Final accounts – an understanding – Key statements

In the upload, as shared earlier in the  Learning & Development group, we saw how and why accounting developed.

What are the key statements used in final accounts? The answer to these questions lie in the quest of what do we really want to achieve from final accounts.

The first and foremost thing we would like to know that over the period of one year or a predefined period, what was the result of our operations, what did we earn, what did we spend, whether we were in profit, which added to our net worth, or did we make a loss, and reduced our savings / assets. Thus, we will need a profit and loss account or an income and expenditure account.

The next thing we would examine would be “what is our financial standing” as on the last day of that period? What assets do we possess, what is our investment in the business, what do we owe to the external entities that we dealt with and what do we need to recover? In short we need to ascertain the assets and liabilities  of the business we did. So the statement that we need here is the Balance Sheet.

Now there could be situations, where we sold a product or service, and are awaiting to receive the payments for the same. Similarly, we could have availed a service or bought a product, for which we have not paid. I hope you remember the matching and the accrual concepts. These need to be accounted for in our profit and loss for sure. But then, do we have enough cash to meet our day to day requirements? This is where the Cash Flow Statement comes into play.

So, to summarize, the three key statements are :

  • The Profit & Loss Account / Income & Expenditure statement
  • The Balance Sheet
  • The Cash Flow statement

More on these in the next post….

Mohit Gupta