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.
Objectives of Final Accounts
1. Financial statements should provide information useful to present and potential investors and creditors
in making rational investment and credit decisions.
2. It should supply information about the economic resources of an enterprise the claims to those resources,
and the effects of transactions and events that change resources.
3. Providing information to help users assess the amounts, timing, and uncertainty of prospective receipts.
4. Providing information about an enterprise’s financial performance during a period.
5. If should provide information comprehensible to those who have a reasonable understanding of business
and economic activities and are willing to study the information with reasonable diligence.
6. Financial statements provide information about the post to aid users in making predictions and decisions
related to the future financial status and flows of the business.

Advantages
• The preparation of Final Accounts increases the accuracy and effectiveness of the accounts.
• During the preparation, any innocent mistakes or fraud can be discovered and could be rectified
quickly.
• This account shows the status of the entity and business for the period, and the audit of the same creates
a check on the entity and its processes, which reduces the risk of fraud and misstatement.
• Provide the information for the valuation of the business and evaluation of the real worth of the
business.

Disadvantages
• Final accounts are mainly prepared based on historical & monetary transactions. This only provides
the presentation and status of the money transaction to the users and public but does not provide
information relating to the work environment of the entity, or customer satisfaction for the services &
goods supplied by the company.
• It cannot be assured that the Financials are entirely free from any misstatements as there are inherent
limitations in the audit of the financials, which cannot ensure a 100% guarantee that the financials are
free to form any inaccuracies.
• There are substantial chances that the financials are influenced due to the personal judgment of the
accountant or the judgment of the management personnel.
The final accounts of an entity consisting of the following accounts:
1. Manufacturing and Trading Account
2. Profit and Loss Account
3. Balance Sheet

Manufacturing Account
Meaning
The Concern which is converting raw materials into finished products is called manufacturing concern.
Manufacturing concerns are required to prepare a manufacturing account besides preparing trading and profit
and loss account. It is a statement prepared to ascertain the amount of cost of the finished goods manufactured
during the year. All the items of expenses for the manufacturing activity are debited to this account.

14.1.2 Purpose of manufacturing Account:

1. This account is prepared to calculate to cost of goods manufactured.
2. Manufacturing account is to show constituent items thereof such as the cost of material consumed,
productive wages, and direct and indirect expenses.

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.

Profit and Loss Account

A profit and loss (P&L) statement refers to a financial statement that summarizes the revenues, costs, and
expenses incurred during a specified period, usually a quarter or fiscal year. These records provide
information about a company’s ability or inability to generate profit by increasing revenue, reducing costs,
or both. P&L statements are often presented on a cash or accrual basis. Company managers and investors use
P&L statements to analyze the financial health of a company.
A profit and loss Account is an account prepared to ascertain the net profit earned or net loss incurred by the
business concern for an accounting period.
According to Prof carter, “Profit and loss account is an account into which all gains and losses are collected
to ascertain the excess of gains over the losses or vice versa”.
Importance of Profit and Loss Account
The profit and loss statement can be made by two processes. The first method is a Single Step income
statement which adds all the revenues and minuses all the expenses. The second method is a Multi-Step income
statement which involves many steps to find the profit and loss statement.

1. To find net profit.

2. To find total expenses.
3. To find the ratio between net profit and sales.
4. Helps in reducing indirect expenses.

Advantages Of Profit and Loss Account

The main advantages of a profit and loss account are as follows:

1. To Obtain Net Result

A profit and loss account gives the actual information about the net profit or net loss of the business for an
accounting period. So, it is very useful to know the financial condition of the firm.

2. To Know the Total Expenses

The profit and loss account gives the actual information about indirect expenses.

3. Determination of Ratio
The profit and loss account serves to determine the ratio between net profit to sales and the ratio between net
profit to operating expenses. It helps to understand the operational efficiency of the firm.

4. Controlling
A profit and loss account helps in controlling indirect expenses by providing important information about
these expenses.

Disadvantages Of Profit and Loss Account

The main disadvantages of profit and loss account are as follows:

1. Not a complete picture

A business manager runs the risk of looking at the profit and loss statement as the only picture of the health
of the business. The profit and loss statement is only one item to look at.
2. Reporting to often
A big disadvantage of the profit and loss statement lies with businesses that report the data too often. With the
widespread use of computerized accounting systems, a profit and loss statement can often be called up and
printed on demand. If a manager is looking at the report too often, weekly, or more frequently, it gives an
unrealistic picture of the business's financial position because the data sample is too small.
Balance Sheet

Meaning
The balance statement shows readily the financial position of the business as of a given date by disclosing the
amount of capital contributed and how the same has been invested and the values of assets and liabilities and
their nature. It is rightly called a “mirror” of the business wherein the business can see its face i.e., its true
position. It is prepared at the end of the accounting period, after the preparation of Trading and profit and loss
Accounts. From the balance sheet at one glance, the situation of the enterprise at a certain date can be
understood.
Definitions

i) Francis R. Stead: “Balance Sheet is a Screen picture of the financial position of a going business at a certain
moment”

ii) R.N. Antony: “Balance sheet is a statement which reports the property values owned by the enterprise and
the claims of the creditors and owners against the properties. It shows the status of the business as at a given
moment, in so far as a counting of figures can show its status.”

iii) Cropper: “Balance sheet is a classified summary of the ledger balances remaining after closing all revenue
items into the trading and profit and loss accounts.”

Functions of a Balance Sheet:

1. A Balance Sheet exhibits the true financial position of a firm at a particular date.

2. Financial position can be ascertained clearly with the help of Balance Sheet.

3. It provides valuable information to the management for taking better decision through ratio analysis.

4. Balance Sheet helps in knowing past and present position of an enterprise. It may be called the horoscope

of the concern.
5. It is a mirror of a business.

Importance of Balance Sheet:

Balance sheet analysis can say many things about a company’s achievement. Few essential factors of the
balance sheet are listed below:

• Creditors, investors, and other stakeholders use this financial tool to know the financial status of a
business.
• It is used to analyse a company’s growth by comparing different years.
• While applying for a business loan, a company has to submit a balance sheet to the bank.
• Stakeholders can find out the business accomplishment and liquidity position of a company.
• Company’s balance sheet analysis can detect business expansion and future expenses.
Components of a Balance Sheet

Assets
Accounts within this segment are listed from top to bottom in order of their liquidity. This is the ease with
which they can be converted into cash. They are divided into current assets, which can be converted to cash
in one year or less; and non-current or long-term assets, which cannot.

Here is the general order of accounts within current assets:

• Cash and cash equivalents are the most liquid assets and can include Treasury bills and short-term
certificates of deposit, as well as hard currency.
• Marketable securities are equity and debt securities for which there is a liquid market.
• Accounts receivable (AR) refer to money that customers owe the company. This may include an
allowance for doubtful accounts as some customers may not pay what they owe.
• Inventory refers to any goods available for sale, valued at the lower of the cost or market price.
• Prepaid expenses represent the value that has already been paid for, such as insurance, advertising
contracts, or rent.

Long-term assets include the following:

• Long-term investments are securities that will not or cannot be liquidated in the next year.
• Fixed assets include land, machinery, equipment, buildings, and other durable, generally capital-
intensive assets.
• Intangible assets include non-physical (but still valuable) assets such as intellectual property and
goodwill. These assets are generally only listed on the balance sheet if they are acquired, rather than
developed in-house. Their value may thus be wildly understated (by not including a globally
recognized logo, for example) or just as wildly overstated.

Liabilities

A liability is any money that a company owes to outside parties, from bills it has to pay to suppliers to interest
on bonds issued to creditors to rent, utilities and salaries. Current liabilities are due within one year and are
listed in order of their due date. Long-term liabilities, on the other hand, are due at any point after one year.

Current liabilities accounts might include:

• Current portion of long-term debt is the portion of a long-term debt due within the next 12 months.
For example, if a company has a 10 years left on a loan to pay for its warehouse, 1 year is a current
liability and 9 years is a long-term liability.
• Interest payable is accumulated interest owed, often due as part of a past-due obligation such as late
remittance on property taxes.
• Wages payable is salaries, wages, and benefits to employees, often for the most recent pay period.
• Customer prepayments is money received by a customer before the service has been provided or
product delivered. The company has an obligation to (a) provide that good or service or (b) return the
customer's money.
• Dividends payable is dividends that have been authorized for payment but have not yet been issued.
• Earned and unearned premiums is similar to prepayments in that a company has received money
upfront, has not yet executed on their portion of an agreement, and must return unearned cash if they
fail to execute.
• Accounts payable is often the most common current liability. Accounts payable is debt obligations
on invoices processed as part of the operation of a business that are often due within 30 days of
receipt.
Long-term liabilities can include:

• Long-term debt includes any interest and principal on bonds issued

• Pension fund liability refers to the money a company is required to pay into its employees' retirement
accounts
• Deferred tax liability is the amount of taxes that accrued but will not be paid for another year. Besides
timing, this figure reconciles differences between requirements for financial reporting and the way
tax is assessed, such as depreciation calculations.

Some liabilities are considered off the balance sheet, meaning they do not appear on the balance sheet.

Shareholder Equity

Shareholder equity is the money attributable to the owners of a business or its shareholders. It is also known
as net assets since it is equivalent to the total assets of a company minus its liabilities or the debt it owes to
non-shareholders.

Retained earnings are the net earnings a company either reinvests in the business or uses to pay off debt. The
remaining amount is distributed to shareholders in the form of dividends.

Treasury stock is the stock a company has repurchased. It can be sold at a later date to raise cash or reserved
to repel a hostile takeover.

Some companies issue preferred stock, which will be listed separately from common stock under this section.
Preferred stock is assigned an arbitrary par value (as is common stock, in some cases) that has no bearing on
the market value of the shares. The common stock and preferred stock accounts are calculated by multiplying
the par value by the number of shares issued.

Additional paid-in capital or capital surplus represents the amount shareholders have invested in excess of
the common or preferred stock accounts, which are based on par value rather than market price. Shareholder
equity is not directly related to a company's market capitalization. The latter is based on the current price of
a stock, while paid-in capital is the sum of the equity that has been purchased at any price.

Limitations of Balance Sheet:

1. It is prepared on a historical cost basis. Changes in prices are not considered.

2. Window-dressing may be done in Balance Sheet.

3. Historical Cost of Balance Sheet does not convey fruitful information.

4. Different assets are valued according to different rules.

5. It cannot reflect the ability or skill of staff.

6. It is measured in terms of money or money’s worth. That is, only those assets are recorded in it which can

be expressed in money.

7. In inflationary trend, if the readers are not expert may mislead.

8. Balance Sheet has some fictitious assets, which have no market value. Such items are unnecessarily inflate
the total value of assets.