Final Accounts: The Completion Of Accointing Cycle

Final Accounts: The Completion Of Accounting Cycle

Every businessman goes into a business with the idea of making profit, which is the reward of his efforts. He tries his best to get more and more profit at the smallest economic cost.

    The role of accounting is to accumulate accounting data in such a manner that the amount of profit made or loss sustained during a particular period could be ascertained. The "Final Accounts" enable us to check on the conduct of the business, and to discover whether it is being run profitably. They are the means of conveying to the owner, management, creditors, and interested outsiders a concise picture of profitability and financial position of the business. The preparation of  Final Account is not the first stage of an accounting cycle but they are the final products of the accounting cycle ,  that is why, they are called 'Final Accounts'.

These accounts summaries all the accounting information recorded in the original books of entry and the ledger considered of hundreds or thousands of pages . The Final Accounts and Financial statements' consist of,

• Trading and Profit and Loss Account or Income Statement, which is prepared to know the profit earned or loss suffered by the business during a specific period.

• Balance sheet, which is prepared to know the financial position of the business during  specific period.    

These two accounts or statement are collectively known as "Final Account or Financial Statement".

                         Trial Balance

        A Starting Point For Final Accounts 

We know the Trial Balance is simply a list of ledger accounts balances at the end of an accounting period. This summary of the ledger at the end of an accounting period, is a convenient starting point in the preparation of the Final Accounts . i.e. Trading and Profit and Loss Account, and balance sheet.

A  Trial Balance usually contains the following types of balances,

• Balances from Expenses Accounts

• Balances from Revenue Accounts

• Balances from Assets  Accounts

• Balances from Liabilities Accounts

• Balances from Capital Accounts

The first two types of  balances are transferred to  Trading and Profit and Loss.

The other three types of balances are transferred to the Balance Sheet to know the financial position of the business.

Thus we prepare from the trial balance a Trading and Profit and Loss Account by matching Revenue balances with Expenses balances and by the time we have finished, we have a very much smaller Trial Balance, which is then arranged into a "Balance Sheet". So,

                         Profit = Revenue - All expenses

What Do We Mean By Revenue:

In common language "Revenue" means Tax or  income. But in a business concern revenue means "Sale proceeds of goods or services or it is the price of goods sold or services rendered to the customers. Again  according to the American Accounting Association, "Revenue - is the monetary expression of the aggregate of products or services transferred by an enterprise to its customers during a period of time". When a business delivers goods to its customers or renders services to them, it either receives immediate payment in cash  or acquires an account receivable (Debtor) which will be the inflow of Cash and receivable (Debtors) from sales made in that period. Thus,

       Revenue = Amount Received in Cash + Receivable 

Sources Of Revenue:

The sources of revenue are:

1. Sale proceeds of goods or services. (Sales A/c).
2. Interest received on investment.(Interest A/c Cr. balance).
3. Dividend received on share (Dividend A/c).
4. Discount received from creditors (Discount received A/c Cr balance).
5. Commission received from customers (Commission A/c Cr. balance).
6. Profit on sale of assets (Expect Goods).

If may be mentioned here that various terms are used to described different types of revenue. For example business which sells goods rather than services will use the term "Sales" to describe the revenue; revenue earned by a property dealer may be called "Commission earned; in the professional practice of payers, charted accountants, the revenue is called "fee earned".

Every business has one or two major sources of revenue and may also, have some minor sources of revenue also. So the sources of revenue may be divided into two categories.

Operational Source Or Major Sources Or Direct Source Of Revenue

The revenue earned out of normal business activities belongs to this source. For example, for a trader, sale proceeds of goods is a major source of revenue; for a property Dealer, commission earned is a major source of revenue. for a lawyer, fees earned is a major source of revenue.

Financial Sources Or Minor Sources Or Indirect Source Of Revenue

Any revenue arising from sources other than normal business activities belongs to this category. e.g. Interest, dividend, profit on sale of fixed assets etc.

Expenses

Expenses mean the expired cost incurred for earning revenue of a certain accounting period.They are the cost of the goods and services used up in the process of obtaining revenue. In other words, it becomes possible to earn revenue with the help of expenses. For example, purchase of goods, wages, salaries, rent, carriage, customs duty etc. We have to incur all these expenses in order to earn revenue.

Expenses are mainly divided into two categories;

1. Direct Expenses 
2. Indirect Expenses

Direct Expenses:

Expenses connected with purchases of goods are known as "Direct Expenses" . For example, Freight, insurance of goods in transit, carriage, wages, customs duty import duty, Octori duty etc. Without incurring these expenses, it is not possible to bring the goods from the purchase point to the go-down of the business. Such expenses are collectively known as direct expenses.

Indirect Expenses:

All the expenses other than direct expenses are assumed as indirect expenses. Such Expenses have  no relationship with purchase of building, depreciation, printing charges etc.