A Company’s Final Accounts

Big companies deal with finances more through profits than investments. They need to keep track of finances in all fields, like how much money was invested in each department and how much profit was gained. All the capital of the company must be accounted for.

Hence, preparing and presenting a company’s final accounts play a vital role in managing its finances. Final accounts give the company a brief about its financial position and where they stand in the market at the end of a fiscal year. Let’s understand how this works.

Final Accounts Overview 

Let’s discuss a company’s final accounts.

A company’s final accounts are an overview of all the financial transactions and investments made by a company throughout the accounting year. Final accounts are prepared annually and ideally at the end of a financial year. These provisions fall under the Indian Company Act, 2013.

A company’s final accounts consist of the following things:

• A version of the trading, profit, and losses incurred by the company
• A balance sheet including all the financial activities performed
• A profit and loss appropriation account

The Objective of Final Accounts

A company’s final accounts are prepared to satisfy specific purposes. Those purposes are stated below:

• The profit and loss statement is part of the final accounts
• It helps the company calculate gross profit and net profit earned in a specific period
• The profit and loss statement also helps the company assess the losses they have incurred and in which fields they have been incurred
• The correct financial position of the company and its position in the market can be estimated by studying the final account
• The balance sheet helps with the same
• The bifurcation of direct expenses can help the company assess its gross profit and loss in a given financial year
• The indirect account expenses help estimate an organisation’s net profit and loss
• According to the holding and usage periods, a company’s final accounts use a balance sheet to bifurcate its liabilities and assets

Format for Final Accounts

The format of a company’s final accounts is as follows:

• Particulars
• Credit amount
• Debit amount
• Profit
• Depreciation
• Administrative expenses
• Financial expenses
• Distribution expenses
• Bad debts
• Interest
• Discount

Types of Final Accounts

According to law, a joint-stock company must prepare and present the following accounts at the end of a fiscal year:

Trading account:

A trading account is an integral part of the final accounts of a company. With the help of this account, we can calculate gross profit. This gross profit is later considered in the profit and loss account.

Manufacturing account:

• A manufacturing account must be maintained only by a joint-stock company, either in construction or manufacturing
• A manufacturing account helps to find the total cost of production
• The cost of production obtained from this account is later transferred to the debit side of the trading account

Profit and loss account:

This account is created to find the net profit a company has gained over the year after considering taxation.

Profit and loss appropriation account:

A profit and loss appropriation is created to account for all the non-operational adjustments of a company.

• The number of available reserves and dividends is adjusted in this account
• The balance of this account is called a surplus, which is later transferred to the liability side of the balance sheet, which is to be created
• Such surplus is included in the surplus and reserve category of the liability side in the balance sheet

Balance sheets:

• A joint-stock company’s balance sheet represents a company’s financial position at the end of the financial year
• All the assets and liabilities of a company are displayed on this balance sheet
• This balance sheet is valid for the company, but it helps the investors, the government, the employees, and the customers obtain a lot of information about that particular company
• All joint-stock companies must include all the above-stated accounts in their final accounts

Sections in Final Accounts

The Indian Company Act of 2013 explains the provisions for preparing final accounts. The whole act consists of 470 sections. Nine amendments were made in the Indian Company Act, applicable from 1 April 2021. There are 29 chapters containing 470 sessions and provisions in the Indian Company Act.

Those provisions are as follows:

• The same provisions are applicable for an income and expenditure account
• A non-profitable organisation should make an income and expenditure account like a profit-making business

Result: The profit and losses incurred should result from business operations. All the operational expenses should be debited, and all the operating incomes should be credited.

Clarity: All the profit and loss account data must be represented transparently.

Conclusion

All the big companies that deal with finances in large quantities need to maintain identical records. The Indian Company Law requires all joint-stock companies to prepare final accounts. These are ready towards the end of a fiscal year representing the company’s financial position in a year. According to the law, accounts such as trading accounts, profit and loss accounts and balance sheets need to be part of a company’s final account. They help the customers and government obtain accurate information about the company.

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