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Role of final accounts in assessing financial performance and decision-making

Role of final accounts in assessing financial performance and decision-making

 Final accounts are considered an essential part of the financial and accounting processes carried out by companies and institutions at the end of each financial year. The final accounts provide accurate and comprehensive financial information about the company's performance and business results during the financial year. Through these statements, a comprehensive financial analysis of the company is presented to assist investors and managers in making critical decisions regarding investments, financing, and strategic direction for the company.

The role of final accounts is not just to provide a final financial report, but revolves around providing crucial information for evaluating financial performance and making wise financial decisions. They offer a comprehensive view of the company's efficiency in utilizing its resources and achieving profits, as well as identifying strengths, weaknesses in business operations, and future growth strategies.

What are final accounts?

Final accounts are accounts prepared by the company at the end of the financial period with the aim of determining the business results of the company as profit or loss during a specific period.

The preparation of final accounts for any company for a new year depends on recording some opening entries that must be included in the general ledger.

These opening entries cannot be included until the closing of the financial accounts represented in the trading account, profit and loss account, and operating account, as without these steps, all subsequent steps to show the financial position of the company will fail.

What are the types and components of final accounts?

There are three types of final accounts used in financial, service, and industrial institutions, and each type has its own specific use as follows:

  • First: Trading Account

    It is used to determine the total profit or loss incurred by the entity, especially companies involved in buying or selling transactions, and the account usually consists of debit and credit sides.

  • Second: Profit and Loss Account

    It closes the company's expenses and revenues throughout the year, and the numbers displayed indicate whether the company's activities are profitable or incurred losses during the accounting cycle, and this account consists of debit and credit sides.

    When the company's revenues (total revenue) exceed all expenses (production costs, operating costs, taxes, and other expenses), this results in net profit. Conversely, when expenses exceed revenues, we have a net loss.

  • Third: Operating Account

    Industrial companies especially rely on operating accounts, which focus on the production costs of goods produced by the company during a specific period, in addition to analyzing all aspects and factors. These accounts are recorded in accordance with accounting principles, whether on the debit or credit side, and the balances of the real accounts are closed and transferred at the end of the accounting cycle, only to be reopened at the beginning of a new financial period.

How are final accounts prepared?

Final accounts represent the last step in the accounting cycle, where all financial data in the company's books are analyzed and summarized to determine the net profit or loss for the business entity. The process involves the following steps:

  1. Transferring financial transactions from the journal to the ledger.

  2. Clarifying the debit and credit balances of different accounts in the trial balance.

  3. At the end of this process, final accounts are prepared, including the trading account and profit and loss account, to determine the final financial results of the entity.

What are the objectives of the final accounts?

Companies aim to increase profits and maximize capital, therefore financial accounts serve as an accurate means to determine the profits and losses of the entity during a specific financial period, and they have other important objectives:

  1. Determining profits and losses:

    The final accounts calculate the net profit or loss achieved by the entity during the financial period.

  2. Preparation of the financial statement:

    The financial statement analyzes the financial position of the entity and provides a clear picture of assets and liabilities.

  3. Monitoring accounts:

    Final accounts are used as a means to verify the accuracy of accounts and control errors and fraud.

  4. Analysis of assets and liabilities:

    Final accounts help in understanding the size and distribution of assets and liabilities of the entity.

  5. Supporting decision-making processes:

    The final accounts provide information that helps management identify weaknesses and make future decisions.

  6. Attracting investors:

    Financial accounts act as a primary source for investors to understand whether the entity is considered a good investment or not.

  7. Determining the value of the entity:

    The final accounts provide the necessary data and information to accurately evaluate the value of the entity.

What is the difference between final accounts and final accounts?

Final accounts and final accounts are accounting concepts related to company financial performance reports. Although the terms may seem similar, each addresses different aspects, including:

  1. Final accounts refer to the accounting processes carried out at the end of the financial period of the company or institution, with the aim of summarizing profits and losses and providing an overview of the overall financial position of the company.

    On the other hand, final accounts are prepared to clarify detailed information about the financial performance of the company during the specified period. Final accounts include all specific financial details such as expenses and revenues with precision, helping to understand the financial position in detail. They also include the detailed final accounts for the current year.

  2. The preparation processes of final accounts and final accounts vary depending on the nature and business activity of the entity. Some institutions may only prepare one final account at the end of the financial period according to their nature, while final accounts must be prepared at the end of each time period regardless of the type of entity.

  3. Final accounts determine the profit and loss results for companies according to the specialized general ledger. Final accounts provide clearer details than final accounts and delve into analyzing all activities and business operations that occurred within the company during a specific time period.

Frequently Asked Questions:

What is the role of final accounts in evaluating the financial position of a company and ensuring financial sustainability?

Final accounts provide a comprehensive picture of the company's performance throughout the financial year, including revenues, costs, profits, and losses. Final accounts also play a role in ensuring financial sustainability by providing accurate and transparent information about the company's financial situation. This helps in making the right financial decisions and effective planning to ensure the company's growth continuity and sustainable financial goals accomplishment.

What are the differences between final accounts of small companies and large companies?

Differences lie in the complexity of accounting processes and the level of detail in financial reports. Large companies require more detailed and complex final accounts preparation due to the scale and diversity of their operations. On the other hand, smaller companies have more flexibility and simplicity in final accounts preparation processes.

How can final accounts be used in making investment and financing decisions?

Final accounts are an important tool in making investment and financing decisions as they provide accurate and detailed financial information and analysis that enable investors and managers to evaluate company performance, guide future strategies, choose appropriate investments, determine financing needs, assess debt repayment capacity, and plan for growth and expansion programs.

What are the main challenges facing the preparation of year-end accounts? How can these challenges be overcome?

The main challenges in the preparation of year-end accounts include gathering and analyzing large amounts of financial data and ensuring its accuracy and compliance with standards, as well as the continuous changes in accounting regulations. These challenges can be overcome by using advanced systems to manage and analyze financial data, employing experienced professionals, utilizing modern technology, and providing ongoing training.

How do monetary policies and inflation affect year-end accounts and how can they be managed?

Monetary policies and inflation affect year-end accounts through changes in currency values, interest rates, and assets. These effects can be managed by presenting adaptable financial reports that take these changes into consideration, analyzing the potential impacts on future financial operations, using financial tools such as currency and interest rate hedging to control potential financial risks.

What is the impact of taxes and economic policies on the preparation of year-end accounts and financial performance evaluation?

Taxes and economic policies can significantly impact the preparation of year-end accounts and financial performance evaluation, as they may lead to changes in accounting profits and cash flows. Tax and economic policies can also affect a company's performance, influencing financial data analysis, profit-making capabilities, and growth planning.

What is the role of internal and external audit in ensuring the accuracy and transparency of year-end accounts?

The role of internal and external audit in ensuring the accuracy and transparency of year-end accounts lies in evaluating a company's financial and accounting procedures. Internal audit offers an independent assessment of financial operations and internal controls, while external audit evaluates and analyzes financial data and financial disclosures to ensure their accuracy and transparency in accordance with accounting standards and financial regulations, enhancing trust in the reliability of year-end accounts and company reports among internal and external stakeholders.

What is the importance of full disclosure and transparency in year-end accounts? How can this disclosure be achieved?

Full disclosure and transparency in year-end accounts are extremely important as they enhance trust and transparency among shareholders and other stakeholders, reduce risks, and provide accurate information for strategic decision-making. Full disclosure and transparency can be achieved by complying with international accounting standards, accurately disclosing financial and non-financial information, providing detailed explanations of non-routine transactions, potential financial risks, tax impacts, and other important information for investors and other stakeholders.

In conclusion:

The role of year-end accounts in evaluating financial performance and making decisions is of great importance to any organization or company, as these accounts provide the necessary data and information needed by managers and investors to understand the company's past financial performance and estimate future trends.

In this way, understanding and analyzing year-end accounts is a crucial step in achieving financial success for the company and effectively reaching its goals, contributing to building investor and business partners' confidence and enhancing the company's reputation in the market.






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