Final Accounts

The Final accounts is considered to be the absolute final stage in the cycle of accounting in any company or business. The accounting cycle goes through several stages, these stages include the recording of business transactions in a journal in the very first stage. It is then followed by the transfer of these records to a ledger where the accounts are balanced. A ledger is an accounting book that contained shortened or summarised information from the journals of accounting, information in this book is posted as either debit or credit. The creation of the final accounts is the ultimate stage of the accounting system. Final accounts are responsible for determining the financial position of a particular business in one financial year. It is hence extremely necessary for Final accounts to contain some extra pieces of formal documents that include a balance sheet, a trading account and a profit and loss sheet. The purpose of a balance sheet is to tabulate the assets and liabilities of the company of a date, the greater the labilities over the assets, the greater or sounder is the financial position of the company. A trading account determines the records of the selling and buying process of goods. The greater aim of a trading account is to differentiate between the cost price and the selling price of a particular good. The trading accounts show a distinctive picture of the trading results of a particular company. It is also responsible for calculating and maintaining the expenses that are direct in nature for the company. Finally, the sheet of profit and loss, as the name suggests records the losses and the profits that the company has incurred. This sheet is maintained with respect to an entire accounting year or a fiscal year. The net profit and loss are calculated and maintained here along with some indirect expenses such as salaries of the employees, rent of the office building, the parking space, the amount used in advertising for the company, electricity costs and so on. A profit and loss statement or sheet is generally something that a company releases on a quarterly, half-yearly or annual basis, companies need to compare the profit and loss sheets regularly. The yearly increase in profits of the company accounted for in these sheets helps the company determine the percentage of growth of the firm. 

Apart from these three basic components of the final accounts which are trading accounts, balance sheet and the profit and loss statement, there is an additional component to the same. This is called the Profit and Loss Appropriation Account. Although this particular document is considered nothing apart from a mere extension of the original profit and loss statement, there are however several differences between these two documents. In plain words, a profit and loss sheet is one of the three main accounts which is mandatory to maintain the final accounts of a company. This sheet maintains the net profit and losses that have been incurred in the company over a certain period which might differ from company to company. However, the profit and loss appropriation sheet is used to clarify the division or categorisation of the profits and the losses among the owners of the company as a whole. 

With respect to the law of finals accounts that fall under the Indian Companies Act of 2013 covering sections 209 to 220, the law suggests the compulsion of maintaining the final accounts of every company. Section 210 talks about the preparation process of the final accounts and the steps that are mandatory in this context. Section 211 talks about the mandatory components of the process of final accounting which contain the creation and maintenance of a balance sheet, trading account and profit and loss record.  

MCQs on Final Accounts and its types: 

1. What are final accounts? 

1. 1. It is the absolute final stage of accounting 
   2. It is the sum of the company’s expenditure and income 
   3. It is the determiner of a company’s net profit and loss
   4. All of the above 

Answer: D (All of the above)

2. How many stages does the process of final accounting have? 

1. 1. 2
   2. 3
   3. 6
   4. 5

Answer: B (3)

3. Organise the order of the process of final accounting. 

1. 1. Final accounts, journal, ledger
   2. Ledger, journal final accounts 
   3. Journal, ledger, final accounts
   4. They do not have an order 

Answer: C (Journal, Ledger, Final Accounts)

4. How many components do final accounts have?

1. 1. 2
   2. 5
   3. 7
   4. 3

Answer: D (3)

5. Which of these is not a component of the final accounts? 

1. 1. Balance sheet 
   2. Trading Account 
   3. Profit and Loss Sheet 
   4. Transaction receipts 

Answer: D (Transaction receipts) 

6. Which of these statements of false? 

1. 1. A trading account determines the records of the selling and buying process of goods
   2. The greater aim of a trading account is to differentiate between the cost price and the selling price of a particular good.
   3. A trading account is used to calculate the trading shares of the company in the market. 
   4. The trading accounts show a distinctive picture of the trading results of a particular company

Answer: C (A trading account is used to calculate the trading shares of the company in the market)

7. A balance sheet 

1. 1. tabulates the assets and liabilities of the company on a date
   2. shows assets and liabilities of a company 
   3. indicates the growth rate of the company 
   4. Both A and B

Answer: D (both A and B)

8. Which of these statements are true? 

1. 1. The profit and loss sheet and the profit and loss appropriation sheet are synonymous 
   2. The profit and loss appropriation sheet is an extension of the profit and loss sheet. 
   3. The profit and loss sheet and the profit and loss appropriation sheet are two different paradigms of accounting. 
   4. The profit and loss appropriation sheet is not a part of the final accounting. 

Answer: B (The profit and loss appropriation sheet is an extension of the profit and loss sheet)

9. A profit and loss sheet is prepared 

1. 1. With the trading account 
   2. In succession to the trading account 
   3. Before the trading account 
   4. It can be prepared anytime 

Answer: B (In succession to the trading account)

10. A profit and loss appropriation account is used to

1. 1. To divide the profit and loss between the owners of the company  
   2. To show an ideal profit and loss situation of the company according to the market. 
   3. To compare the profit and loss of the company with other companies 
   4. None of the above

Answer: A (To divide the profit and loss between the owners of the company)

11. A profit and loss appropriation account is prepared by the following: 

1. 1. All businesses 
   2. Corporations 
   3. Partnership firms 
   4. All of the above 

Answer C: Partnership firms 

12. A profit and loss appropriation account is made 

1. 1. After the profit and loss account 
   2. With the profit and loss account 
   3. Before the profit and loss account 
   4. It can be made anytime 

Answer: A (After the profit and loss account)

13. A balance sheet of a company includes: 

1. 1. Assets and Liabilities 
   2. Assets, Liabilities and equity of stockholders 
   3. Accounts, Assets and Liabilities
   4. Transaction details, accounts, assets and liabilities

Answer B: (Assets, Liabilities and equity of stockholders)

14. Which law/act of the Indian government makes the maintenance of final accounts mandatory for each company? 

1. 1. The Indian Companies Act 2013
   2. The Indians Company Act 1913
   3. The Companies Act 1956
   4. All of the above 

Answer: A (The Indian Companies Act 2013)

15. Sections  ______ to   _______  deal with provisions of final accounting.

1. 1. 201 to 220
   2. 200 to 220 
   3. 210 to 220 
   4. 209 to 220

Answer: D (209 to 220)

16. Which of the following statements are true? 

1. 1. Section 211 states the punishments and fines laid by the government in case a company fails to maintain final accounts. 
   2. Section 211 states the main components of maintaining final accounts 
   3. Section 211 states the advantages and uses of maintaining final accounts 
   4. None of the above

Answer: B (Section 211 states the main components of maintaining final accounts)

17. Final accounts are prepared on a  

1. 1. Yearly basis 
   2. Quarterly basis 
   3. Half Yearly basis 
   4. Differs from company to company 

Answer: D (Differs from company to company)