Steps in the Process of Finalization of Accounts

The most important and crucial function of financial accounting is to ascertain the financial position and the profitability of the business. The trading and profit and loss account show the profit or loss of the business. The Balance Sheet depicts the financial position of the business.

Manufacturing Account

The manufacturing concerns that is to say those which convert the raw materials into finished goods are required to prepare this account. It ascertains the cost of finished goods produced or manufactured.

It includes the cost of raw materials consumed and the cost of procuring them such as GST, customs duty, carriage and freight inwards, landing charges, insurance charges, etc.

Trading Account

A trading concern prepares this account to ascertain the gross profit or loss from its trading activities. Such activities include the purchase and sale of goods during an accounting year.

Further, the items appearing on the debit side are opening stock, purchase return, and direct expenses. The items appearing on the credit side are sales return and closing stock. The excess of credit side over the debit side is Gross profit and vice-versa.

Profit and Loss Account

Every concern, whether manufacturing and trading or only trading prepare this account. It ascertains the net profit or loss from all the business activities during the accounting year.

Then items appearing on the debit side are indirect expenses such as administrative and selling and distribution expenses.

Balance Sheet

It depicts the financial position of the firm at the end of the accounting year. It shows the balances of the real and personal accounts of the business at the date of preparation of the final accounts.

The debit side is the liabilities side and it shows the Capital, reserves and surplus, long-term and current liabilities.

The credit side is the assets side and it shows the fixed assets, investments and the current assets of the firm. The total of the liabilities and assets side of the Balance Sheet shall be equal.