Final accounts are the statement prepared at the end of the accounting period to show

financial performance during the accounting period and financial position of the
business as on that date.
The final accounts or financial statements consists of:
1. 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.
2. 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”

Trading Account
Trading account is prepared for calculating the gross profit or gross loss arising or incurred as a
result of the trading activities of a business. In other words, it is prepared to show the result of
manufacturing, buying and selling of goods. If the amount of sales exceeds the amount of
purchases and the expenses directly connected with such purchases, the difference is termed as
gross profit. On the contrary, if the purchases, and direct expenses exceed the sales, the
difference is called gross loss. A Trading Account records the number of purchases of goods and
also the expenses which are incurred in bringing that commodity to a saleable state. In other
words, all expenses which relate to either purchase of raw material for manufacturing of goods
are recorded in the Trading Account. All such expenses are called ‘Direct Expenses’. According
to J.R. Batliboi, “The Trading Account shows the results of buying and selling of goods. In
preparing this account, the general establishment charges are ignored and only the transaction in
goods are included.”
Sometimes, a Trading Account is also called ‘Good A/c’ because all the transaction relating to
goods are recorded in it. Such as
(i) Opening Stock,
(ii) Purchases,
(iii) Purchases Returns,
(iv) Sales,
(v) Sales Returns,
(vi) Closing Stock,
(vii) Expenses incurred on manufacturing of goods, and
(viii) Expenses incurred on purchasing and bringing the goods to the trading place. All such
expenses are summarised and recorded in the Trading Account at the end of the year.
 Need and Importance of Trading Account

Preparation of Trading Account serves the following objectives:

1. It provides information about Gross Profit and Gross Loss: It informs of the gross profit or
gross loss as a result of buying and selling the goods during the year. The percentage of Current
Year’s gross profit on the amount of sales can be calculated and compared with those of the
previous years. Thus, it provides data for comparison, analysis and planning for a future period.

2. It provides information about the direct expenses: All the expenses incurred on the purchase
and manufacturing of goods are recorded in the trading account in a summarised form.
Percentage of such expenses on sales can be calculated and compared with those of the previous
years. In this way it enables the management to control and rationalise the expenses.
3. Comparison of closing stock with those of the previous years: closing stock has to be valued
and recorded in a trading account. This stock can be compared with the closing stock of the
previous years and if the stock shows an increasing trend, the reasons may be inquired into.
4. It provides safety against possible losses: If the ratio of gross profit has decreased in
comparison to the preceding year, the businessman can take effective measures to safeguard
himself against future losses. For example, he may increase the sale price of his gods or may
proceed to analyse and control the direct expenses.
Format of Trading Account

Profit And Loss Account

Trading account only discloses the gross profit earned as a result of buying and selling of goods.
However, a businessman has to incur a number of expenses which are not taken to trading
account. Hence, a businessman is more interested in knowing the net profit earned or net loss
incurred during the year. As such, a Profit & Loss Account is prepared which contains all the
items of losses and gains pertaining to the accounting period. According to Prof. Carter, “A
Profit & Loss Account is an account into which all gains and losses are collected, in order to
ascertain the excess gains over the losses or vice-versa”.

Need and Importance of Profit & Loss A/c

1. To Ascertain the Net Profit or Net Loss: A Trading Account only discloses the Gross
Profit earned as a result of trading activities, whereas the Profit & Loss Account discloses
the net profit (or net loss) available to the proprietor and credited to his capital account.
2. Comparison with previous years’ profit: The net profit of the current year can be
compared with that of the previous years. It enables the businessman to know whether the
business is being conducted efficiently or no.
3. Control on Expenses: Profit & Loss Account helps in comparing various expenses with
the expenses of the previous year. Also the percentage of each individual expenses to net
profit is calculated and compared with the similar ratio of previous years. Such
comparison will be helpful in taking concrete steps for controlling the unnecessary
expenses.
4. Helpful in the preparation of Balance Sheet: A Balance Sheet can only be prepared
after ascertaining the Net Profit through the preparation of Profit and Loss Account.
Balance Sheet

After ascertaining the net profit or loss of the business enterprise, the businessman would also
like to know the exact financial position of his business. For this purpose a statement is prepared
which contains all the Assets and Liabilities of the business enterprise. The statement so
prepared is called a Balance Sheet because it is a sheet of balances of ledger accounts which are
still open after the transfer of all nominal accounts to the Trading and Profit & Loss Account.
Balances of all the personal and real accounts are grouped as assets and liabilities. Liabilities are
shown on the left hand side o the Balance Sheet and assets on the right hand side.

Definitions: A Balance Sheet has been defined as follows:

In the words of Karlson, “A business form showing what is owed and what the proprietor is
worth, is called a Balance Sheet.”
According to A. Palmer, “The Balance Sheet is a statement at a particular date showing on one
side the trader’s property and possessions and on the other hand the liabilities.”
According to J.R. Batliboi, “A Balance Sheet is a statement prepared with a view to measure the
exact financial position of a business on a certain fixed date.”
Need and Importance of Preparing a Balance Sheet

The purposes of preparing a Balance Sheet are as follows:

1. The main purpose of preparing a Balance Sheet is to ascertain the true financial position
of the business at a particular point of time.
2. It helps in ascertaining the nature and cost of various assets o the business such as the
amount of Closing Stock, amount owing from Debtors, amount of fictitious assets etc.
3. It helps in determining the nature and amount of various liabilities of the business.
4. It gives information about the exact amount of capital at the end of the year and the
addition or deduction made into it in the current year.
5. It helps in finding out whether the firm is solvent or not. The firm is solvent if the assets
exceed the external liabilities. It would be insolvent if opposite is the case.
6. It helps in preparing the Opening Entries at the beginning of the next year.
Difference between Trading and Profit and Loss Account
The following points of difference exist between the Trading and Profit and Loss Account

Parameters Trading Account Profit and Loss Account

Meaning Trading account used to find the gross Profit and loss account or Income
profit/loss of the business for an accounting statement is used to find the net
period profit/loss of the business for an
accounting period

Timing Trading Account is prepared first and then Profit/Loss Account is prepared after the
profit and loss account is prepared. trading account is prepared.

Purpose For knowing the gross profit or gross loss For knowing the net profit or net loss of
of a business a business

Stage It is the first stage in the creation of the it is the second stage in the creation of
final account. the final account.

Dependency It is not dependent on trial balance It is dependent on trading account

Transfer The balance in the form of Gross loss or The balance in the form of Net loss or
of Balance Gross Profit of the trading account will be Net Profit of the profit and loss account
transferred to the Profit and Loss Account will be transferred to the Balance Sheet