Steps in the Process of Finalization of Accounts

The most important and crucial function of financial accounting is to ascertain the financial position and the profitability of the business. The trading and profit and loss account show the profit or loss of the business. The Balance Sheet depicts the financial position of the business.

Browse more Topics under Final Accounts

• Preparation of Trading Account
• Profit and Loss Account
• Liabilities on the Balance Sheet
• Assets on Balance Sheet
• Manufacturing Account

Steps in the Process of Finalization of Accounts

Finalization of the accounts refers to the preparation of profitability and position statements of a business. Following are the accounts that concern needs to prepare according to rules of financial accounting –

A. Trading Concerns

1. Trading Account
2. Profit and Loss Account
3. Balance Sheet

B. Manufacturing and Trading Concerns

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

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Manufacturing Account

The manufacturing concerns that is to say those which convert the raw materials into finished goods are required to prepare this account. It ascertains the cost of finished goods produced or manufactured.

It includes the cost of raw materials consumed and the cost of procuring them such as GST, customs duty, carriage and freight inwards, landing charges, insurance charges, etc.

Trading Account

A trading concern prepares this account to ascertain the gross profit or loss from its trading activities. Such activities include the purchase and sale of goods during an accounting year.

Further, the items appearing on the debit side are opening stock, purchase return, and direct expenses. The items appearing on the credit side are sales return and closing stock. The excess of credit side over the debit side is Gross profit and vice-versa.

Read more about Traditional Approach of Accounting here in detail

Profit and Loss Account

Every concern, whether manufacturing and trading or only trading prepare this account. It ascertains the net profit or loss from all the business activities during the accounting year.

Then items appearing on the debit side are indirect expenses such as administrative and selling and distribution expenses.

Examples of these expenses are salary, rent, electricity charges, audit fees, advertisement expenses, depreciation, legal fees, bad debts, etc.

The items appearing on the credit side are incomes that arise in the ordinary course of business such as commission, discount, etc. and other incomes such as interest, dividends, etc. The excess of credit side over the debit side is Net profit and vice-versa.

Balance Sheet

It depicts the financial position of the firm at the end of the accounting year. It shows the balances of the real and personal accounts of the business at the date of preparation of the final accounts.

The debit side is the liabilities side and it shows the Capital, reserves and surplus, long-term and current liabilities.

The credit side is the assets side and it shows the fixed assets, investments and the current assets of the firm. The total of the liabilities and assets side of the Balance Sheet shall be equal.

Solved Question on Financial Accounting 

Q.What do you understand by profitability and position statements?

Ans. Profitability statements are prepared for a complete accounting year. They show the outcome of the business activities like manufacture, purchase and sell. These are the statements that show the profit or loss earned by the business. Manufacturing A/c, Trading A/c, and Profit and Loss A/c are profitability statements.

The position statement is the statement that shows the financial position of the business at the end of the accounting year. It shows the balances of the assets and the liabilities of the business at the end of the accounting year. Balance Sheet is a position statement.