Question

What is meant by Final Account? Why is Balance Sheet included in final accounts?

Hint:

The Balance Sheet provides a static view, while Trading and Profit & Loss Accounts offer a dynamic performance view.

Answer 1

Step 1: Definition of Final Account Final Accounts refer to the set of financial statements prepared at the end of an accounting period to present the financial performance and position of a business. These typically include the Trading Account, Profit and Loss Account, and Balance Sheet. Step 2: Components and Purpose - The Trading Account shows the gross profit or loss by comparing sales revenue with the cost of goods sold. - The Profit and Loss Account calculates the net profit or loss by including operating expenses and other incomes. - The Balance Sheet provides a snapshot of the business's assets, liabilities, and equity at a specific point in time. Step 3: Reason for Including Balance Sheet The Balance Sheet is included in final accounts because it reflects the financial position of the business, detailing what the business owns (assets), owes (liabilities), and the owner's equity. It ensures stakeholders can assess the solvency, liquidity, and overall financial health, complementing the income-focused Trading and Profit and Loss Accounts.