Final account

What exactly is a final account?

Final accounts are those accounts prepared at the end of every year. It provides the owners, management, or other interested parties with a detailed understanding of the financial status of the business/organization. Financial statements are first documented in a journal and then moved to a ledger, and finally, a final account is generated.

The final account is the agreed amount that the employer will pay to the contractor and it is the conclusion of the contract total (including all necessary changes). Any work paid by the main contract to the contractor is included in it.

It covers any loss and expense incurred as a result of any extensions of time, as well as any additional claims that the contractors believe they are entitled to under the contract.

It also shows the resolution of any problems that may have occurred and, in that sense, draws a line under both parties' financial responsibilities, except in the case of faults.

Final Accounts Contractual Definitions

As outlined in the various kinds of contracts, the procedures differ slightly in terminology and technique, but they all accomplish the same result. Most contracts demand the contractor to provide substantiation of their accounts to the employer to be correctly assessed.

The FIDIC suite of contracts, mostly employed worldwide, each has its timetable. Clause 14 discusses payment, while sub-clause 14.11 details the final account process and timeframes.

A final account often contains the following components:

• Trading Account
• Manufacturing Account
• Profit and Loss Account
• Balance sheet

1. Trading Accounts

Trading accounts indicate the company's Gross Profit/Gross Loss from sales and purchases for the specific accounting period.

• Opening Stock
  Previous year's stock will be written as the opening stock for the current year and it appears as "To Opening Stock" on the debit side of the Trading Account for the current financial year.
• Purchases
  During the current financial year, total purchases mean net purchase return of traded items, including cash and credit purchases, appeared on the debit side of the Trading Account as "To Purchases."
• Direct Expenses
  The expense incurred to transport traded products to business premises/warehouses is a direct expense. Freight charges, cartage or carriage charges, customs, import duty, gas, electricity, fuel, water, packaging material, wages, and any other expenses that are directly related to the production process are known as direct expenses. These expenses are listed on the debit side of the Trading Account as "To Particular Name of the Expenses."
• Sales Account
  The total sale of traded items, including cash and credit sales, will appear as "By Sales" in the outer column on the credit side of the Trading Account. Net releasable worth, excluding Central Sales Tax, VAT, Customs, and Excise Duty, should be used to make sales.
• Closing Stock
  It refers to the entire value of unsold stock for the current fiscal year and it displays on the credit side of the Trading Account.
  Opening Stock + Net Purchases - Net Sale = Closing Stock
• Gross profit
  The difference between revenue and the cost of providing services is known as gross profit. It is calculated before payroll, taxes, overhead, and other interest payments are taken into the account. Gross Margin is used in American English and has the same meaning as Gross Profit.
  Gross Profit = Sales - Cost of Goods Sold
• Operating Profit
  The gap between revenue and costs generated by normal operations is operating profit. It is, however, calculated before taxes, interest payments, investment gains/losses, and a variety of other non-recurring things are deducted. Operating profit is calculated as gross profit and total operating expenses.
  Operating Profit = Gross Profit - Total Operating Expenses
• Net profit
  The difference between the company's entire revenue and total expenses is referred to as net profit. Net income or net earnings are other terms for it.
  Operating Profit - (Taxes + Interest) = Net Profit

Specimen of Trading Account

2. Manufacturing Accounts

Manufacturing accounts are used to calculate the cost of production. A manufacturing account is created in the event of goods manufactured by the company. The cost of manufacture is subsequently transferred to the Trading account and other traded goods are treated in the same way as the Trading account.

Important Point Concerning the Manufacturing Account

Aside from the criteria covered in the Trading account section; there are a few other key concerns that must address here:

• Raw materials are utilized to create products and they may have an opening stock, purchases, and closing stock. The main and basic material used to make goods is raw material.
• Work-in-Progress refers to products that are still in the process of being finished but are critical components of the opening and closing stock. To know the correct value, you must first identify the correct manufacturing cost.
• The Final Product A finished product is a product that a company produces and then sells through a trading account.
• RMC (Raw Material Consumed): The formula is as follows:
  RMC = Raw Material Opening Stock + Purchases - Closing Stock
• Production Costs: The cost of production is the Manufacturing account's balance.

3. Profit and Loss Account

The Profit & Loss account indicates the gross profit transferred from the Trading Account to the credit side of the account and any other income received by the firm, such as interest, commission, and so on.

The debit side of the profit and loss statement summarizes all indirect expenses incurred by the firm during that fiscal year.

Examples are expenses such as administrative, personal, financial, selling and distribution, depreciation, bad debts, interest, discount, and others. The real and net profit earned at the end of the accounting period is shown in the profit and loss account balance, which is then transferred to the Balance Sheet.

4. Balance Sheet

A balance sheet depicts a company's financial situation throughout a given period. The balance sheet is created by totaling the assets (fixed assets + current assets) and liabilities (long term obligation + current liability) as of a given date.

Business assets are their economic resources. It can be classified as:

Assets

• Fixed Assets
  Fixed Assets are assets that have been purchased or created and are utilized to generate profit in the current year and future years. However, the asset's life and utility are important factors to consider. Fixed assets are those assets that can be both tangible and intangible. A few examples of Fixed Assets are plant and machinery, land and buildings, furniture and fixtures, etc.
• Current Assets
  The assets that are easily available to release the firm's current liabilities are current assets. Current assets include cash in hand and bank, stocks, and various debtors.
• Fictitious Assets
  Fictitious Assets are accumulated losses and expenses that are not genuinely virtual assets. The principal examples of fictional assets are the discount on the issue of shares, the profit and loss statement, and capitalized spending for the time being.
• Wasting Assets
  These are the assets whose value have decreased or have been depleted due to their use, for example, mining, inquiries, and so on.
• Tangible Assets
  These assets can be touched, seen, and have volumes, such as cash, stock, building, etc.
• Intangible Assets
  Intangible Assets are those assets that are valuable but cannot be seen, touched, or quantified, such as patents, goodwill, trademarks, etc.
• Working Capital
  Working Capital is the difference between current assets and current liabilities.
• Accounts Receivables
  This group includes bills receivables and other debtors.

Liability

A liability is an obligation incurred by a business, organization, or company due to previous transactions or occurrences. Its settlement/repayments are projected to result in a drain on the particular firm's resources.

Liability can be divided into two categories.

• A short-term liability is an obligation incurred by a business/firm/company due to prior transactions/events.
• Long-term liabilities are liabilities that are projected to be liquidated in longer than a year. Mortgages, long-term loans, long-term bonds, pension liabilities, etc. are some examples of long-term liabilities.

Assets and liabilities are grouped

Marshaling and grouping of assets and liabilities can take two forms:

• Liquidity Ordered Assets and Liabilities are organized based on their liquidity.
• Permanence in order: The order of asset and liability arrangement is reversed in this case, as it is in the order of liquidity.

Accounting Treatment of Financial Statements with Adjustments Entries

Before finalizing the accounts, several very essential adjustments must be made to generate a genuine and fair financial statement:

Accounting Procedures

1. Closing Stock

After the fiscal year, the unsold stock is referred to as closing stock and is valued at "cost or market value, whichever is less."

Accounting Treatment

The Closing Stock is shown as an adjusted buy account on the debit side of the Trading Account and appears in the Balance Sheet under Current Assets when an opening and closing stock are adjusted through a purchase account. The amount of the Closing Stock is shown in the Trial Balance.

2. Outstanding Expenses

Outstanding expenses are those expenses that are due but have not been paid.

Treatment in Accounting

Outstanding expenses will be added to the Trading and Profit & Loss Account in a specific expense account. It will come under current liabilities on the liabilities side of the Balance Sheet.

3. Expenses Paid in Advance

Prepaid Expenses are those expenses that have been paid in advance.

Accounting treatment

Prepaid expenses will be subtracted from the specific expenses listed in the Trading and Profit & Loss Account and appear in the Balance Sheet under current assets.

4. Accrued Income

Accrued income refers to money made during the year but not received after the fiscal year.

Treatment in Accounting

Accrued revenue will be added to a specific income under the Profit & Loss account and reported as current assets on the Balance Sheet.

5. Amount of Money Received in Advance

Advance rent, for example, is an income received in advance but not earned.

Treatment in Accounting

In the profit and loss account, an income will be decreased by the amount of advance income and will appear as current liabilities in the Balance Sheet.

6. Interest on Capital

This is interest paid on capital brought in by the firm's founder or partner.

Accounting treatment

• Added to capital account on the profit and loss account (Credit side of Capital account).

7. Interest for Drawing

Interest is paid on capital introduced by the firm's proprietor or partner.

• Credit side of profit and loss account
• Capital account reduced (Debit side of drawing account).

8. Allowance for Doubtful Debts

If there is any doubt on the recovering money from sundry debtors then such debts are categorized as doubtful debts.

Provision for the Doubtful shall be taken from the Sundry Debtors' Account in a Balance Sheet.

9. Bad Debts

Debts that are not repaid by the debtors are called bad debts.

Accounting Treatment

• Debit Side of Profit & Loss Account
• Sundry debtors will be presented on the Balance Sheet's assets side after deducting Bad Debts.

10. Set aside money for a credit discount

This is to be done if there is any possibility of receiving a reduction on the payment of various creditors within a particular time frame.

11. Stock losses due to fire

In this scenario, there can be three possibilities.

Treatment in Accounting

1. If the stock is completely insured
   • Trading Account's Credit Side
   • The balance sheet's asset side
2. If a portion of the stock is insured
   • Trading account's credit side
     (With Total Loss Value)
   • Profit & Loss account's debit side
     (With the loss's value unrecoverable)
   • The Balance Sheet's Asset Side
     (With the possibility of recouping the value)
3. If the stock isn't covered by insurance
   • Trading Account's Credit Side
   • Profit and Loss Account's debit side

12. Accounting for Reserve Funds

• Profit & Loss Account's Debit side
• Balance Sheet's Liabilities side

13. Customers receive free samples of accounting treatment.

• Trading Account's Credit Side
• Profit & Loss Account's Debit Side

14. Accounting Treatment for Managerial Commissions

• Profit & Loss Account (debit)
• Balance Sheet (liabilities) as commission payable

Final Account Preparation

The final account is prepared throughout the contract duration. The quantity surveyor's financial figures will usually be the beginning point for final account negotiations, i.e.,

• Agreeing on the entire prime cost
• Any losses and costs associated with time extensions

The contractor should ensure that all potential deviations from subcontractors and suppliers are identified and disclosed to the employer. Even if there is no evident contractual link between the contractor's right to be paid by the employer and their obligation to pay their subcontractors, the contractor will not want to start final account negotiations until they have exact costs from their supply chain.