Understanding Final Accounts of a Company: A Complete Guide
Final accounts are essential financial documents that provide a clear picture of a company's performance over a fiscal year. These accounts, prepared by joint-stock companies, are crucial for management, investors, creditors, and other stakeholders to assess the company's financial health. Understanding the format and components of final accounts can help businesses make informed decisions and improve financial transparency.
What are Final Accounts?
Final accounts refer to the financial statements prepared at the end of an accounting year to reflect the company's financial position. These accounts include:
Trading and Profit and Loss Account
Balance Sheet
Profit and Loss Appropriation Account
These accounts help determine the profit or loss incurred during the year, the financial position of the company, and the company's ability to pay off its liabilities. The final accounts of a company also provide important insights for investors, creditors, and other stakeholders about the company's solvency.
Purpose of Final Accounts
The primary objectives of preparing final accounts are:
Determining Profit or Loss: Final accounts help calculate whether the company has earned a profit or incurred a loss during the financial period.
Assessing Financial Position: These accounts provide an overview of the company's assets, liabilities, and shareholders' equity, helping to determine the overall financial health.
Informing Stakeholders: Final accounts act as a crucial source of information for stakeholders, such as owners, creditors, and investors, enabling them to understand the company's solvency and operational efficiency.
Final Accounts Format
The preparation of final accounts follows a systematic process. Here's a breakdown of the standard final accounts format:
1. Trading and Profit and Loss Account
This account reflects the company's profit or loss during the accounting period. It is divided into two parts:
Trading Account: This section calculates the gross profit or loss by subtracting the cost of goods sold from the sales revenue.
Profit and Loss Account: This section calculates the net profit or loss by accounting for all operating and non-operating expenses and revenues.
Sample of Trading account
Sample of Profit and Loss Account
2. Balance Sheet
The balance sheet provides a snapshot of the company’s financial position at the end of the year. It lists the company’s assets and liabilities, showing the overall value of the business. The balance sheet is divided into two sections:
Assets: These include both current and non-current assets, such as cash, inventories, and fixed assets.
Liabilities: These include short-term and long-term liabilities, such as loans, creditors, and equity capital.
Sample of the Balance Sheet of a Fictitious Company:
3. Profit and Loss Appropriation Account
This account details the distribution of profits among various stakeholders, such as shareholders (dividends) and reserves. It also includes allocations to retained earnings for reinvestment in the company.
Final Accounts with Adjustments
In real-world accounting, businesses often face adjustments that need to be included in the final accounts. Some common adjustments in final accounts include:
Depreciation: Depreciation is deducted from assets to account for wear and tear. For example, depreciation on buildings and machinery is often calculated at a fixed percentage (e.g., 5% on buildings, 10% on machinery).
Reserve Fund: A certain percentage of profits may be transferred to a reserve fund for future needs or contingencies.
Stock Valuation: The stock at the end of the financial year is valued to determine its impact on the profit or loss.
Dividend Provision: The company may declare dividends on share capital at a predetermined rate (e.g., 15%).
Example of Final Accounts with Adjustments
Let’s take the example of Rajesh Ltd., with the following adjustments as of 31st December 2009:
Transfer Rs. 10,000 to the Reserve Fund.
Provide 5% depreciation on buildings.
Stock on 31st December 2009 is valued at Rs. 12,000.
Dividend provision at 15% on share capital.
Depreciation on plant and machinery at 10%.
Using these adjustments, we prepare the final accounts with adjustments to calculate the profit, distribute the dividends, and determine the company’s overall financial position.
Final Accounts Problems with Solutions
To help students better understand final accounts, we can provide several final accounts problems with solutions. These problems can cover a range of scenarios, from simple accounts with no adjustments to more complex cases involving various adjustments like depreciation, stock valuation, and dividend declarations.
By practising these problems, students can gain a deeper understanding of how final accounts work and how to deal with adjustments in a real-world context.
Unique Aspects in Company Final Accounts
In the case of company final accounts, there are specific rules and formats that companies must adhere to, according to the Companies Act. For instance, the Profit and Loss Appropriation Account is a unique feature in company accounts, ensuring profits are properly allocated among dividends, reserves, and retained earnings.
Patents in Final Accounts
While most final accounts focus on tangible assets, some companies may also have patents in final accounts. Patents are intangible assets that should be included under the category of non-current assets in the balance sheet. Companies must also account for the amortisation of patents, which is similar to depreciation but for intangible assets.
Conclusion: Final Accounts and Their Importance
Final accounts are important for every company to assess its financial performance, manage its resources effectively, and communicate its financial position to stakeholders. From the Trading and Profit and Loss Account to the Balance Sheet and Profit and Loss Appropriation Account, each component plays a key role in the financial analysis process. For businesses, understanding and preparing final accounts with adjustments examples is essential to maintaining transparency and ensuring accurate financial reporting. By preparing these accounts systematically, companies can make better strategic decisions and foster investor trust.
FAQs on Final Accounts: Format, Final Accounts with Adjustments, Examples
1. What are Final Accounts?
The Balance Sheet, Profit and Loss Account and Trading Account of any company at the end of a financial year are collectively known as final accounts. It determines the financial strength, or lack thereof, of an enterprise’s financial position.
2. How to Prepare Final Accounts?
All the assets and liabilities of an entity are identified, analyzed, and organized as demonstrated above. After completing this process, the accountants of the organization prepare the final accounts following the existing accounting standards. These accounts may later be reviewed for accuracy by internal or external auditors. Since adjustments play a crucial role in final accounts, it is important to refer to examples of final accounts with adjustments to gain a clearer understanding of the concept.
3. What is the importance of a final account?
Final accounts carry importance not only for the company but also for the consumers. It helps the company to get the proper information regarding its overall running policy creating awareness from any kind of fraud or disputes. On the other hand, final accounts also create a reputation in the market which allows the investors to judge whether the company can satisfy its consumers’ needs or not.
4. What are the main objectives of final accounts?
The main objective of final accounts can be listed as :
To calculate the total profit or loss of a particular forum.
It keeps track of all the expenses, direct or indirect.
And finally, a proper balance sheet gives a proper track of all assets and liabilities of the particular firm.
5. What are the two types of reserves? Explain briefly?
A appropriation of profits is termed as a reserve that is supposed to increase the working capital of a firm and strengthen the final position of the firm.
The two types of reserves are capital reserve and revenue reserve.
Capital reserves are not supposed to get used as the division among the shareholders of a particular firm.
Revenue reserves are available for the distribution of the dividend among the shareholders of a particular firm.
6. What is the major distinction between provision and reserve?
Provision causes decrement of profit where reserve causes an increment of profit provisions are necessary to make legally but reserves are made out of future concerns provisions cannot be used as / is a reserve and stored for a long time can be used as divided among the shareholders.
7. What do you mean by (I) liability (ii) assets (iii) provisions?
A sum of money that a person or a company owes is termed as liability includes loans, warranties, mortgages, accounts payable.
Any resource owned or controlled by a company or a business is termed as assets. Anything that helps to create a positive economic influence is termed as assets.
An account that keeps a track of the present liability of a firm is called as provision.
8. How are depreciation and amortisation treated in final accounts?
Both depreciation (for tangible assets like machinery) and amortisation (for intangible assets like patents) reduce the value of assets over time. These adjustments are recorded in the Profit and Loss Account as expenses and also reflected in the Balance Sheet as a decrease in asset values.
9. Why are adjustments important in final accounts?
Adjustments in final accounts are necessary to reflect accurate financial performance and position. They include elements like accruals, prepayments, depreciation, and provisions, which help align the financial statements with accounting principles and give stakeholders a clearer picture of the company's finances.
10. What is the role of auditors in final accounts?
Auditors, whether internal or external, review the final accounts to ensure that they adhere to the established accounting standards and are accurate. They check for any discrepancies, fraud, or misstatements in the accounts and provide an audit report for the company’s stakeholders.
