Basically, the main object of a business firm is to earn the profit from the investment made by the firm in a legal business. That is why at the end of the financial year or at a particular point of time, a business firm would like to know the true and correct position of the activities of its business and this is possible only with the help of the final accounts.
Trading and profit and loss account and balance sheet are known as financial statement also. The final accounts are prepared with the help of the trial balance and the trial balance is prepared with the help of ledger as on the last date of accounting period.
The amount shown in debit side of trial balance may be either expenses or assets. The debit balances in trial balance relating to purchase or expenses should be shown in expenditure side of trading and profit and loss account and the debit balance relating to assets should be shown in assets side of balance sheet Similarly, the credit balances in trial balance relating to income should be shown in credit side of the trading and profit and loss account and the credit balances relating to liabilities should be shown in liabilities side of the balance sheet.
While preparing the final accounts, the accountant must give proper attention for proper allocation of capital expenditures, revenue expenditures, capital receipts and revenue receipts. If the proper allocation of account head is not done in final accounts then it will not give the true and correct position of the business results.
The final accounts are divided in to two parts:-
- Trading and profit and loss account:– In first part, Trading account shows the gross profit or gross loss to the business firm. Gross profit is calculate after deducting the cost of sales from the sales amount. If the cost of sales is more than sales then it will become the gross loss. In second part the profit and loss account is prepared to show the net profit of the business firm. Gross profit or gross loss is carried forward to the credit or debit side of profit and loss account as the case may be. All other income or indirect income are shown in credit side of profit and loss account and other expenditures or indirect expenditures are shown in debit side of the profit and loss account. If the total of credit side is more then it will be net profit and if the total side of debit side is more then it will be the net loss. Net profit or net loss is transferred to the capital of proprietor or partners. Profit and loss account is also called as income and expenditure account. There is no need to prepare trading account in the firms where there is not sale or purchase of goods is involved.
- Balance sheet:– Balance sheet shows the assets and liabilities of the business firm on a particular date or at the end of the financial year. Balance sheet is divided in two parts. 1. Liabilities :- all the liabilities including the credit balance of capital is shown in liabilities side and all the assets including debit balance of capital are shown in asset side.
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