Final accounts are containing financial information about an organization. The required financial statements are income statement, statement of owner Equity, balance sheet and cash flow statement. Companies that are publicly traded must provide shareholders with an annual report which always includes financial statements. In addition, the annual report includes the following information:
- Management Discussion and Analysis
- Notes to the Financial Statements
- Auditor’s Report
1. Final Accounts
Popularly, the Trading and Profit & Loss Account and the Balance Sheet are together called the final accounts. The trading and profit & loss account is prepared to show the financial results of a business, may be in the form of profit or loss during an accounting period or year. Balance sheet is prepared to show the financial position or conditions of business in terms of position of assets and liabilities of a business as on a particular date.
Trading means buying and selling. The trading account shows the result of buying and selling of goods. End result of trading account is gross profit or gross loss. Following are format for Trading Account.
Example 1: Trading Account
Prepare Trading Account for the year ending 31st March 2018 for Precious Ltd.
Opening stock Rs. 170,000 Purchases return Rs. 10,000
Sales Rs. 250,000 Wages Rs. 50,000
Sales return Rs. 20,000 Purchases Rs. 100,000
Carriage inward Rs. 20,000 Closing stock Rs. 160,000
3. Profit and Loss Account
After calculating the gross profit or gross loss the next step is to prepare the profit and loss account. To earn net profit a trader has to incur many expenses apart from those spent for purchases and manufacturing of goods. If such expenses are less than gross profit, the result will be net profit. When total of all these expenses are more than gross profit the result will be net loss.
Example 2: Profit and Loss Account
Prepare Profit and Loss Account, from the following balances of Precious Ltd. for the year ending 31.03.2018:
Office rent Rs. 30,000 Salaries Rs. 80,000
Printing expenses Rs. 2,000 Stationeries Rs. 3,000
Tax, Insurance Rs. 4,000 Discount allowed Rs. 6,000
Advertisement Rs. 36,000 Travelling expenses Rs. 26,000
Gross Profit Rs. 250,000 Discount received Rs. 4,000
4. Balance Sheet
Balance sheet is prepared by taking up all personal accounts and real accounts (assets and properties) together with the net result obtained from profit and loss account. On the left hand side of the statement, the liabilities and capital are shown. On the right hand side, all the assets are shown. Balance sheet is not an account but it is a statement prepared from the ledger balances. Balance sheet is defined as ‘a statement which sets out the assets and liabilities of a business firm and which serves to ascertain the financial position of the same on any particular date’.
Example 3: Trading and Profit and Loss Account; Balance Sheet
From the following trial balance of Abdul Rehman Khan & Brothers, prepare trading and profit and loss account for the year ending on 31st March, 2017 and balance sheet as on the date: