Any business is started with an objective of earning profits. As such the business concerns are interested to know
A. Results of the business I.e. profit earned or loss incurred during the year will be calculated by preparing trading and profit and loss account which is also known as income statement.
B. Financial position of the business I.e. assets and liabilities at the year end will be calculated by preparing balance sheet.
The above two are Aldo called as financial statement since they show the financial results and financial position of the business. They are also called as final accounts as they are prepared at the end of the accounting cycle. I.e., transaction, journal/subsidiary books, ledger, trail balance and final accounts
A. Results of the business I.e. profit earned or loss incurred during the year will be calculated by preparing trading and profit and loss account which is also known as income statement.
B. Financial position of the business I.e. assets and liabilities at the year end will be calculated by preparing balance sheet.
The above two are Aldo called as financial statement since they show the financial results and financial position of the business. They are also called as final accounts as they are prepared at the end of the accounting cycle. I.e., transaction, journal/subsidiary books, ledger, trail balance and final accounts
Importance of final accounts.
1. Reveals financial results of the business i.e., profit or loss
2. Reveals financial position of the business I.e., assets and liabilities .
3. Liquidity and solvency of the business can be understood.
4. Helps in tax calculation.
Limitations of final accounts
1. Profit or loss true picture can not be calculated
2. Assets and liabilities values also not accurate
3. Window dressing is possible in preparing final accounts
4. Personal options of accountants/owners will influence final accounts to some extent.
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