𝐅𝐢𝐧𝐚𝐥 𝐀𝐜𝐜𝐨𝐮𝐧𝐭
The final account is the financial statement of the business. A Financial statement prepared after the trial balance is prepared. It is based on the trading and profit and loss account and balance sheet.
Trading and profit and loss account: This is a show of the financial performance of a business operating an accounting period.
Balance sheet: This is a show of the financial position of the business on a particular date.
Now, we first discuss the trading and profit and loss accounts.
𝐓𝐫𝐚𝐝𝐢𝐧𝐠 𝐀𝐜𝐜𝐨𝐮𝐧𝐭
The trading account is the first stage of preparing the final account. In the trading account, show the gross profit and gross loss. By which ascertain the earns and incurred during the accounting period.
- Sale
- Services
- Closing Stock or Inventory
- Opening Stock or Inventory
- Purchase
- Direct Expense
Some item is credited into the trading account like :
𝐅𝐞𝐚𝐭𝐮𝐫𝐞𝐬 𝐨𝐟 𝐓𝐫𝐚𝐝𝐢𝐧𝐠 𝐀𝐜𝐜𝐨𝐮𝐧𝐭
- The trading account is the first stage of preparing the final account.
- This account records only net sales and direct cost of goods sold.
- The balance of this account shows gross profit and gross loss.
- Gross profit and gross loss are transferred to the profit and loss account.
𝐁𝐚𝐥𝐚𝐧𝐜𝐞 𝐨𝐟 𝐓𝐫𝐚𝐝𝐢𝐧𝐠 𝐀𝐜𝐜𝐨𝐮𝐧𝐭
All debit and credit items are recorded in the trading account. After recording balance is calculated to ascertain gross profit and gross loss. If the total of the credit side is more than that of the debit side. It is called gross profit. If the total of the debit side is more than that of the credit side. It is called gross loss. Gross profit is transferred to the credit side into the profit and loss account and gross loss is also transferred to the debit side into the profit and loss account.
Some formulas are ascertained by preparing a trading account
- Net sale = Total sale - Sale return
- Net purchase = Total purchase - Purchase return
- Gross profit = Net sale - Cost of the goods sale
- Cost of goods sale = Opening stock + Net purchase + Direct expenses - Closing stock
And now, we second discuss the profit and loss account
𝐏𝐫𝐨𝐟𝐢𝐭 𝐚𝐧𝐝 𝐥𝐨𝐬𝐬 𝐚𝐜𝐜𝐨𝐮𝐧𝐭
The profit and loss account is prepared after the trading account. This account ascertains the net profit earned and net loss incurred by the business during the accounting period. The profit and loss account is into which all gain and loss is collected. So, we knew the gains and losses in the business. Gross profit and gross loss are transferred to the profit and loss account. Gross profit is kept on the credit side and the gross loss is kept on the debit side of the profit and loss account. Because the trading account is said to be a part of the profit and loss account. Thereafter, Indirect expenses and losses are transferred to the debit side and indirect income is transferred to the credit side of the profit and loss account. All means of that which expenses and income have not been debited and credited to the trading account are debited and credited in the profit and loss account. This account ascertains net profit and net loss. If the total of the credit side exceeds the debit side. it means net profit. If the total of the debit side exceeds the credit side. It means net loss.
𝐅𝐞𝐚𝐭𝐮𝐫𝐞𝐬 𝐨𝐟 𝐭𝐡𝐞 𝐩𝐫𝐨𝐟𝐢𝐭 𝐚𝐧𝐝 𝐥𝐨𝐬𝐬 𝐚𝐜𝐜𝐨𝐮𝐧𝐭
- The profit and loss account is the second stage in the preparation of the final account.
- Gross profit and income from Other sources are credited and Indirect expenses and losses are debited in this account.
- The balance of this account is the net profit or net loss.
- The capital of the owner increases or decreases by the balance of this account.
𝐁𝐚𝐥𝐚𝐧𝐜𝐞 𝐨𝐟 𝐩𝐫𝐨𝐟𝐢𝐭 𝐚𝐧𝐝 𝐥𝐨𝐬𝐬 𝐚𝐜𝐜𝐨𝐮𝐧𝐭
Balance in the profit and loss means net profit or a net loss. If the total on the credit side is more than the total on the debit side. It is a net profit. If the total on the debit side is more than the total on the credit side. It is a net loss. Net profit and net loss are transferred to the capital account.
𝐁𝐚𝐥𝐚𝐧𝐜𝐞 𝐬𝐡𝐞𝐞𝐭
The balance sheet is a statement of the assets and liabilities. This sets out the assets and liabilities of a form. Having trading and profit and loss accounts, the balance sheet is prepared. It is a statement prepared to show the financial position of the business on a particular date. In the balance sheet are prepared assets liabilities and capital. The financial statement of the business is shown by assets and liabilities. The purpose of preparing the balance sheet is to show the financial position of a business. So, to know what the business owes and what it owns at a certain date. The balance sheet is a heading of the profit and loss account. Debit balance is shown on the "Assets" and credit balance is shown on the "Liabilities" side of the balance sheet. It is a method to show the financial position of a business in a systematic and standard form. It is the only statement and not an account.
𝐅𝐞𝐚𝐭𝐮𝐫𝐞𝐬 𝐨𝐟 𝐛𝐚𝐥𝐚𝐧𝐜𝐞 𝐬𝐡𝐞𝐞𝐭
- It shows the financial position of the business.
- It is prepared after preparing of trading and profit and loss account.
- It is prepared at a particular time and not for a particular period.
- It is a statement and not an account.
- Trading and profit and loss account and balance sheet together called final account.
- The total of the assets must be equal to the total of the liabilities side. If the total is not the same, there is certainly an error.
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