Final Accounts – Comprehensive Summary

This lesson ties together everything you have learned about Final Accounts for a trading/​manufacturing business.

1. Trading Account

• Purpose: Determine Gross Profit (or Loss).
• Key Items: Opening Stock, Purchases, Direct Expenses, Sales, Closing Stock.
• Formula: Gross Profit = (Sales + Closing Stock) – (Opening Stock + Purchases + Direct Expenses).

2. Profit & Loss Account

• Purpose: Adjust Gross Profit for all expenses to arrive at Net Profit/Loss.
• Key Items: Direct Expenses, Indirect Expenses, Other Incomes, Depreciation.
• Formula: Net Profit = Gross Profit – (Direct + Indirect Expenses).

3. Closing Entries

• Transfer balances of temporary accounts (Revenue, Gains, Expenses, Losses) to Profit & Loss Account.
• Move Net Profit/Loss to Capital/Retained Earnings.
• Reset temporary accounts to zero for the next period.

4. Balance Sheet

• Purpose: Show the financial position at period‑end.
• Structure: Assets = Liabilities + Equity.
• Components:
  • Assets: Current (Cash, Debtors, Stock) + Fixed (Land, Buildings, Machinery).
  • Liabilities: Current (Creditors, Short‑term loans) + Long‑term (Mortgage, Bonds).
  • Equity: Capital, Reserves, Retained Earnings (adjusted for Net Profit/Loss).

Flow Diagram

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

Inter‑relationships

• Gross Profit (from Trading) is the starting point for the Profit & Loss.
• Net Profit/Loss (from P&L) 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 accounting period.

Quick Checklist for Final Accounts

• Trading Account prepared and balanced.
• Profit & Loss Account prepared, showing Net Profit/Loss.
• All temporary accounts closed correctly.
• Balance Sheet balances (Assets = Liabilities + Equity).
• Disclosures for adjustments (depreciation, doubtful debts, contingencies).

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."