Final Accounts – Overview

The Final Accounts package presents the financial performance and position of a business for a given period.

Components

1. Trading Account – Determines Gross Profit (or Loss).
2. Profit & Loss Account – Adjusts Gross Profit for all expenses to arrive at Net Profit (or Loss).
3. Balance Sheet – Shows the financial position (Assets = Liabilities + Equity) at period‑end.
4. Closing Entries – Transfer temporary account balances to permanent accounts, resetting the books.

Flow of Preparation

graph LR
    A[Trading Account] --> B[Profit & Loss Account]
    B --> C[Closing Entries]
    C --> D[Balance Sheet]

Key Relationships

• Gross Profit from the Trading Account is the starting point for the Profit & Loss Account.
• Net Profit/Loss from the Profit & Loss Account is transferred to Equity in the Balance Sheet via Closing Entries.
• Closing Entries ensure that revenue and expense accounts start at zero for the next period.

Example Summary (XYZ Manufacturing Ltd.)

Common Mistakes

• Forgetting to close the Profit & Loss Account to Capital.
• Misclassifying expenses as direct/indirect.
• Not reconciling the Balance Sheet totals.

Quiz

💡 Final Wisdom: "Think of Final Accounts as a story: Trading tells the tale of sales, P&L tells the tale of costs, Closing Entries tie the story together, and the Balance Sheet shows where the story ends."