Final Accounts

Final accounts are an integral part of a financial accounting year for every business. In other words, it is the end product of the accounting process carried out the whole year. These need to be prepared by every business on or by the 31st of March every financial year as it marks the end of the year.

Meaning of Final Accounts

Final accounts refer to the accounts prepared by a business entity at the end of every financial year. The final accounts depict a clear and accurate financial position of the entity. This information is of use to the management, investors, owners, shareholders, and also to other users of such information.

The final accounts of an entity consists of the following accounts:

1. Manufacturing and Trading Account
2. Profit and Loss Account
3. Balance Sheet
4. Profit and Loss Appropriation account

The trial balance forms the basis for the preparation of the final accounts. Further, these are audited by the internal as well as external auditors, usually the Chartered Accountants. Thus, these need to be prepared in a fair and transparent manner.

Manufacturing Account

Manufacturing entities need to prepare a Manufacturing account before preparing the Trading Account. It determines the Cost of goods sold.

Format of Manufacturing Account

Particulars	Units	Amount		Particulars	Units	Amount
To Raw material consumed:				By By-products at net realizable value
Opening inventory				By Closing Work-in-Process
Add: Purchases				By Trading A/c
Less: Closing inventory				Cost of production
To Direct Wages
To Direct expenses
Prime cost
To Factory overheads:
Royalty
Hire charges
To Indirect expenses:
Repairs & Maintenance
Depreciation
Factory cost
To Opening Work-in-process

Trading Account

It is prepared after the manufacturing account by the manufacturing industries. However, in case of trading concerns, it is the first account that is prepared. It determines the gross profit or gross loss of an entity resulting from the trading activities. Trading activities refer to the buying and selling activities of a business.

Opening stock, Purchases (less returns) and Direct expenses are written on the debit side of the Trading account while Closing Stock and Sales (less returns) are written on the credit side of the Trading account. When the credit side exceeds the debit side, it shows Gross Profit and if the debit side exceeds the credit side, it shows Gross Loss.

The gross profit or loss is transferred to the Profit and Loss A/c. The closing entries are as follows:

For Gross Profit

Trading A/c     Dr.

To Profit and Loss A/c

For Gross Loss

Profit and Loss A/c      Dr.

To Trading A/c

Sample Trading Account

Trading Account

Particulars	Amount	Particulars	Amount
To opening stock	–	By sales (less returns)	–
To purchases (less returns)	–	By closing stock	–
To fuel and power	–	By gross loss (transfer to P & L A/C)	–
To wages	–
To carriage inwards	–
To freight and octroi	–
To direct expenses
To gross profit (transfer to P & L A/C)	–

Profit and Loss Account

The profit and loss account determines the net profit or net loss of the business for the accounting period. It begins with the balance carried down from the Trading Account. The revenues and expenses that are indirect or that do not form a part of the Trading account, form a part of the Profit and Loss Account.  When the credit side of the Profit and Loss Account exceeds the debit side, it shows net profit and vice-versa.

The net profit or loss is then shown as an addition or deduction respectively, from the Capital account in the Balance Sheet.

Some expenses that form a part of the Profit and Loss Account are:

1. Sales Tax
2. Provisions
3. Maintenance
4. Administrative Expenses
5. Selling and Distribution Expense
6. Depreciation
7. Freight and carriage on sales
8. Wages and Salaries

Some revenues that appear on the credit side of the Profit and Loss Account are Commission received, Discount received, profit obtained on sale of assets, etc.

Closing Entries for Net Loss or Net Profit are as follows:

For Net Loss

Capital A/c – Dr.

To Profit and Loss A/c

For Net Profit

Profit and Loss A/c         Dr.

To Capital A/c

Format for Profit and Loss Account

Profit & Loss Account

Particulars	Amount	Particulars	Amount
To gross loss		By gross profit
To salaries		By rent received
To rents and taxes		By discounts earned
To travelling expenses		By interests earned
To stationary/printing expenses		By bad debts recovered
To postage		By commissions earned
To audit & legal charges		By dividends received
To telephone expenses		By income from other sources
To insurance premium		By Net Loss (transferred to Capital A/C)
To marketing/advertisement
To interest paid
To discount allowed
To sundry expenses
To carriage outwards
To bad debts
To depreciation
To loss by fire/theft
To any other expenses
To net profit (transferred to Capital A/C)

Balance Sheet

The balance sheet is a statement showing the total assets, total liabilities and the capital of the business. It shows the financial position of the business on the last day of the financial year i.e. 31^st March.

The assets are on the Right-hand side of the Balance sheet while Capital and liabilities are on the Left-hand side. The total assets need to be equal to the total liabilities and capital for the Balance sheet to match.

Format of Balance Sheet

Balance Sheet

Balance Sheet

Liabilities	Amount	Assets	Amount
Capital (Less: drawings Add: profit)		Land and building
Reserves and surplus		Plant and machinery
Outstanding expenses		Furniture
Loans		Stock
Trade creditors		Sundry debtors
Bills payable		Bills receivable
		Misc. investments
		Cash in hand
Total	xx	Total	xx

Adjustments in Final Accounts

When the books are maintained as per the accrual basis of accounting, the incomes and expenses need to be recorded on an accrual basis. This implies that an income earned in the current financial year whether received or not and an expense incurred for the current financial year whether paid or not needs to be accounted for in the current financial year. This gives rise to the adjustments in final accounts. The adjustments always appear outside the Trial Balance.

Some common adjustments:

• Closing Stock
• Outstanding Expenses
• Prepaid or Unexpired Expenses
• Accrued or Outstanding Income
• Income Received In Advance or Unearned Income
• Depreciation
• Bad Debts
• Provision for Doubtful Debts
• Provision for Discount on Debtors
• Manager’s Commission
• Interest on Capital
• Goods Distributed among Staff Members for Staff Welfare
• Drawing of Goods for Personal Use
• Abnormal or Accidental Losses

FAQs on Final Accounts

Q.1. What are the objectives of preparing Final Accounts?
Answer. The objectives of preparing the Final accounts are as follows:

1. Determining the profit or loss incurred by a business in the financial year.
2. Determining the financial position of the business.
3. Providing information to the users of accounting information (such as owners, creditors, investors and other stakeholders) about the solvency of the business.

Q.2. What is the formula for calculating gross profit?

Answer.

Gross profit = Net sales – Cost of goods sold

Where,

Net sales = Gross sales – sales returns – discounts and allowances.