Final accounts are the ultimate outcome of the accounting process and provide a summary of the financial results and position of a business entity. For non-corporate entities like sole proprietorships and partnerships, final accounts typically include the Trading and Profit and Loss Account and the Balance Sheet. In the case of manufacturing concerns, a Manufacturing Account is also prepared. These financial statements are compiled with the help of the trial balance and additional information or adjustments related to the financial year.
Purpose of Final Accounts
The Trading and Profit and Loss Account reveals the operational result of the business, showing the profit earned or the loss suffered during the accounting period. Incomes and expenses related to the period, whether paid or received or not, are recorded using the accrual or mercantile system of accounting. This system recognizes income when earned and expenses when incurred. Therefore, adjustments must be made for items such as outstanding expenses, accrued incomes, prepaid expenses, income received in advance, and closing stock.
The Balance Sheet, in contrast, is not an account but a statement showing the financial position of the business on a specific date. It lists the assets and liabilities and is a snapshot of the organization’s financial standing at that moment in time.
The Manufacturing Account, when prepared, shows the total cost of goods manufactured during the year. This cost is then transferred to the Trading Account to arrive at the gross profit or loss.
Components of Final Accounts and Their Meaning
Trading Account
The Trading Account helps determine the gross profit or gross loss of a business. It considers only the direct costs and incomes related to the purchase and sale of goods. On the credit side of the Trading Account, sales and closing stock are recorded. On the debit side, purchases (adjusted for returns), opening stock, and direct expenses such as carriage inward and wages are included. The resulting balance is either gross profit or gross loss, which is then transferred to the Profit and Loss Account. While corporate entities generally integrate trading information directly into the Profit and Loss Account, non-corporate entities often prepare a separate Trading Account to assess the gross margin.
Profit and Loss Account
The Profit and Loss Account determines the net result of operations after accounting for indirect incomes and expenses. It starts with the gross profit or gross loss transferred from the Trading Account. Other incomes, such as interest and discounts, are added, while administrative, selling, financial, and other indirect expenses are deducted. The net profit or loss is typically transferred to the capital account or, in the case of partnerships, to the Profit and Loss Appropriation Account. Although it is not mandatory, it is common for the entire profit or loss to be transferred to the proprietor’s or partners’ capital account. Therefore, the Profit and Loss Account itself may not appear in the Balance Sheet.
Profit and Loss Appropriation Account
The Profit and Loss Appropriation Account is used to allocate the net profit or net loss among the partners or to make other appropriations such as interest on capital, salaries, commissions, or reserves. Items such as interest charged on drawings are credited, while appropriations like interest on capital or transfers to reserves are debited. The remaining balance is then transferred to the capital accounts of the proprietors or partners. While charges against profit are treated as expenses and debited to the Profit and Loss Account, appropriations of profit are debited to the Profit and Loss Appropriation Account. This account is also a period-based statement, usually reflecting the results of one accounting year. In corporate entities, the remaining balance after all appropriations, including dividends, appears in the Balance Sheet under retained earnings.
Manufacturing Account
A Manufacturing Account is prepared by manufacturing entities to determine the cost of goods produced. The cost includes raw materials consumed (opening stock plus purchases minus closing stock), direct wages, carriage inward, and other factory-related expenses like power, fuel, and depreciation of factory assets. The opening stock of work-in-progress is debited, and the closing work-in-progress is credited. The resulting figure represents the total manufacturing cost and is transferred to the Trading Account. If a Manufacturing Account is not prepared separately, its components are included directly in the Trading Account. Depreciation may sometimes be posted directly to the Profit and Loss Account rather than the Trading Account. The Manufacturing Account, like the Trading Account, is a period-based statement.
Balance Sheet
The Balance Sheet presents the financial position of the entity at a particular point in time. It details what the business owns (assets) and what it owes (liabilities), with the net difference representing the owner’s equity. Although not an account, the Balance Sheet is structured in a way that assets and liabilities balance out. Assets are listed based on either permanence (fixed assets first, followed by current assets) or liquidity (cash and equivalents first, followed by less liquid assets). The permanence method is commonly used by traders and manufacturers, while financial institutions like banks often use the liquidity method. Liabilities are generally listed starting with capital and reserves, followed by loans and current liabilities. Despite lacking debit and credit sides, students are advised to understand that the asset side reflects debits and the liabilities and capital side reflect credits. This understanding aids in the accurate preparation of final accounts. The Balance Sheet is compiled using the accrual basis of accounting, where incomes are recorded when earned and expenses when incurred, necessitating adjustments for prepaid, outstanding, and accrued items.
Trial Balance
The Trial Balance is a statement that lists the balances of all ledger accounts at a specific point in time, typically classified into debit and credit. It serves as a preliminary step in preparing the final accounts and is used to check the arithmetic accuracy of accounting records. The Trial Balance includes balances of all expenses, incomes, assets, and liabilities. Using the Trial Balance and any accompanying adjustments, final accounts are prepared. All incomes and expenses are allocated to the Manufacturing Account, Trading Account, Profit and Loss Account, or Profit and Loss Appropriation Account depending on their nature. All asset and liability balances are reported in the Balance Sheet.
Adjustment or Additional Information
After the preparation of the Trial Balance, additional information or adjustments may be required. These could be transactions not yet recorded or errors that need correction. Such adjustments are given a double-entry treatment, with both debit and credit effects recorded. Sometimes adjustments are implied or indirectly derived from the information in the Trial Balance. These are called derived adjustments. The physical placement of this information—whether before, within, or after the Trial Balance—is irrelevant. What matters is the correct interpretation and accounting treatment.
Common Adjustments and Their Accounting Treatment
During the preparation of final accounts, certain adjustments must be made to ensure that all incomes and expenses are recorded in the correct accounting period. These adjustments are essential in the mercantile or accrual system of accounting. Below are some of the most common types of adjustments along with their accounting treatments.
Outstanding Expenses
Outstanding expenses refer to costs that have been incurred during the accounting period but remain unpaid at the end of the period. Since the benefit of these expenses has already been received, they must be recorded even if the payment is yet to be made.
The accounting entry is:
Expense account debit
To Outstanding expenses account (a liability)
This ensures the expense is recorded in the Profit and Loss Account, and the liability is reflected in the Balance Sheet.
Prepaid Expenses
Prepaid expenses are those for which payment has been made in advance for services or benefits to be received in the following period. These amounts are not considered expenses for the current year and must be removed from the Profit and Loss Account.
The accounting entry is:
Prepaid expense account debit (an asset)
To Expense account
The prepaid amount is excluded from current year expenses and shown as an asset in the Balance Sheet.
Accrued Income or Outstanding Income
Accrued income is income that has been earned during the period but not yet received. Despite the lack of cash inflow, it must be recorded as income for the period.
The accounting entry is:
Income receivable account debit (an asset)
To Income account
This reflects the income in the Profit and Loss Account and also records the receivable as an asset in the Balance Sheet.
Income Received in Advance
This refers to income received during the year for services to be rendered in the next accounting period. Since the income has not yet been earned, it must be excluded from the current year’s income.
The accounting entry is:
Income account debit
To Advance income account (a liability)
The amount is deducted from income and shown as a liability in the Balance Sheet.
Depreciation
Depreciation is the systematic allocation of the cost of a fixed asset over its useful life. It represents the wear and tear or reduction in value of an asset due to usage, passage of time, or obsolescence.
There are two common ways to account for depreciation:
Depreciation account debit
To Asset account
Or alternatively,
Depreciation account debit
To Provision for depreciation account
In either case, the depreciation is treated as an expense and is debited to the Profit and Loss Account, while the asset’s value is reduced in the Balance Sheet either directly or through a provision.
Closing Stock
Closing stock represents the value of unsold goods at the end of the accounting period. This stock must be accounted for in the Trading Account to determine the correct cost of goods sold.
The accounting entry is:
Closing stock account debit (an asset)
To Trading account
Closing stock is added to the credit side of the Trading Account and is also shown as a current asset in the Balance Sheet.
Adjustments Before Preparing the Trial Balance
Adjustments can be recorded before preparing the Trial Balance to ensure accuracy and completeness of records. For example, closing stock can be accounted for in the books before drafting the Trial Balance.
To do this, the opening stock is transferred to the Purchases Account:
Purchases account debit
To the Opening stock account
Then the closing stock is recorded:
Closing stock account debit
To Purchases account
As a result, the Trial Balance will reflect the closing stock on the asset side and the adjusted Purchases amount in the debit column. The Trading Account will then include the adjusted Purchases figure.
Add-Less Method Versus Debit-Credit Method
While some students use the add-less method to apply adjustments, using debit and credit entries offers greater accuracy and reflects the true nature of double-entry accounting. Developing a habit of forming journal entries for every transaction improves understanding and reduces reliance on memorization. Add-less methods are helpful for quick revisions, but long-term understanding requires fluency in accounting language, which is based on debits and credits.
By applying correct journal entries, each adjustment’s effect is appropriately reflected in both the Trial Balance and the final accounts. This approach ensures compliance with real-world accounting and audit standards, where all transactions must be documented in the books.
Closing Entries and Finalization of Accounts
Once all adjustments are recorded, it becomes necessary to close the nominal accounts and finalize the books for the year. Nominal accounts include all expense and income accounts that are required to be transferred to Trading or Profit and Loss Account.
Expenses accounts are closed by debiting Trading or Profit and Loss Account:
Trading or Profit and Loss Account debit
To Expense account
Incomes are closed by crediting the Trading or Profit and Loss Account:
Income account debit
To Trading or Profit and Loss Account
The gross profit or loss from the Trading Account is transferred to the Profit and Loss Account:
Trading account debit
To Profit and Loss account
The net profit or loss from the Profit and Loss Account is transferred to the Capital Account:
Profit and Loss account debit
To the Capital account
After these closing entries are passed, the only remaining accounts are those related to assets and liabilities. These are shown in the Balance Sheet and carried forward to the next accounting period as opening balances.
Once the books are finalized and audited, no changes are made in the closed accounts. Any debit balance is either an expense or an asset, and any credit balance is either income or a liability. These balances form the basis for preparing next year’s accounts.
Accounting for Bad Debts
When credit sales are made, debtors are created. However, some of these debts may become irrecoverable, resulting in bad debt losses.
If a specific debt is confirmed to be uncollectible, the party’s account is closed, and the entry is:
Bad debt account debit
To Debtor’s account
Alternatively, if the debt is doubtful and you want to create a reserve without closing the party’s account:
Bad debt account debit
To Provision for bad and doubtful debts account
Bad debts written off may be recorded at any time during the year, but provisions for bad debts are generally created only at year-end based on the total receivables and estimated irrecoverable amount.
If a provision already exists in the books, only the additional amount needed is recorded:
Bad debts account debit.
To Provision for bad and doubtful debts account
If the existing provision is more than required, the excess is written back:
Provision for bad debts account debit.
To Bad Debts account..
This adjustment ensures that the final provision balance appears as a deduction from Debtors in the Balance Sheet and the correct amount of bad debt loss is recorded in the Profit and Loss Account.
Interpretation of Adjustments Related to Provisions
The interpretation of how much provision should be created depends on the wording provided. For example:
If the instruction says “Provision to be maintained” or “Provision to be raised to,” it implies the total closing provision.
If it says “Provision to be increased by” or “Additional provision to be made,” it refers to the additional amount over the existing provision.
In such cases, it is advisable to form journal entries based on a clear understanding of the accounting principles involved. If a total provision is to be created, the full amount is recorded. If additional provision is required, only the difference is recorded.
Impact of Bad Debt and Provisions in Final Accounts
The total amount of bad debt loss is included in the Profit and Loss Account and consists of the sum of bad debts written off and any additional provision made.
The closing balance of the provision is shown as a deduction from the total Debtors in the Balance Sheet to arrive at the net realizable value. This conservative approach ensures the assets are not overstated and aligns with the prudence concept in accounting.
Classification of Accounts and Nature of Balances
In accounting, it is crucial to understand the classification of accounts to correctly prepare and interpret final accounts. Accounts are generally classified into real, nominal, and personal accounts. Each of these has specific rules for debit and credit, which help determine the nature of their balances.
Real Accounts
Real accounts include all assets, both tangible and intangible. Tangible assets include machinery, land, buildingss, and furniture. Intangible assets include goodwill, patents, and trademarks. These accounts generally have a debit balance and are carried forward from one period to another. They appear on the asset side of the Balance Sheet and are not closed at year-end. The rule for real accounts is: debit what comes in, credit what goes out.
Nominal Accounts
Nominal accounts include all expense and income accounts. Examples of expenses are rent, salaries, and interest paid, while examples of incomes include commission received and interest earned. These accounts are used to determine the profit or loss of the business and are closed at the end of the accounting period by transferring their balances to the Profit and Loss Account. The rule for nominal accounts is: debit all expenses and losses, credit all incomes and gains.
Personal Accounts
Personal accounts relate to individuals, firms, and companies. They include debtors, creditors, capital accounts, and drawings. These accounts can have either a debit or credit balance. The rule for personal accounts is: debit the receiver, credit the giver. Personal accounts of customers and suppliers are essential in recording transactions involving credit.
Nature of Balances in Accounts
Each type of account has a characteristic balance. Asset accounts and expense accounts usually carry debit balances, while liability accounts, income accounts, and capital accounts carry credit balances. Understanding this helps ensure proper classification and presentation in the Trial Balance and subsequently in the final accounts.
Importance of Adjustments in Final Accounts
Adjustments are a critical component in the preparation of final accounts. Without adjustments, the financial statements would not accurately reflect the performance and financial position of the entity. Adjustments account for transactions that are not yet recorded or those that require correction to match the accrual basis of accounting.
Matching Principle
One of the key accounting principles justifying adjustments is the matching principle. It states that expenses should be matched with the revenues they help to generate during the same accounting period. This principle ensures accurate profit measurement and avoids misleading financial reporting.
Prudence Concept
The prudence or conservatism concept requires that potential losses be accounted for as soon as they are anticipated, but gains should only be recognized when they are realized. Provisions for doubtful debts, depreciation, and obsolete inventory are based on this principle. Adjustments are made accordingly to avoid overstatement of assets or income.
Consistency and Comparability
Adjustments also ensure consistency and comparability of financial statements across periods. By making appropriate year-end adjustments, businesses maintain a consistent basis of accounting, which is essential for comparing financial results over time.
Application of Adjustments in Practical Scenarios
To understand the impact of adjustments more clearly, consider some practical scenarios involving year-end adjustments and their reflection in the final accounts.
Scenario One: Outstanding Rent
Suppose the rent for March has not been paid and is outstanding. The business has used the premises, so the expense must be recognized. The outstanding rent is added to the rent account in the Profit and Loss Account and shown as a liability in the Balance Sheet.
Rent account debit
To Outstanding rent account
Scenario Two: Prepaid Insurance
A portion of the insurance premium paid during the year relates to the next accounting period. This amount is deducted from the insurance expense in the Profit and Loss Account and recorded as an asset in the Balance Sheet.
Prepaid insurance account debit
To Insurance expense account
Scenario Three: Accrued Commission Income
Commission earned but not received is added to income in the Profit and Loss Account and shown as an asset in the Balance Sheet.
Accrued commission account debit
To Commission income account
Scenario Four: Advance Received from Customers
Advance payments received from customers for goods or services to be delivered in the next year are deducted from sales income and recorded as a liability.
Sales account debit
To Advance from customer’saccount account
These adjustments help ensure that the income and expenses presented in the Profit and Loss Account belong strictly to the reporting period and that assets and liabilities in the Balance Sheet are correctly stated.
Accrual Basis Versus Cash Basis in Accounting
The accrual basis of accounting is the standard method used for preparing final accounts. Under this system, revenues and expenses are recognized when they are earned or incurred, not necessarily when cash is received or paid.
Accrual Basis
The accrual system provides a more accurate view of a company’s financial performance and position. It records all expenses and incomes within the period they relate to, regardless of cash flow. This system necessitates year-end adjustments for outstanding expenses, accrued incomes, prepaid expenses, and incomes received in advance.
Cash Basis
Under the cash basis of accounting, transactions are recorded only when cash is received or paid. This method is simpler and often used by small businesses or professionals. However, it does not present a complete picture of financial performance and is not acceptable for general-purpose financial statements.
Comparison and Relevance
While the cash basis may offer simplicity, the accrual basis aligns with the matching principle and is legally mandated for most businesses. Final accounts are prepared on the accrual basis to comply with financial reporting standards and ensure accurate profit determination.
The Flow from Journal to Final Accounts
The accounting process begins with recording transactions in the journal, then posting to the ledger, extracting a trial balance, and finally preparing the final accounts. Each stage is essential for accuracy and completeness.
Journal
The journal is the book of original entry where all transactions are first recorded in chronological order. Each journal entry follows the rules of debit and credit based on the type of accounts involved.
Ledger
Entries from the journal are posted into the respective ledger accounts. The ledger contains individual accounts such as cash, sales, purchases, and rent, which show the cumulative effect of transactions.
Trial Balance
Once all transactions are posted, a trial balance is prepared to ensure that total debits equal total credits. If they do not match, it indicates errors in recording or posting.
Final Accounts
Using the trial balance and any additional adjustments, the final accounts are prepared. These include the Trading Account, Profit and Loss Account, and Balance Sheet. Each account is prepared in a specific sequence to show the financial resultss and position of the business.
Use of Working Notes in Final Accounts
Working notes are an essential part of preparing final accounts. They provide detailed calculations that support the figures presented in the financial statements. Although not part of the main financial statements, working notes are crucial for transparency and accuracy.
Purpose of Working Notes
Working notes are used for adjustments, provisions, depreciation calculations, and any other complex figures that require computation. They ensure that each number included in the accounts is backed by a logical and documented calculation.
Format of Working Notes
Working notes should be neatly presented, clearly titled, and include explanations for each step. This helps not only in exams but also in audits, where supporting calculations are required for verification purposes.
Working notes may include:
- Calculation of depreciation
- Computation of adjusted purchases
- Bad debts and provision analysis
- Prepaid and outstanding expense treatment
- Interest on capital or drawings
By using clear and well-organized working notes, the final accounts become more accurate and easier to understand for stakeholders.
Treatment of Adjustments in Final Accounts
Adjustments are essential in final accounts because they ensure that all expenses and incomes relating to the accounting period are properly accounted for, even if they are not yet paid or received. These adjustments follow the accrual concept of accounting and are made through journal entries and reflected in the financial statements accordingly.
Outstanding Expenses
These are expenses that have been incurred but not yet paid by the end of the accounting period. They are added to the respective expense in the Profit and Loss Account and shown as a current liability in the Balance Sheet. For example, if salaries worth ₹10,000 are outstanding, the journal entry will be: Salaries A/c Dr. ₹10,000 To Outstanding Salaries A/c ₹10,000. In the final accounts, this amount is added to the salaries expense in the Profit and Loss Account and shown as a liability in the Balance Sheet.
Prepaid Expenses
These are expenses paid in advance for the next accounting period. They are deducted from the respective expense in the Profit and Loss Account and shown as a current asset in the Balance Sheet. For instance, if insurance of ₹2,000 is paid in advance, the entry is: Prepaid Insurance A/c Dr. ₹2,000 To Insurance A/c ₹2,000. This will reduce the insurance expense in the Profit and Loss Account and appear under current assets in the Balance Sheet.
Accrued Income
Accrued income is income earned during the current accounting period but not yet received. It is added to the respective income in the Profit and Loss Account and shown as a current asset in the Balance Sheet. For example, if interest on investment worth ₹1,000 has accrued but not yet received, the entry is: Accrued Interest A/c Dr. ₹1,000 To Interest A/c ₹1,000.
Income Received in Advance
Also known as unearned income, this refers to the amount received before it is earned. It is deducted from the respective income in the Profit and Loss Account and shown as a current liability in the Balance Sheet. For example, if rent of ₹5,000 is received in advance, the entry is: Rent A/c Dr. ₹5,000 To Rent Received in Advance A/c ₹5,000.
Depreciation
Depreciation is the reduction in the value of a fixed asset due to wear and tear or obsolescence. It is charged as an expense in the Profit and Loss Account and deducted from the asset value in the Balance Sheet. The journal entry is: Depreciation A/c Dr. ₹X To Asset A/c ₹X. This ensures that the financial statements reflect a realistic value of assets and proper matching of costs and revenues.
Bad Debts
Bad debts refer to the amounts that are not expected to be received from debtors. They are written off as an expense in the Profit and Loss Account and deducted from debtors in the Balance Sheet. The entry is: Bad Debts A/c Dr. ₹X To Debtors A/c ₹X.
Provision for Bad and Doubtful Debts
It is a reserve created to cover potential future losses from bad debts. It is shown as an expense in the Profit and Loss Account and deducted from Sundry Debtors in the Balance Sheet. If a provision of 5% on ₹20,000 debtors is to be created, then the journal entry is: Profit and Loss A/c Dr. ₹1,000 To Provision for Bad Debts A/c ₹1,000.
Provision for Discount on Debtors
This is made to good debtors to encourage prompt payments. It is shown as an expense in the Profit and Loss Account and deducted from Sundry Debtors in the Balance Sheet. For example, if the provision is 2% on ₹19,000 (after deducting bad debts and provision), the amount would be ₹380.
Reserve for Discount on Creditors
This is a notional income anticipated from timely payments to creditors. It is shown as income in the Profit and Loss Account and deducted from creditors in the Balance Sheet. If the creditors amount to ₹10,000 and the reserve is 2%, the income recorded will be ₹200.
Importance of Adjustments in Final Accounts
Without adjustments, final accounts will not present an accurate and fair view of the business. Adjustments ensure compliance with the accrual principle, matching principle, and help in determining the correct net profit or loss for the period. They also ensure the assets and liabilities are properly stated in the Balance Sheet.
Manufacturing Account
The manufacturing account is prepared by manufacturing firms to ascertain the cost of producing goods. It includes all direct expenses like raw materials, direct wages, and factory overheads. The closing balance of the manufacturing account is the cost of goods manufactured, which is transferred to the Trading Account.
Format of Manufacturing Account
The manufacturing account typically includes: Opening stock of raw materials, Add: Purchases of raw materials, Less: Closing stock of raw materials, Result: Cost of raw materials consumed, Add: Direct wages, Add: Factory overheads, Less: Closing work-in-progress, Result: Cost of goods manufactured.
Trading Account
The trading account shows the gross result (gross profit or loss) from buying and selling goods. It includes the cost of goods sold and the revenue from sales. It does not include indirect expenses.
Format of Trading Account
The format generally includes: Debit side – Opening stock, Purchases, Direct expenses like carriage inward, wages, etc.; Credit side – Sales and closing stock. The difference between the two sides gives gross profit (if credit side > debit side) or gross loss (if debit side > credit side).
Profit and Loss Account
This account shows the net profit or loss of the business after accounting for all indirect incomes and expenses. It starts with the gross profit transferred from the trading account.
Contents of Profit and Loss Account
Debit side – Indirect expenses such as salaries, rent, insurance, depreciation, bad debts, etc.; Credit side – Incomes like commission received, interest, rent received, discount received, etc. The net result is either net profit or net loss, which is transferred to the capital account.
Balance Sheet
The balance sheet shows the financial position of the business at a specific date. It includes assets and liabilities of the firm, categorized into current and non-current, and shows the owner’s equity.
Format of Balance Sheet
It is usually prepared in a vertical format with two main sections: Assets and Liabilities. Assets are further classified into current assets (cash, debtors, stock) and non-current assets (land, buildings, machinery). Liabilities are categorized into current (creditors, bills payable, outstanding expenses) and long-term liabilities (loans, mortgages). The capital account appears under liabilities with adjustments for net profit or loss and drawings.
Capital and Drawings
Capital is the amount invested by the proprietor in the business. It increases with net profit and additional capital introduced and decreases with drawings and net loss. Drawings refer to the amount withdrawn by the proprietor for personal use and are deducted from the capital.
Adjusted Trial Balance
An adjusted trial balance is prepared after incorporating all adjustments into the trial balance. It serves as the final list of ledger balances before the preparation of final accounts. It ensures the arithmetical accuracy of books even after making year-end adjustments.
Interrelation of Financial Statements
The trading, profit and loss account, and balance sheet are interrelated. Gross profit or loss from the trading account is transferred to the profit and loss account. The net profit or loss from the profit and loss account is transferred to the capital account, which appears in the balance sheet. The balance sheet uses data from both the trading and profit and loss account to present the financial position.
Limitations of Final Accounts
Despite their usefulness, final accounts have limitations. They are based on historical cost and ignore the impact of inflation. Non-financial information is not recorded. Estimates and personal judgments (like in depreciation or provisions) may affect the accuracy. Final accounts also do not reveal fraudulent practices unless audited.
Conclusion
The preparation and analysis of final accounts provide critical information about the profitability and financial position of a business. Proper understanding and treatment of adjustments are essential for reflecting the true financial performance and position. They help various stakeholders, including management, investors, creditors, and tax authorities, to make informed decisions. Accounting treatment of items like outstanding expenses, accrued incomes, provisions, and depreciation ensures compliance with accounting principles and helps in presenting an accurate picture. Understanding final accounts is foundational for anyone pursuing studies or careers in accounting, finance, or business management.