.
Objectives of Preparation of Final Accounts
- To determine the result of transactions: Final accounts are prepared with the aim of determining the profitability of the business that arises from daily operations.
- To determine the position of business: Final accounts such as balance sheet help determine the position of a business on any given day.
Importance of Final Accounts in Accounting
Final accounts are very important for accounting purpose. Here are some reasons which show how important final accounts are:
- To determine the net effect of all transactions
- To determine profit or loss arising from the operations
- To help investors determine if more investment is required
- To determine an organisations financial viability
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