Financial managers prepare final accounts and corporate balance sheets to get a clear picture of a company's economic situation. They do so in accordance with specific guidelines and standards, the most important of which are generally accepted accounting principles (GAAP) and U.S. Securities and Exchange Commission (SEC) accounting staff bulletins.
To understand final accounts, it's helpful to understand financial accounts. These include assets, equity items, liabilities, revenues and expenses. Financial accounts help a company's bookkeeper record any transaction, as long as the junior accountant can determine which account the transaction pertains to. Assets are resources a company owns, and they include cash, equipment and land. Liabilities are corporate debts. Revenue is income the business generates through its operations, whereas expenses represent costs it incurs. Equity is money external financiers poured into the business.
Before determining final accounts, a bookkeeper must post economic events in general, as well as subsidiary, ledgers. The junior does so by debiting an asset or expense account to increase its value and crediting the account to reduce its worth. The opposite holds true for a revenue, equity or liability account. Under GAAP, a general ledger primarily holds an account's final balance. For example, a bookkeeper may post accounts receivable from Company A and Company B in the respective subsidiary ledgers, but the company's accounts receivable general ledger would show total remittances expected from all customers.
A trial balance is a two-faceted financial summary that incorporates final amounts for all accounts. "Final," in this context, means the account's worth at the end of a period -- say, a quarter or fiscal year. A trial balance helps financial managers review journal entries and ensure the accuracy of final accounts.
A balance sheet is also known as a statement of financial position or report on financial condition. It includes assets, liabilities and equity. A balance sheet indicates to investors the steps corporate management is taking to constantly refine processes, improve performance metrics and make liquidity management an integral part of day-to-day planning. For example, a company's financial-condition report may show that department heads bought equipment to improve production mechanisms and that the business borrowed to prop up its cash position.
Final accounts and balance sheets help investors make sense of a company's financial condition. They show financiers whether the business is forthcoming with performance data, how it intends to marshal its resources to pound the competition, and the steps it is taking to repay its long-term loans and avoid lender exodus.
- Accounting Coach; Balance Sheet; Harold Averkamp
- Solution Matrix; Balance Sheet (B/S)/Statement of Financial Position; Marty J.Schmidt
- PrinciplesofAccounting: The Reporting Cycle; Dr. Larry Walther
- SME Tool Kit: Trial Balance Worksheet
- The Free Dictionary by Farlex: Trial Balance
- New York University Stern School of Business; Financial Statement Analysis; Aswath Damodaran
Importance of the Accounting Cycle
Organizations use accounting methods to track and analyze financial transactions and monitor the company's money. Managers use the financial information accounting ...
Income Statement Classification of Royalty Expense
Businesses create income statements for each accounting cycle, typically on a yearly basis. Each income and expense account must be reported on...
The Importance of Balance Sheets in a Business
The balance sheet is one of three important financial statements intended to give investors a window into company's financial condition at a...
Why Is Monitoring Accounts Receivable Important?
According to ING, accounts receivable is the largest or second largest account on most companies' balance sheets. The account represents all outstanding...
Why Is the Balance Statement Important?
A company's balance sheet is an important financial statement. It provides an overview on how the company is doing financially at any...
What Is the Importance of Investing?
The importance of investing cannot be overstated. Money is a fluid thing. Something worth one dollar one day could cost significantly more...
What Is the Importance of Financial Planning?
Financial Planning is a process of setting realistic goals and then achieving them through investment planning, insurance planning and tax planning. To...
Definition of a Fiduciary Bank Account
In its simplest form, a fiduciary bank account is a deposit account in which the funds are owned by one individual or...