Final Accounting :: Need for Additional Information
Final - Accounts/Accounting
- Occurring at or forming an end or termination
- Conclusive in a process or progression
Final Accounts/AccountingIn its simplest sense, final accounts or final accounting refers to all the activities or tasks related to accounting that are carried on towards the end of a period called financial period or accounting period.
Accounting - Regular tasks and information derived
The organisation's information needs define the number of elements in the accounting system of the organisation. The more the information needed by the organisation the more the elements (accounting heads) that are to be maintained by the organisations'.
We can get an idea of the information that is available or derived by knowing about the regular tasks involved in the accounting process.
Creating a Proof of the TransactionWhenever a transaction takes place in an organisation, more so, in the case of transactions relevant to accounting, a proof is created in the form of either a voucher or a receipt or an invoice or any other document that gives the details relating to the transaction.
Strictly speaking, this task is not a part of the accounting process. It is only a task which would enable the accomplishment of the accounting process or tasks.
Actual Accounting TasksThe actual accounting tasks are a part of the accounting cycle.
Recording (Journalising)The first accounting task (called Recording the transaction or journalising) is preparing the Journal based on the proof of the transaction. This involves recording the information from the proof of the transaction in a specified format.
But for the information being recorded in a specified format, there is no new information available in the journal compared to information available in the proof of the transaction. The journal is a crucial component in the accounting system. So crucial that we say, no journal no accounting. It enables the subsequent flow of information in the accounting system.
Posting (into the ledger)The next accounting task (called posting) is carrying the information in the journal into the two elements or accounting heads affected by the journal. The ledger enables collecting all the information relating to an element at a single place and is the most useful component in the accounting system.
Balancing (the ledger)The ledger account is balanced periodically to derive the information relating to the balance in each ledger account. The balance gives an idea of the value relating attributable to that element at a specific period of time when the balance has been drawn.
Other TasksThere are tasks other than the ones within the accounting cycle.
Preparing a Trial BalanceA trial balance is a statement of all the ledger account balances at a specified point of time. It provides the information relating to all the ledger account balances at a glance.
The trial balance is prepared to check the arithmetical accuracy of accounting, which is the primary reason for which it is prepared. It is also used for other purposes wherever possible. Just because it is being used for other purposes (like in the preparation of final accounts), we cannot say that the trial balance is prepared for those other purposes.
Unlike the journal and the ledger, preparation of a trial balance is not a regular task. Moreover, the trial balance is not a part of the accounting cycle. The accounting cycle can exist and run even without a trial balance.
Additional Information Needed by the Organisation
Each ledger account collects information relating to an element. All the ledger accounts (account heads) are classified into three types. Personal accounts (relating to persons and organisations), Real accounts (relating to tangible aspects) and Nominal accounts (relating to incomes/gains and expenses/losses).
Going Concern ConceptAn organisation would continue operations for the foreseeable future without the necessity or intent to liquidate or cease operations, unless there is information to the contrary.
When do the regular tasks stop?
The regular tasks are carried on as long as the organisation exists. Based on the Going concern concept an organisation is assumed to continue its operations for an indefinite period of time, unless otherwise stated. Thus we will have to assume that the regular tasks never stop.
As and when an element is effected by a transaction, the ledger account is posted to with the information. This keeps going on continuously as the regular tasks do not stop. The ledger are periodically balanced to derive the balances.
There two important types of information derived through the process of final accounting.
Profits made by the organisationThe organisation would be interested in knowing, periodically, the amount of overall profit or loss made over the period of time.
This information is not readily available with the organisation. The only information available in this direction is in the form of ledger account balances of nominal accounts which represent incomes, expenses, gains or losses.
Involvement of a PeriodWhen it comes to thinking about profits there is a period involved in the thought. We think of profits made over a period and not at a particular instance.
Eg: We think or talk of Profits made
- From 1st April to 31st April or
- During April or
- During the 6 months ending 30th June
- For the year from 1st April, 20_5 to 31st March 20_6.
We do not say profits made as on or as at.
Position of the OrganisationOne another information that the organisation would be interested in knowing periodically is the information relating to its position as at a particular point of time. By position we mean the financial position of the organisation.
This information is also not readily available with the organisation. The only information available in this direction is in the form of ledger account balances of real accounts which represents assets and personal accounts which represent either debtors (assets) or creditors (liabilities).
Assets and Liabilities indicate a persons PositionWhat is it that comes to our mind when we think of a persons position? It is the value of his/her property and the liabilities he/she has.
Even in accounting, in trying to ascertain the position of a business entity, this is what we think of. The position of a business is indicated by the value of its assets and liabilities.
Position at an instanceWhen it comes to thinking about the position there is an instance involved in the thought. We think of the position as at a point of time and not a period.
Eg: We think of the position
- As on 24th June or
- As at the end of a period or
- As on the last day of the period.