Financial Statements are popularly known as Final Accounts. Trial Balance is generally prepared at the end of every month and at the end of the accounting year to know the balances of all the accounts & to test the arithmetic accuracy of accounts.
The basic objective of accounting is to know about the profit or loss during the previous year & present financial position at the end of the accounting year. This can be known only if Trading account and Profit & Loss account and Balance Sheet are prepared at the end of year. These are also known as FINANCIAL STATEMENTS.
It is only from Trial Balance that the Final Accounts i.e.
1) Trading and Profit & Loss account and
2) Balance Sheet
can be prepared.
As these two statements are prepared to give the final results of the business, both of these are collectively called as final accounts. Accounting cycle finally ends with these statements.
Trading account is prepared by trading concerns i.e., concerns which purchase and sell finished goods, to know the gross profit or gross loss incurred by them from buying and selling of goods during a particular period of time. Gross profit or gross loss is the difference between the cost of goods sold and the proceeds of their sale. If the sale proceeds exceed the cost of goods sold, gross profit is made and vice-versa in case of gross loss.
For non-corporate business organization Profit & Loss account is second part of income statement. It is prepared to know the net profit or net loss of business during a particular period. Every businessman has to spend on expenses other than on manufacture or purchase of goods which are called indirect expenses. There can be other incomes except sales. So, gross profit or loss is adjusted keeping in view these indirect expenses and other incomes to find out net profit or net loss.
Balance Sheet is a component of financial statements which shows balances of capital, liabilities & assets. All nominal accounts are closed by transferring these to Trading & Profit & Loss Account. Only personal & real accounts are left to be entered in Balance sheet.
Balance Sheet is the final step in accounting cycle. It shows the true position of the business in terms of assets, liabilities and capital on a particular date.