Final accounts are the financial statements prepared at the end of an accounting period to determine the profitability and financial position of a business. These accounts include:
1. Trading Account
2. Profit and Loss Account
3. Balance Sheet

Purpose of Final Accounts
Final accounts help to evaluate the financial performance (profitability) and the financial position (assets, liabilities, and equity) of a business. They are crucial for stakeholders such as owners, managers, creditors, and investors for making informed decisions.

Definition of Trading Account
The Trading Account is the first step in preparing the final accounts. It is prepared to determine the Gross Profit or Gross Loss by showing the direct income and direct expenses related to the sale of goods. It focuses on the relationship between sales and cost of goods sold.

Format of Trading Account
Particulars Debit Side | Credit Side
------------------------------|------------------------------
Opening Stock | Sales
Purchases | Closing Stock
Wages/Direct Expenses | Manufacturing Expenses
Gross Profit (or Loss) | Gross Profit

Explanation
Sales: Revenue from the sale of goods or services.
Cost of Goods Sold: The direct costs incurred to produce the goods sold (e.g., opening stock + purchases + direct expenses – closing stock). Gross Profit is calculated by subtracting the cost of goods sold from net sales.

Definition of Profit and Loss Account
The Profit and Loss Account is prepared after the trading account to determine the Net Profit or Net Loss of the business by accounting for indirect income and indirect expenses. It focuses on operating expenses (e.g., rent, salaries) and income not directly related to the core business operations (e.g., interest, commission).

Format of Profit and Loss Account
Particulars Debit Side | Credit Side
------------------------------|------------------------------
Indirect Expenses (e.g., salaries, rent, depreciation) | Indirect Income (e.g., interest, commission)
Net Profit (or Loss) | Net Profit

Explanation
Indirect Expenses: Expenses like administrative expenses, selling and distribution expenses, depreciation, etc. Net Profit is the final result after subtracting total indirect expenses from gross profit and adding indirect income.

Definition of Balance Sheet
The Balance Sheet is a statement that shows the financial position of the business on a specific date. It lists assets and liabilities, showing how the business’s resources are financed by debt (liabilities) and equity (owner’s capital). The balance sheet follows the basic accounting equation:
Assets = Liabilities + Owner’s Equity

Format of Balance Sheet
Liabilities | Assets
------------------------------|------------------------------
Capital | Fixed Assets
Reserve and Surplus | Current Assets
Long-term Liabilities | Investments
Short-term Liabilities | Cash and Bank

Explanation
Liabilities: Amounts owed by the business, including long-term liabilities (e.g., loans) and short-term liabilities (e.g., creditors, bills payable). Assets: Resources owned by the business, including fixed assets (e.g., buildings, machinery) and current assets (e.g., cash, stock, receivables).

What are Adjustments?
Adjustments are entries that are made to bring the financial statements in line with actual income and expenses that may not have been recorded during the accounting period. Adjustments may include:
- Accrued Income: Income that has been earned but not yet received.
- Outstanding Expenses: Expenses that have been incurred but not yet paid.
- Prepaid Expenses: Expenses that have been paid in advance.
- Depreciation: The reduction in the value of fixed assets due to wear and tear.
- Provision for Doubtful Debts: An allowance for potential bad debts.

Example of Adjustments
- Accrued Income: Interest income of ₹1,000 has been earned but not yet received.
- Outstanding Expenses: Wages of ₹2,000 have been incurred but not yet paid.

How to Handle Adjustments in Trading, Profit and Loss, and Balance Sheet
- Trading Account: Adjustments related to stock (e.g., adjustments for closing stock) are made here.
- Profit and Loss Account: Adjustments for accrued income, prepaid expenses, and outstanding expenses are made in this account.
- Balance Sheet: Adjustments like depreciation, provision for doubtful debts, and adjustments to outstanding or prepaid expenses are recorded in the balance sheet.

Procedure
When no adjustments are necessary, the trading account is prepared to determine the gross profit, followed by the profit and loss account to calculate the net profit. The balance sheet is prepared after calculating net profit or loss, showing the business’s financial position.

What is Marshalling of the Balance Sheet?
Marshalling of the balance sheet refers to the arrangement of items in the balance sheet in a systematic and logical order. It ensures clarity and consistency in presenting financial information.

Types of Marshalling
- Marshalling of Assets
- Order of Liquidity: Assets are listed in the order of their liquidity, i.e., how quickly they can be converted into cash.
- Fixed Assets are listed first, followed by Current Assets.
- Marshalling of Liabilities
- Order of Maturity: Liabilities are listed in the order of their due dates.
- Long-term liabilities are listed before short-term liabilities.

Example of Marshalling
Assets: Fixed Assets → Current Assets → Cash and Bank.
Liabilities: Long-term Liabilities → Short-term Liabilities → Sundry Creditors.

Summary of Key Points
Final accounts provide crucial information about the profitability and financial position of a business. The Trading Account calculates gross profit, the Profit and Loss Account determines net profit, and the Balance Sheet shows the financial position. Adjustments are necessary for accurate financial reporting, and Marshalling helps organize the balance sheet for clarity.

The Importance of Final Accounts
Final accounts play a vital role in business decision-making, financial planning, and regulatory compliance. They help in evaluating business performance and assessing financial health.