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.
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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 book-keeper 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 book-keeper 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 book-keeper 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 financial 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.
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