Competitive Exams Accountancy Final accounts

Final Accounts

what do you under stand by final accounts illustrate with help of a chart the process of final account.

Answer: The trading, profit and loss accounts are prepared every financial year 12 month period to find out the status of business, profit or loss and also to know asset and liabilities of the business. It is important to know the following terms during finalization

Trial balance, balance sheet, incomes, expenses, closing entries, closing entries, depreciation.

When interpreting final accounts we must answer the following questions

How well has the business performed this year?

  1. Does it match my competitors?

  2. What will those interested in the business think of our performance? When we look at a set of accounts, the above questions cannot be answered simply by looking at the balance sheet and profit and loss accounts. To bring a level of understanding to our business that will be useful to key groups, we must calculate exactly how the business has performed, and ideally relate this to previous year's figures. To do this we need access to the final accounts of the business we are investigating. There are three key areas to consider:

    • Profitability
    • Liquidity
    • Activity

Each of the above can be calculated quite simply through a series of straightforward long divisions and multiplications. Using the formulae below we rapidly discover the final outcome of each ratio. However, a number alone means very little, the key skill is the ability to evaluate the numbers, and whether they reflect well on the business concerned. We will examine the profitability ratio in depth within this task. Further research and deduction is required from you to determine the meaning of our other key ratios.

Profitability

Gross Profit ratio: Gross Profit/Sales x 100

Net Profit Ratio: Net Profit/Sales x 100

Return on capital Employed: Net Profit/Capital Employed x 100

Liquidity

Current ratio sometimes called working capital ratio & Current assets/current liabilities.

Liquid ratio sometimes called the acid test ratio

Current assets excluding stock/Current liabilities & Activity

Stock Turnover ratio

Costs of goods sold/average stock

Debtor Collection Ratio

Debtors/Credit sales over the period x 52 weeks

Creditor payment ratio

Creditors/Credit purchase over period x 52 weeks