Question

What is the need for preparing final accounts?

Answer 1

• Provides information about gross profit or gross loss:

1. It shows the gross profit or gross loss of the business for an accounting year.
2. This helps the business persons to find out the gross profit ratio by expressing the gross profit as a percentage of sales.
3. It helps to compare and analyze the ratios of the previous years. Thus, it provides data for comparison, analysis, and planning for a future period.

• Provides an opportunity to safeguard against possible losses:

1. If the ratio of gross profit has decreased in comparison to the preceding years, effective measures can be taken to safeguard against future losses.
2. For example, the sale price of goods may be increased or steps may be taken to analyze and control the direct expenses.

• Provides information about direct expenses and direct incomes:

1. All the expenses incurred on the purchase of goods are direct expenses. They are recorded in the trading account.
2. The trading account also shows sales revenue, which is a direct income. With the help of a trading account, the percentage of such expenses on sales revenue can be calculated and compared with similar ratios of the previous years. Thus, it enables the management to have control over the direct expenses.