Types of Final Account
The final accounts are the accounts prepared at the final stage of an accounting period. This account is created to highlight the profit and the financial position of a company. Internal and external parties utilize these reports for different purposes.
The three types of final accounts are
- Trading Account
- Profit and Loss Account
- Balance Sheet
Trading Account
In the process of preparing the final account, the first account developed is a trading account. This account is composed to determine gross loss or profit sustain throughout an accounting cycle. The item recorded in the left-hand side of the trading account on the debit section are all direct expenses, purchases, and opening stock etc.
Gross Profit – If the aggregate of the credit side is higher than the debit side (RHS > LHS), the surplus is known as gross profit. The excess is transferred to the profit and loss account credit section.
Gross Loss – When the total of the debit side is higher than the credit side (LHS > RHS) the shortage is called gross loss. The deficit is transferred to the profit and loss account debit section.
Profit and Loss Account
After preparing a trading account, a profit and loss account is prepared to establish the net profit or net loss suffered by a company. The preparation starts with a transfer of gross loss or profit from the trading account. The profit and loss account is also known as an income statement.
On the debit section of a profit and loss account, an indirect expense like rent, office, stationery, marketing, salary, and admin etc. and loss suffered by theft/fire or the sale of assets are recorded. Similarly, in the credit side, all the indirect income like bad debts recovered, interest earned, sale of assets and dividends received on shares are incorporated.
Balance Sheet
The balance sheet is composed to obtain the financial position of a company as on a specific date.
Both the income statement and profit and loss account contribute to obtaining a firm’s profitability. All the assets, liabilities, and capital are included in the balance sheet.
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