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Every firm likes to measure the performance of its business operations in terms of profit or loss. It also likes to know the values of its assets and liabilities on the closing date of accounting period. In order to ascertain its income and also to assess the position of assets and liabilities statements prepared are known as Financial Statements. These statements are also known with their traditional name as ‘Final Accounts’.

Financial statements are divided in two parts, i.e., income statements and position statements. The term income statement is traditionally known as Trading and Profit and Loss Account and position statements are known as balance sheet.

Business transactions are recorded in our original books, i.e., subsidiary books and journal proper. With the help of these original books of record, we prepare ledger accounts. Trial balance is prepared with the balances of ledger accounts. With the help of Trial balance we prepare final accounts or financial statements. Final accounts consist of Trading account, profit and loss account and Balance sheet. Trading account shows gross profit or gross loss, net profit or net loss is available from Profit and loss account. The Balance sheet exhibits the position of assets and liabilities on a particular date.