Final Accounts vs. Financial Statements Dilemma

Accounting is simply the language of business. Just as people keep a personal diary to remember daily events, businesses use accounting to record every rupee that comes in and every rupee that goes out. The output is financial statements like Profit and Loss Account, Balance Sheet, and Cash Flow.

Anand & Neha’s Final Accounts Dilemma

Anand and Neha, two startup founders, sat in a cafeteria one evening, sipping coffee.

Anand asked Hi Neha, how are you doing? Neha replied it’s fine but little jumbled about financial statement of business – this is confusing! Some say we just need a profit and loss account. Others say we should follow the Companies Act like big firms. Which rules are right for us?”

Anand nodded, “Exactly! I’ve seen annual reports of a few companies showing balance sheets, directors’ reports, and cash flow statements. But do we, as a small firm, really need all that?”

This confusion is real for many owners running small businesses. Small firms (like sole proprietorships and partnerships) prepare final accounts mainly to know profit, pay taxes, or apply for loans. Limited companies, however, are bound by the Companies Act, 2013, which requires detailed formats, audits, and disclosures for compliance.

Let’s explore this framework to keep everyone informed about the relevant business requirements.

Aspects	Limited company (Private and Public)	Small Businesses
Ownership	Equity shareholders	Owned by individuals, partners
Legal Status	Registered entity under the Companies Act.	May or may not be a registered entity
Liability	Limited liability for shareholders	Depends on the type of business; can be unlimited.
Share Trading	Shares can be publicly traded for listed public companies but it is restricted for private companies	Not applicable
Law & Compliance	Should abide by strict regulations under the Companies Act, including audits and filings.	Legal formalities and compliance requirements are not very stringent
Taxation	Taxed as per corporate tax laws	Taxation rule depends on type of business (sole proprietorship, partnership etc.)
Sources of fund	Shareholders’ equity, venture capital, debt fund	Owner’s fund and bank loans
Existence	Separate legal entity and continue even if there is change in ownership	May dissolve on the death of proprietor or partner.
Reliability	Credibility is higher due to stringent rules and regulations	May not be as credible for bankers and investors

Final Accounts vs. Financial Statements

Aspects	Limited company (Private and Public)	Small Businesses
Governing Law	Companies Act, 2013	Income Tax Act (and Partnership Act, if applicable)
Format	Format under Schedule III, Companies Act 2013 (Part I- Balance Sheet, Part II – Profit and Loss Statement), Cash Flow Statement, Statement of changes in equity and Explanatory notes	Flexible — Trading A/c, Profit & Loss A/c, Balance Sheet
Users of Accounts	Shareholders, government., investors, public	Owner, partners, tax officers, lenders
Disclosure	Comprehensive – auditor’s report, board’s report, notes	Nominal — mainly for tax & banks
Statement of Changes in Equity	Mandatory	Not applicable
Statement of Changes in Equity	Mandatory (except a few companies)	Not applicable
Profit Distribution	Declared as dividend under law	Taken as drawings / partners’ share
Audit	Compulsory (few exemptions only)	Not mandatory unless specifically mentioned

Pay Attention

Small Businesses (Not Maintaining Proper Accounts)

• Wrong calculation of profit results in incorrect tax payments.
• Difficulty in getting loans
• Risk of penalties under the Income Tax Act.

For Limited Companies (Not Maintaining Proper Accounts)

• Heavy fines and penalties under the Companies Act, 2013.
• Directors may be held personally liable.
• Loss of credibility with investors, lenders, and public.

Anand and Neha finally understood that while both small firms and companies prepare final accounts, the rules, format, purpose, and legal framework are different.

• A small shopkeeper can keep accounts in a simpler format.
• A limited company must follow strict legal requirements.

Both leave the cafeteria smilingly, relieved that their dilemma is finally over. “Yes,” Neha says, let’s prepare the final accounts in the proper format!