Final accounts are also known as financial statements and are a crucial aspect of any business. They provide a summary of a company's financial position and performance over a specific period, such as a fiscal year or quarter. The three main types of final accounts are the balance sheet, income statement, and cash flow statement. Each document serves a different purpose and provides valuable information to stakeholders such as investors, creditors, and management.
Did You Know? The modern form of financial statements, including the balance sheet, income statement, and statement of cash flows, was developed in the 14th century by the Italian mathematician Luca Pacioli.
What are Final Accounts?
Final accounts, also known as financial statements, are a summary of a company's financial position and performance over a specific period, such as a fiscal year or quarter. There are three main types of financial statements: the balance sheet, income statement, and cash flow statement.
The balance sheet provides a snapshot of a company's financial position at a specific time, displaying the business's assets, liabilities, and equity. The income statement, also known as the profit and loss statement, shows a company's revenues, expenses, and net income over a period of time. The cash flow statement shows the inflows and outflows of cash for a business over a specific period. This indicates whether a company has sufficient cash on hand to meet its financial obligations.
Also Read: Know about Balance Sheet - Definition & Examples
Types of Final Accounts
There are three main types of financial statements, also known as final accounts: the balance sheet, income statement, and cash flow statement.
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The Balance Sheet
The balance sheet is a financial statement that provides a snapshot of a company's financial position at a specific point in time. It shows the assets, liabilities, and equity of the business.
The balance sheet is divided into two main sections:
- Assets: Assets are resources owned by a company, such as cash, inventory, and property.
- Liabilities: Liabilities are obligations that a company owes to others, such as loans and accounts payable.
The balance sheet is an important financial statement because it provides information about a company's financial position and its ability to pay its debts. It is typically prepared on an annual basis, but can also be prepared quarterly or monthly.
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The Income Statement
The income statement, also known as the profit and loss statement or statement of earnings, is a financial statement that shows a company's revenues, expenses, and net income over a specific time, such as a fiscal year or quarter.
The income statement begins with revenues earned from selling goods or services. It then lists the expenses incurred to generate those revenues, such as the cost of goods sold, selling and administrative expenses, and interest expenses.
Net income is the difference between revenues and expenses. If revenues are greater than expenses, the company has a net profit. If expenses are greater than revenues, the company has a net loss. The income statement is important because it shows a company's profitability over a specific period. It is typically prepared annually but can also be prepared quarterly or monthly.
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The Cash Flow Statement
The cash flow statement is a financial statement that shows the inflows and outflows of cash for a business over a specific period. For example, a fiscal year or quarter. It indicates whether a company has sufficient cash to meet its financial obligations. The cash flow statement is divided into three sections: cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities.
Cash flows from operating activities include cash generated from the company's core business operations, such as the sale of goods or services. Cash flows from investing include purchasing and selling long-term assets, such as property, plant, and equipment. Cash flows from financing activities include issuing and repaying debt and paying dividends to shareholders.
The cash flow statement is important because it shows the sources and uses of cash for a business. It is typically prepared annually but can also be prepared quarterly or monthly. In addition to these three main financial statements, some companies may also prepare additional reports, such as a statement of changes in equity or a statement of comprehensive income.
Also Read: What Is A Cash Flow Statement? Meaning, Structure, Uses And Limitations
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Statement of Change in Equity
The statement of changes in equity, also known as the statement of changes in shareholder equity, is a financial statement that shows the changes in a company's equity during a specific time, such as a fiscal year or quarter. It is usually presented as separate or part of the company's financial statements.
The statement of changes in equity consists of two main sections: changes in equity resulting from profit or loss and changes in equity resulting from transactions with owners in their capacity as owners. Changes in equity stemming from profit or loss include net income or loss and other comprehensive income such as foreign currency translation adjustments and revaluation of assets.
Changes in equity resulting from transactions with owners in their capacity as owners include the issuance or repurchase of shares, the payment of dividends, and the distribution of profits or losses to shareholders. The statement of changes in equity is an important financial statement because it shows the changes in a company's equity over a specific period. It is typically prepared annually but can also be prepared quarterly or monthly.
Adjustment in the Final Accounts
Final accounts are the financial statements prepared at the end of an accounting period, which show the company's financial performance and position for that period. Adjustments to the final accounts are therefore made to ensure that the financial statements are accurate and reliable.
Here are some common adjustments made to final accounts:
These are expenses that have been incurred but have not yet been paid for. Examples include salaries and wages, rent, and interest. These expenses are recorded as liabilities in the financial statements.
These are expenses that have been paid for in advance but have not yet been incurred. Examples include insurance and rent. These expenses are recorded as assets in the financial statements.
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Depreciation
This is the process of allocating the cost of long-term assets over their useful lives. Depreciation expense is recorded in the income statement, while accumulated depreciation is recorded in the balance sheet as a contra asset.
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Bad Debts
These are debts that are unlikely to be collected. A provision for bad debts is made to reduce the value of accounts receivable on the balance sheet.
Adjustments may be made to the value of inventory to reflect its actual value. This may involve writing down the value of obsolete or damaged inventory or adjusting the value of inventory to reflect changes in market prices.
These adjustments are made to ensure that the financial statements accurately reflect the company's financial position and performance for the period in question. Failure to make these adjustments can result in misleading financial statements that do not provide an accurate picture of the company's financial position or performance.
Also Read: Comparative Income Statement: Examples, Analysis and Format
Significance of the Final Accounts
There are several aspects of financial statements, also known as final accounts:
- Financial statements provide a summary of a company's financial position and performance, making it easier for stakeholders to understand and analyze the business's financial health.
- Financial statements enable stakeholders to make informed decisions about a company, such as whether to invest in the business or lend it money.
- Financial statements provide a way for management to monitor the business's financial performance and identify areas for improvement.
- Financial statements help compare the financial performance of different companies in the same industry.
Conclusion
In conclusion, financial statements, also known as final accounts, are essential to any business. They provide a summary of a company's financial position and performance, enabling stakeholders such as investors, creditors, and management to make informed decisions about the business. The three main types of financial statements are the balance sheet, income statement, and cash flow statement.
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