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What are Final Accounts?

What are known as Final Accounts?

Trading, profit & loss account and balance sheet, all these three together, are called as final accounts. Final result of trading is known through Profit and Loss Account. Financial position is reflected by Balance Sheet. These are, usually, prepared at the close of the year hence known as final accounts.

Trading and P&L accounts

Preparation of Final Accounts

They serve the ultimate purpose of keeping accounts. Their purpose is to investigate the consequence of various incomes and expenses during the year and the resulting profit or loss.

1. Trading and Profit and Loss A/c is prepared to find out Profit or Loss.

2. Balance Sheet is prepared to find out financial position of a  concern.

Trading Account

Trading refers buying and selling of goods. Trading A/c shows the result of buying and selling of goods. This account is prepared to find out the difference between the Selling prices and Cost price.

Profit and Loss Account

Trading account discloses Gross Profit or Gross Loss. Gross Profit is transferred to credit side of Profit and Loss A/c. Gross Loss is transferred to debit side of the Profit Loss Account. Thus Profit and Loss A/c is commenced. This Profit & Loss A/c reveals Net Profit or Net loss at a given time of accounting year.

Balance Sheet

Trading A/c and Profit & Loss A/c reveals G.P. or G.L and N.P or N.L respectively; besides the Proprietor wants

i. To know the total Assets invested in business

ii. To know the Position of owner’s equity

iii. To know the liabilities of business.

Definition of Balance Sheet

The Word ‘Balance Sheet’ is defined as “a Statement which sets out the Assets and Liabilities of a business firm and which serves to ascertain the financial position of the same on any particular date.” On the left hand side of this statement, the liabilities and capital are shown. On the right hand side, all the assets are shown. Therefore the two sides of the Balance sheet must always be equal. Capital arrives Assets exceeds the liabilities.



1. It shows accurate financial position of a firm.

2. It is a gist of various transactions at a given period.

3. It clearly indicates, whether the firm has sufficient assents to repay its liabilities.

4. The accuracy of final accounts is verified by this statement

5. It shows the profit or Loss arrived through Profit & Loss A/c.


Preparation of final account is the last stage of the accounting cycle. The basic objective of every firm  maintaining the book of accounts is to find out the profit or loss in their business at the end of the year. Every businessman wishes to find out the financial position of his business firm as a whole during the particular period. In order to accomplish the objectives for the firm, it is essential to prepare final accounts which include Trading, Profit and Loss Account and Balance Sheet.

It is mandatory that final accounts have to be prepared, every year, in every business. Trading and profit & loss accounts are prepared, after all the accounts have been completely written and trial balance is extracted. Before preparing final accounts, it becomes obligatory  to scritinize whether all the expenses and incomes for the year for which accounts are prepared have been duly provided for and included in the accounts.

Form of Final Accounts: There is a standard format of final accounts only in the case of a limited company. There is no fixed prescribed format of financial accounts in the case of a proprietary concern and partnership firm.


Occasionally, it is seen that after preparation of trial balance, but, prior to preparation of final accounts, it may be noticed some business transactions have been, completely or partially, omitted to be recorded or entered wrong. Also, there are some income or expenses, which are related to the next year but have been received or paid during the current year. Before preparing trading and profit & loss accounts, adjustment entries are necessary in these accounts.