Question

What are final accounts? What are its constituents?

Answer 1

1. The business entities are interested in knowing periodically the results of business operations carried on and the financial soundness of the business.
2. In other words, they want to know the profitability and the financial position of the business.
3. These can be ascertained by preparing the final accounts or financial statements.
4. The final accounts are usually prepared at the end of the accounting period on the basis of balances of ledger accounts shown by the trial balance.

The final accounts or financial statements include the following:

1. Income Statement or Trading and Profit and Loss Account and
2. Position Statement or Balance Sheet.

The purposes of preparing the financial statements are:

1. To ascertain the financial performance of an enterprise and
2. To ascertain the financial position of an enterprise.
3. The income statement and balance sheet are prepared for these purposes respectively.
4. An income statement gives the manner in which the profit or loss for an accounting period is arrived at.
5. Hence, at the close of the accounting period, all nominal accounts (i.e. expenses, losses, revenues, gains, purchases, purchases returns, sales, and sales returns) are to be closed by transferring to the income statement or trading and profit and loss account.