Understanding Final Accounts Preparation in Business
Final accounts, including Income Statement and Balance Sheet, are crucial for stakeholders to assess a company's financial progress. The objectives of final account preparation involve determining profits or losses, showcasing financial status, and providing vital information to users. Income statement reveals business results while the balance sheet reports assets, liabilities, and equity. These financial statements are essential for evaluating a company's financial health.
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Preparation of Preparation of Final Accounts Final Accounts
INTRODUCTION INTRODUCTION The stakeholders of a business are interested in financial progress. The assessment of financial progress is done by estimating the impact of business activities on financial position and financial status of the business. For this purpose, a business unit prepares final accounts. The final accounts which portray the financial position and financial status are Income statement and Balance Sheet . Thus, the final progress are as follows: accounts prepared to estimate business
Objectives of Final Account Objectives of Final Account preparation preparation Final accounts are prepared with the following objectives: To determine profit or loss incurred by a company in a given financial period. To determine the financial position of the company. To act as a source of information to convey the users of accounting information (owners, creditors, investors and other stakeholders) about the solvency of the company.
Income statement or Profit and Income statement or Profit and Loss Account Loss Account Profit and loss account reveals the results of the business firm s activities for an accounting period. It includes the income and expenditure of a firm over a period of time and then by comparing such incomes and expenditures gives a final figure which represents the amount of profit and loss for the period. If income exceeds expenditure, the difference is called net profit and in case expenditure, exceeds income the difference is called net loss. The profit and loss account is also called as Income statement.
Balance Sheet Balance Sheet A balance sheet is a financial statement that reports a company's assets, liabilities and shareholders' equity at a specific point in time, and provides a basis for computing rates of return and evaluating its capital structure. Balance sheet maybe defined as a statement of assets and liabilities of the company at a particular date. Balance sheet is prepared and presented in the form prescribed in Schedule III, Part I of the Companies Act,2013. The form prescribed is vertical. Balance sheet must exhibit a true and fair view of the financial position at the close of the year.
Importance Importance It is important because it helps in understanding the performance of a company. Following are the reasons why it is important: To understand the financial health of a company. Stakeholders can study the balance sheet to understand the liquidity position and business performance of the company. Comparing balance sheets over the years helps in determining the growth of the company. It is an essential document to obtain a business loan. Analysing the company s balance sheet helps in understanding the ability of the firm to undertake expansions projects and unforeseen expenses. It helps in identifying the source of company funding, for example, equity funding or debt funding.
Differences between Balance Differences between Balance Sheet and Profit & Loss Account Sheet and Profit & Loss Account The Balance Sheet is prepared at a particular date, usually the end of the financial year while the Profit and Loss account is prepared for a particular period. The Balance Sheet reveals the entity s financial position, whereas the Profit and Loss account discloses the entity s financial performance. A Balance Sheet gives an overview of the assets, equity, and liabilities of the company, but the Profit and Loss Account is a depiction of the entity s revenue and expenses. The significant difference between the two entities are is that the Balance Sheet is a statement while the Profit and Loss account is an account. The Balance sheet is prepared on the basis of the balances transferred from the Profit and Loss account.
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