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Aastha

What is the need, importance, and purpose of final accounts?

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  1. This answer was edited.

    Need and Importance of Final Accounts

    Final accounts are considered as one of the essential elements of the organization. It is prepared at the final stage of the accounting process. I would like to break the explanation into two segments. The first segment would be why do we need final accounts and second would be its importance.

    Why do we need a final account?

    The main need for preparing the final account is to keep a track of all the business activities of an organization by the end of every accounting period.  Every organization is required to record financial transactions, prepare financial reports, analytics and information.

    Final accounts data is considered as extremely crucial information for the organization and administration for making informed judgments. Final accounts are needed by various users of the financial statements such as shareholders, lenders, creditors, suppliers, customers and government.

    Importance of Final Accounts

    1. Final accounts assist the shareholders to evaluate their investments which help them to make accurate decisions. Shareholders are more interested to know the liquidity position of the organization and the amount of profit and dividends earned by them.

    2. Final accounts are essential for the tax department to make sure that the organization makes the payment of various taxes and additional duties on time without any delay. Therefore preparation of final accounts (Income statement) is very important for computing tax.

    3. Final accounts provide important facts and figures regarding performance, liquidity, progress and deposition of an enterprise. This helps the internal management to make quick, informed and accurate future decisions on the various aspects of the organization.

    4. Final accounts allow lenders and creditors to have a look at the financial health and soundness of the organization. Creditors use the following information to assess the risk, credibility and its ability to repay the debt on the agreed date.

    5. Final accounts help the employees to know about the company’s profitability and its adverse effects on job security, remuneration, transfers, salary hikes, incentives and various other bonuses.

    6. Final accounts play an important role in helping the organization to achieve steady growth and development by deploying various techniques and strategies for improving revenue, developing a strong customer base and providing more employment opportunities.

    Purpose of Final Accounts

    The following are the main purpose of preparing final accounts-

    1. Final accounts are prepared to determine the net profit or net loss incurred by the organization within one accounting period.

    2. Gross Profit and Net Profit of the current accounting period are compared with the previous years’ profit. This helps in determining the progress of the business. This information further helps in framing future decisions and policies for the organization.

    3. Final accounts facilitate the preparation of trading accounts and profit & loss accounts which provides details regarding all the expenses and incomes (direct or indirect) of an organization. This helps the organization in applying various tactics for reducing the expenses and strengthening incomes.

    4. Final accounts serve as a purpose and facilitate the preparation of financial ratios by using trading and profit & loss accounts information. For example- Gross Profit Ratio, Net Profit Ratio, Operating Ratio etc.,

    5. Final accounts are prepared to ascertain the financial and liquidity position of an organization on a certain date by providing and reflecting the exact value of assets and liabilities. The current values shown under the various heads of the balance sheet is used for comparing it with the previous years’ figures to evaluate changes in the financial position.

    6. Final accounts are prepared with an objective to determine the solvency position of the business. It states that business must have an ability to meet short-term solvency by calculating Current Ratio and Liquidity Ratio. Similarly, long-term solvency can be achieved by computing Debt-equity Ratio and Proprietary Ratio.

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