Page 147 - DCOM101_FINANCIAL_ACCOUNTING_I

Unit 12: Final Accounts

? Notes
Did u know? There are two types of persons interested in financial statements: (1) Internal

users, and (2) External users.
1. Internal Users: These are: (a) Shareholders, (b) Management, and (c) Trade unions
employees etc.

(a) Shareholders are interested to know the welfare of the business. They can know
the operational results through such financial statements and the fi nancial

position of the business.

(b) Management is interested to take important decisions relating to fixing up the
selling prices and making future policies.
(c) Trade unions and employees are interested to know the operational results because
their bonus etc. is dependent on the profit earned by the business. Financial

statements also help in their negotiations for wages/salaries.
2. External Users: The following are most important external users of fi nancial
statements:
(a) Investors: They are interested to know the earning capacity of business which

can be known through financial statements. They can also know the fi nancial
soundness of the business through fi nancial statements.
(b) Creditors, Lenders of Money etc: The creditors and lenders of money etc. can also

know the financial soundness through financial statement. They have to see two
things (i) Regularity of income and (ii) solvency of the business so that their
investment is risk free.
(c) Government: Government is interested to formulate laws to regulate business
activities and also law relating to taxation etc. Financial statements help while
computing National Income statistics etc.
(d) Taxation authorities: Financial statements provide information relating to
operational results as well as fi nancial position of the business. Tax authorities

decide the amount of tax as per financial statement. It is very useful to other
taxation authorities such as sales tax etc.
(e) Stock Exchanges are meant for dealing in share/securities. Purchase and sale of
such shares and securities are possible through stock exchanges which provide

financial information about each company which is listed with them.
12.2 Preparation of Final Accounts

The profit and loss account and the balance sheet are, together popularly known as the fi nal

accounts. The profit and loss account is prepared to show the financial results of a business and

the balance sheet is prepared to show the financial position. To calculate the accurate amount of

profit or loss, it is a must that there should be a recognisation of the revenues and expenditures. If
there is a wrong recognisation of expenses or revenues, results of the business will also be wrong.
Thus the distinction between the capital and revenue items is very important.
There are two types of expenses and two types of incomes which are classifi ed as:
1. Revenue expenditure/Revenue receipts
2. Capital expenditure/Capital receipts

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