Final Account: Meaning, Format & Key Components Explained

A final account is a complete summary of a business's financial activities during a year. It includes the Trading Account, Profit and Loss Account, and Balance Sheet.

Example:
Shailesh runs a small garment shop. At the end of the financial year, he prepares his final accounts to check how much profit he made and what his business owns and owes. This helps him plan better for the next year and attract investors or get loans if needed.

Here is a part of Shailesh’s final account for the year ending 31st March:
 

Final accounts help Shailesh understand if his shop is doing well or needs improvement.

What Are the Benefits of Final Accounts?

Final accounts give a clear picture of how a business is performing. They help owners, investors, and others make smart choices by showing all the important money matters in one place.

Example:
Shailesh, who owns a garment shop, uses his final accounts to check how much profit he made, what he spent, and what he owns. This helps him plan better for the next year.

Key Benefits of Final Accounts
 

• They give full details of a business’s earnings and costs.
   
• They help compare results with other businesses.
   
• They follow proper formats, so reports are easy to read and trust.

Final accounts help Shailesh run his business better and stay on the right side of the law.

What Is a Trading Account?

A Trading Account is the first part of the final accounts. It shows how much money a business makes just by selling its goods before paying for things like rent or advertising.

Aarti runs a clothing shop. During the year, she sold clothes worth ₹2,00,000. She had clothes worth ₹30,000 at the start and ₹20,000 at the end. She spent ₹1,20,000 to buy new stock.

She calculates her cost of goods sold (COGS):

Opening Stock: ₹30,000
Add: Purchases: ₹1,20,000
Less: Closing Stock: ₹20,000
COGS = ₹1,30,000

Then she works out her gross profit:

Sales: ₹2,00,000
Less: COGS: ₹1,30,000
Gross Profit = ₹70,000

This shows her shop earned ₹70,000 before other expenses.

What Goes into a Trading Account?
 

Easy Formula:
Gross Profit = Sales minus Sales Returns minus Opening Stock plus Purchases plus Direct Expenses minus Closing Stock.

What Is a Profit and Loss Account?

A Profit and Loss Account shows the full financial result of a business. It comes after the Trading Account and tells us whether the business made a net profit or a net loss after counting all other incomes and expenses t.

After Aarti sells clothes for a month, she earns a gross profit of ₹50,000. But she doesn’t stop there. She also receives ₹5,000 as interest from her savings and ₹10,000 as rent from a shop she owns.

Next, she checks her expenses. She pays ₹20,000 for staff salaries, ₹3,000 for electricity, and ₹2,000 for transport.

Now she calculates her net profit:

Gross Profit: ₹50,000
Add: Other Income (Interest ₹5,000 + Rent ₹10,000) = ₹15,000
Total Income = ₹65,000

Less: Expenses (Salaries ₹20,000 + Electricity ₹3,000 + Transport ₹2,000) = ₹25,000

Net Profit = ₹65,000 – ₹25,000 = ₹40,000

So, Aarti made a real profit of ₹40,000 after looking at all incomes and expenses.

What Goes into a Profit and Loss Account?
 

Simple Formula:
Net Profit = Gross Profit plus Indirect Incomes minus Indirect Expenses

What Is a Balance Sheet?

A Balance Sheet is a financial statement that shows what a business owns and what it owes at a specific point in time. 

Aarti wants to know if her shop is stable. So she prepares a balance sheet to see her assets, like cash and stock, her debts, such as loans, and how much of the business she owns.

Main Parts of a Balance Sheet
 

Balance Sheet Formula:
Assets = Liabilities plus Equity

What Is the Proforma of Final Accounts?

The proforma of final accounts is a standard format used to prepare and present the Trading Account, Profit and Loss Account, and Balance Sheet. 

Below is a simple layout to understand each part.

Trading Account Proforma

This account shows the gross profit or loss by comparing sales with direct costs like purchases and wages.

For the year ended [Date]
 

Profit and Loss Account Proforma

This account shows net profit or loss by subtracting indirect expenses from gross profit and adding indirect incomes.

For the year ended [Date]
 

Balance Sheet Proforma

The balance sheet shows what the business owns and owes. It compares assets with liabilities and capital to give a full financial picture.

As of [Date]
 

What Are the Common Adjustments in Final Accounts?

When preparing final accounts, some changes or adjustments are made to show the true financial picture of the business. Below are some simple examples:

• Accrued Income:
  Aarti earned interest of ₹5,000, but it was not recorded yet. She added it to her Profit and Loss Account to show her total income correctly.
   
• Prepaid Expenses:
  Aarti paid ₹5,000 as rent in advance. Since it is for a future period, she reduced it from her expenses in the Profit and Loss Account.
   
• Outstanding Expenses:
  Salaries worth ₹10,000 had not been paid yet. Aarti added this to her expenses in the Profit and Loss Account and also showed it as a liability in the Balance Sheet.
   
• Depreciation:
  The value of her plant and machinery reduced by ₹10,000. She recorded this in the Profit and Loss Account as depreciation.
   
• Provision for Bad Debts:
  Aarti expected ₹5,000 from some customers may not be received. So, she made a provision for doubtful debts in her Profit and Loss Account.

Conclusion

A final account gives a full picture of a business’s financial performance and position over a year. It includes the Trading Account, Profit and Loss Account, and Balance Sheet. These accounts help owners, investors, and others understand how much profit the business made, what it owns, and what it owes. 

FAQ’s

1. Why do businesses close their books with a final account?

They close their books with a final account to check profit or loss and understand the financial position at the end of the year.

2. Can a final account show how well a company used its money?

Yes, it shows where the company spent money, earned income, and whether it used resources wisely or wasted them.

3. Do only large firms need final accounts?

No, even small shops or freelancers prepare final accounts to track earnings, manage tax, and make better financial choices.

4. What happens if a firm skips its final account?

If a firm skips it, they may face tax issues, poor financial planning, and legal penalties for not meeting reporting rules.

5. How does a final account help future planning?

It helps owners see what worked, what failed, and where they can save or invest more in the next year.

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