2.5. Final Accounts of Companies

As per the Companies Act, companies must prepare: • Balance Sheet • Statement of Profit and Loss

According to the Companies Act, every company is required to prepare specific financial documents that reflect its financial position. These two primary documents are the Balance Sheet and the Statement of Profit and Loss. The Balance Sheet summarizes the company's assets, liabilities, and equity at a specific point in time, whereas the Statement of Profit and Loss provides an overview of the company's financial performance over a certain period, detailing revenues and expenses.

Think of the Balance Sheet as a snapshot of your personal financial health at the end of the month, showing how much money you have, what you owe, and how much you could have left (your assets, liabilities, and equity). The Statement of Profit and Loss is like a monthly report card showing how much money you earned and spent, helping you understand whether you are saving or losing money.

Assets: • Non-current Assets • Current Assets Liabilities: • Shareholders’ Funds • Non-current Liabilities • Current Liabilities

The Balance Sheet has a specific format that starts with assets separated into non-current and current assets. Non-current assets are long-term investments that a company expects to bring value over time, like machinery or buildings. Current assets are short-term assets, such as cash and inventory, that are expected to be converted into cash within a year. On the liabilities side, you have shareholders’ funds (equity) and liabilities categorized into non-current (long-term debts) and current (obligations due within a year). This classification helps users understand the financial structure and liquidity of the company.

Imagine you are creating a personal financial statement. Your 'assets' could be your car and cash in your bank account (non-current and current respectively), while your 'liabilities' might include a mortgage (non-current) and credit card debt (current). This organization reveals your financial standing clearly, much like a company’s Balance Sheet.

Includes: • Revenue from Operations • Other Income • Expenses • Profit before Tax • Tax Expense • Profit after Tax

The Statement of Profit and Loss outlines all financial activities within a specific period. It starts with Revenue from Operations, which shows earnings from the company’s primary business activities. Other income can include gains from investments or sales of assets. The expenses section lists all costs incurred by the company. The next line denotes Profit before Tax, which represents the company’s earnings before tax obligations. The Tax Expense line shows the tax due based on the profit, leading down to Profit after Tax, which represents the net earnings of the company considered for usage or distribution.

Think of the Statement of Profit and Loss like a household budget for a month. You first write down all your income sources (like salary or freelance work), then subtract all your expenses (like rent, groceries, and bills). The number left after all deductions is akin to your net savings or loss, similar to how the company's profit after tax is calculated.

• Depreciation • Provision for Tax • Outstanding Expenses • Prepaid Expenses • Accrued Income • Income Received in Advance • Proposed Dividend

Final accounts also require specific adjustments to accurately reflect the company’s financial status. Depreciation accounts for the wear and tear of assets over time, impacting their book value. Provision for Tax prepares for tax liabilities that the company is expected to pay. Outstanding expenses are costs incurred but not yet paid, while prepaid expenses are payments made ahead of time. Accrued income refers to income earned but not yet received, whereas income received in advance is money received for services not yet rendered. Finally, a proposed dividend is a recommendation for profit distribution to shareholders, which affects the company’s retained earnings.

Imagine balancing your home finances where you account for bills that are due but not yet paid (outstanding expenses), and also money you've earned but haven't received yet (accrued income). Adjusting these amounts ensures your budget accurately reflects what you truly have and owe, just like a company must adjust its accounts to portray a true financial picture.

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