Meaning and Objectives of Final Accounts

Every trial balance a business prepares is only a checkpoint — a proof that the ledger's debits and credits agree. It does not, by itself, tell the owner two things every trader wants to know at the end of the year: how much profit (or loss) did the business make, and what is the business worth on the closing date? Answering these two questions is exactly what Final Accounts exist to do, and this chapter — one of the most important and heavily practical chapters of the Maharashtra HSC (MSBSHSE) Std XI Book-Keeping and Accountancy syllabus — shows how a trial balance is converted into a Trading Account, a Profit and Loss Account, and a Balance Sheet for a proprietary concern (a business owned and run by a single individual, also called a sole trader or sole proprietorship).

What are Final Accounts? Final Accounts are the set of statements prepared at the end of an accounting year from the balances in the trial balance (adjusted, where necessary, for items not yet recorded) to show the final, summarised result of a year's trading and the financial position on the last day of that year. For a proprietary concern, Final Accounts consist of three parts, always prepared in this order:

1. Trading Account — to find out the Gross Profit or Gross Loss made purely from buying and selling goods.
2. Profit and Loss Account — to find out the Net Profit or Net Loss of the business after including all other incomes and indirect/operating expenses.
3. Balance Sheet — a statement (not an account) showing all the assets and liabilities of the business as they stand on the closing date, so that its financial position is visible at a glance.

Objectives of preparing Final Accounts.

• To ascertain the gross profit or gross loss earned purely from the trading (buying-and-selling) activity of the business, isolated from all other incomes and expenses — this is the specific job of the Trading Account.
• To ascertain the net profit or net loss of the business as a whole for the accounting period, after accounting for every other income earned and every other expense incurred — this is the job of the Profit and Loss Account, and it is the figure that actually belongs to the owner (added to capital) or is borne by the owner (deducted from capital).
• To ascertain the financial position of the business on a given date — what it owns (assets) and what it owes (liabilities), and by extension, the owner's own stake (capital) in it — shown by the Balance Sheet.
• To provide information to interested parties. The owner, prospective partners, banks and creditors extending credit, and (where required) tax authorities, all rely on Final Accounts to judge how the business has performed and how financially sound it currently is.
• To compare performance across years, and against other similar businesses, using the figures Final Accounts consistently produce year after year.

Throughout this chapter, keep the underlying purpose in view: Final Accounts exist to answer, honestly and completely, "How much did we earn?" and "What do we now own and owe?" — questions every business, and every student of Maharashtra's commerce curriculum, needs to be able to answer with real figures.