Final Accounts are records of all financial transactions of the business. At the end of each accounting period, usually one year and each quarter, accountants draw up the Final Accounts which include all monetary records.
Accounting, with its earliest use in ancient Mesopotamia, is the language of business invented to track money in trade and TAXation.
Why businesses prepare Final Accounts?
Businesses prepare basic Final Accounts to keep simple records of their income and expenditures. By doing so, they will know whether they are spending more than they are earning.
It is also a requirement for businesses to keep records of their financial statements. But, there are many different ways how it can be done. Mostly depending on different types of business organizations.
However, all incorporated businesses, which are limited companies owned by shareholders, must provide a set of Final Accounts. Private Limited Companies and Public Limited Companies are legally obliged to produce Final Accounts. It is done to ensure transparency for the owners in their use of funds. These official Final Accounts will be included in the annual report and quarterly reports which are sent out to every shareholder of the business.
Proper accounting helps business managers with planning and better control of the business as financial reporting is a way to account for the money. By producing Final Accounts, managers ensure that all receipts and payments of a business are officially accounted for.
The 3 basic Final Accounts
Final Accounts of the business consist of three financial statements:
1. Profit and Loss Account (P&L Account)
This account summarizes all the year’s transactions. It shows in detail how profit is calculated from the trading activities of a business at the end of a specified accounting period, usually December 31.
In this account, it will be shown how much Sales Revenue the business generated from selling goods and services. And, how much costs it had to pay in order to make those goods and provide those services. Both the cost of production and expenses will be included.
The account will also show how much Interest the business needs to pay back to the bank. And, how much Corporate TAX it owes to the government.
Finally, details will be shown how the final profit that has been made is split up between Dividends to shareholders (owners) and Retained Profit. Retained earnings are kept up in the business for future business growth.
2. Balance Sheet
This account shows the assets (all items owned by the business) and liabilities (amounts owed by the business) at a specific point in time, usually on a particular date being December 31. It is because a business can only spend money that it either has, or have borrowed.
The Equity (Net worth of the business) is also included in this account showing the real wealth of the firm. Equity is the difference between the value of what a company owns (assets) and what it owes (liabilities) to others.
3. Cash Flow
This account is about Cash only. Cash is an asset which represents the actual money a business has. It can exist in the form of ’cash in hand’ (cash held in the business) or ’cash in the bank’ (cash held in a corporate bank account).
This account will show how much Cash the business has at the beginning of the year, how much Cash was received, what the business spent Cash on, and how much Cash the business has at the end of the year.
While Cash Flow Statement is a financial document that shows the actual movements of cash into and out of a business per current time period, Cash Flow Forecast is a financial document that shows expected movements of cash into and out of a business per time period in the future.
Do Final Accounts need to be certified?
In addition to the requirement of preparing and reporting Final Accounts, it is also a legal requirement in most countries for companies to have their financial statements audited by independent accountants. These chartered accountants certify accuracy and truthfulness of the accounts.
However, because there is not one universal method to present Final Accounts, there is a decent degree of flexibility in reporting the ‘actual’ numbers. In order for accountants to remain professional, they should follow basic accounting concepts and principles.
