FINAL ACCOUNT:
Every businessman goes into a business with the idea of making profit, which is the reward of this effort. He tries his best to get more and more profit at the smallest economic cost.
The role of accounting is to accumulate accounting data in such a manner that the amount of profit made or loss sustained during a particular period ascertained. The "final accounts" enable us to check on the conduct of the business, and to discover whether it is being run profitably. They are the means of conveying to the owner/owners, management, creditors, and interested outsiders a concise picture of profitability and financial position of the business.
The preparation of the final accounts is not the first stage of an accounting cycle but they are the final products of the accounting cycle, that is why, they are called final accounts.
These accounts summaries all the accounting information recorded in the original books of entry and the ledger consisted of hundreds of thousands of pages.
The final accounts or financial statements consists of:
- Trading and profit and loss account or income statement, which is prepared to know the profit earned or loss suffered by the business during a specific period.
- Balance sheet, which is prepared to know the financial position of the business on a particular date.
These two items or statements are collectively known as "final accounts or financial statements"
Preparing of final accounts
Final account, being the final process of accounting, is prepared at the end of the accounting year; it normally involves preparation of profit and loss a/c and balance sheet. Nepal company act 2053 has specified the preparation of the following financial statement. They are company final account that includes incomes statement and balance sheet and cash flow statement. However, for sole trading business, t is common practice and convenient to split the final accounts into:
• Trading accounts
• Profit and loss account
• Balance sheet
The following chart reproduces the different steps in preparation of final accounts.
1. Trial balance
a. Income statement:- trading account/ profit and loss account
b. Balance sheet
Final account
Trading Account
Trading account is maintained by a trading business (company) to find out the gross profit or gross loss as a result of the business activities, it shows the result of buying and selling of goods for a particular period. The trading account record the amount of purchase and also expenses relating to manufacturing of goods or expenses which are incurred in bringing the commodity to saleable state. All these expenses are expenses are knows as direct expenses. When sales exceed cost of goods sold, it result in gross profit and loss will result in the reverse case, where cost of goods sold, it results in gross profit and gross loss will result in the reverse case where cost of goods sold represents cost of opening stock purchase and other direct expenses less closing stock.
Importance and advantage of trading account
Trading account facilitates a company to know it’s the trading result. It provides relevant information about sales and cost of goods sold, thus shows the trading efficiency of the company. The main importance of trading account is as follows:
• It provides information about gross profit or gross loss made during a creation accounting period.
• It help to control direct expenses as it takes into account only those expenses which are directly related with manufacturing of products.
• It helps to judge the profitability of the company by comparing the gross profit with sales.
• It helps to establish relationship between cost of goods sold and sales which ultimately helps to fix the selling price of the product.
Preparation of trading account
Trading account is the first step in the preparation of final account. All expenses relating to purchase and manufacturing of the product are shown in the debit side and the amount of sales is shown in the credit side of trading account. Since all the goods manufactured or purchase may not be sold during the period, amount of closing stock is also shown in the credit side, to show the true result from buying/manufacturing and selling of products.
Closing entries (trading account)
All the direct expenses and direct revenue (sales) including closing stock should be transferred to trading account. Transferring these to trading account is also known as the closing entries closing entries must be passed every year when final account are maintained.
Adjustment and their treatment in final account
Adjustments are unrecorded event or transactions of business organization. Since every transaction have two fold effects according to the principle of double entry system of book keeping every adjustment, therefore, has two side effects in final accounts. The adjustment is shown either on.
• Trading account and balance sheets or
• Trading account and profit and loss account or
• Profit and loss account and balance sheets or
• Trading account and profit & loss account and balance sheet or
• Assets side and liabilities of balance sheet.
Closing stock
the goods, which remain unsold during a period, are knows as closing stock. Generally, it is not shown in the trial balance, as they are valued at the end of the accounting year (after the preparing of trial balance). The entry for adjustment is made is follows:
Treatment in final accounts
• Closing stock is firstly shown in credit side of trading account.
• And then, it is shown on the asset side of balance sheet.
• If closing stock is given inside the trial balance, it is only shown in the assets side of balance sheets as it is already adjusted against the purchase.
Outstanding expenses
Expenses, which are incurred but not paid during the same accounting period, are called outstanding expenses. These are the expenses from which services or goods have been received but amount is not paid yet. It must be taken into account in the final account to find out the true profit and loss of the business organization.
Treatment in final account
• The outstanding expenses is firstly added to the convened expenses on debit side or trading or profit and loss account and then
• It is shown on the liability side of balance sheet.
• Outstanding expenses already existing in the trial balances is directly shown in the liabilities side of balance sheet.
Prepaid expenses
Expenses paid in advance to get future benefit (service) are called prepaid expenses in other words, prepaid expenses related to future accounting period. These expenses are, therefore, must be excluded to determine the actual profit or loss of the business organization. The entry for adjustment of period expenses is given below.
Treatment in final account
• The prepaid expense is firstly deducted from the concerned expenses. In trading or profit and loss account it is the direct expenses, says wages, it is deducted from wages on trading account and if it is in directed expenses, say, salary: it is adjustment on the profit and loss account and then.
• It is shown on the assets side of balance sheet.
• Prepaid expenses already exiting in the trial balance sheet are directly sown in the assets.
• Trading accounts
• Profit and loss account
• Balance sheet
The following chart reproduces the different steps in preparation of final accounts.
1. Trial balance
a. Income statement:- trading account/ profit and loss account
b. Balance sheet
Final account
Trading Account
Trading account is maintained by a trading business (company) to find out the gross profit or gross loss as a result of the business activities, it shows the result of buying and selling of goods for a particular period. The trading account record the amount of purchase and also expenses relating to manufacturing of goods or expenses which are incurred in bringing the commodity to saleable state. All these expenses are expenses are knows as direct expenses. When sales exceed cost of goods sold, it result in gross profit and loss will result in the reverse case, where cost of goods sold, it results in gross profit and gross loss will result in the reverse case where cost of goods sold represents cost of opening stock purchase and other direct expenses less closing stock.
Importance and advantage of trading account
Trading account facilitates a company to know it’s the trading result. It provides relevant information about sales and cost of goods sold, thus shows the trading efficiency of the company. The main importance of trading account is as follows:
• It provides information about gross profit or gross loss made during a creation accounting period.
• It help to control direct expenses as it takes into account only those expenses which are directly related with manufacturing of products.
• It helps to judge the profitability of the company by comparing the gross profit with sales.
• It helps to establish relationship between cost of goods sold and sales which ultimately helps to fix the selling price of the product.
Preparation of trading account
Trading account is the first step in the preparation of final account. All expenses relating to purchase and manufacturing of the product are shown in the debit side and the amount of sales is shown in the credit side of trading account. Since all the goods manufactured or purchase may not be sold during the period, amount of closing stock is also shown in the credit side, to show the true result from buying/manufacturing and selling of products.
Closing entries (trading account)
All the direct expenses and direct revenue (sales) including closing stock should be transferred to trading account. Transferring these to trading account is also known as the closing entries closing entries must be passed every year when final account are maintained.
Adjustment and their treatment in final account
Adjustments are unrecorded event or transactions of business organization. Since every transaction have two fold effects according to the principle of double entry system of book keeping every adjustment, therefore, has two side effects in final accounts. The adjustment is shown either on.
• Trading account and balance sheets or
• Trading account and profit and loss account or
• Profit and loss account and balance sheets or
• Trading account and profit & loss account and balance sheet or
• Assets side and liabilities of balance sheet.
Closing stock
the goods, which remain unsold during a period, are knows as closing stock. Generally, it is not shown in the trial balance, as they are valued at the end of the accounting year (after the preparing of trial balance). The entry for adjustment is made is follows:
Treatment in final accounts
• Closing stock is firstly shown in credit side of trading account.
• And then, it is shown on the asset side of balance sheet.
• If closing stock is given inside the trial balance, it is only shown in the assets side of balance sheets as it is already adjusted against the purchase.
Outstanding expenses
Expenses, which are incurred but not paid during the same accounting period, are called outstanding expenses. These are the expenses from which services or goods have been received but amount is not paid yet. It must be taken into account in the final account to find out the true profit and loss of the business organization.
Treatment in final account
• The outstanding expenses is firstly added to the convened expenses on debit side or trading or profit and loss account and then
• It is shown on the liability side of balance sheet.
• Outstanding expenses already existing in the trial balances is directly shown in the liabilities side of balance sheet.
Prepaid expenses
Expenses paid in advance to get future benefit (service) are called prepaid expenses in other words, prepaid expenses related to future accounting period. These expenses are, therefore, must be excluded to determine the actual profit or loss of the business organization. The entry for adjustment of period expenses is given below.
Treatment in final account
• The prepaid expense is firstly deducted from the concerned expenses. In trading or profit and loss account it is the direct expenses, says wages, it is deducted from wages on trading account and if it is in directed expenses, say, salary: it is adjustment on the profit and loss account and then.
• It is shown on the assets side of balance sheet.
• Prepaid expenses already exiting in the trial balance sheet are directly sown in the assets.
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