Importance of Final accounts

(B.Kavitha)

The organisational accounting system provides information in the form of ledger accounts maintained in the books of accounts. The additional information that is needed is obtained by deriving it from the information that is existing in these ledger accounts.
• Information relating to Profits
The ledger accounts relating to the organisation are classified into three types. Personal, Real and Nominal.
» Nominal Accounts
Nominal accounts are related to expenses, losses, incomes and gains.
Since ascertaining profits or losses involves dealing with incomes, gains, expenses and losses we can conclude that all the nominal accounts together would give us the information relating to the profits or losses made by the organisation.
» Trading and Profit and Loss Accounts
To derive the information relating to profits from these nominal accounts a ledger account by name "Trading and Profit & Loss a/c" is prepared. Preparation of these ledger accounts requires us to think beyond just transferring the information in the nominal accounts into these accounts.
• The Position of the organisation
The ledger accounts maintained within an organisational accounting system are classified into three as Personal, Real and Nominal.
» Real Accounts
Real accounts are related to tangible aspects. In general we can identify that all asset accounts are real accounts.
» Personal Accounts
Personal accounts are related to persons and organisations. These are persons/organisation which owe the organisation or to whom the organisation owes. In effect they either form creditors (liabilities) or debtors (assets).
Since all the nominal accounts have been dealt with in deriving the information relating to profits and we are left with only the real and personal accounts which represent either assets or liabilities we can conclude that all the real and personal accounts together give us the information relating to the position of the organisation.
» Balance Sheet
To derive the information relating to the position of the organisation from these real and personal accounts a statement by name "Balance Sheet" is prepared.
However preparing the Balance sheet need us to think a bit beyond just listing out the information relating to the personal and real accounts in the statement.

Assets
Real accounts and Personal accounts are capable of being called assets. Any element (account) that is capable of being liquidated (that is capable of being converted to cash by giving it away) indicates an asset. Machinery, Furniture, Cash, etc are real accounts that can be called assets.
» Debtors represent Assets
Debtors represent the persons and organisation who owe to the organisation. They would clear their dues by paying out either in cash or in some other form. Thus Debtors get liquidated and as such can be called assets.
• Liabilities
All elements representing liabilities are Personal accounts. An element that is capable of being cleared by paying out indicates a liability.
» Creditors represent Liabilities
Creditors represent the persons and organisation to whom the organisation owes. The organisation would clear its due by paying them either in cash or in some other form. Thus creditors are cleared by paying out and as such can be called liabilities.