Adjusted accounts: Call the EFCC?

What is the first thought that comes to mind when you hear the phrase ‘Adjusting the accounts? The first time I heard those words, my mind went straight to fraud. Strange, but true. Imagine my shock at discovering that adjusting the accounts is a critical part of the accounting process, and it ensures that financial statements accurately reflect the financial position of a business. This process involves making changes to accounts at the end of an accounting period to ensure that the financial statements are up-to-date and accurate.

The main objective of adjusting the accounts is to match revenues with expenses accurately using adjusting entries. Adjusting entries are journal entries made at the end of an accounting period to allocate revenues and expenses to the correct period. These entries are necessary because most accounting systems use the accrual method of accounting, which recognizes revenues and expenses when they are incurred, rather than when they are received or paid.

There are several types of adjusting entries that businesses may need to make at the end of an accounting period. For example, a business may need to record accrued revenue or expenses, prepayments, or depreciation.

Accrued revenue or expenses are those that have been earned or incurred but have not yet been recorded. For example, if a business provides services in December but does not receive payment until January, it must record the revenue earned in December as an accrued revenue in December. Similarly, if a business receives an invoice for services in December but does not pay the invoice until January, it must record the expense as an accrued expense in December.

Prepayments occur when a business pays for goods or services in advance. For example, if a business pays for rent for the next six months in December, it must record the portion of the rent that applies to January as a prepaid expense in December.

Depreciation is the process of allocating the cost of a long-term asset over the period its useful life. For example, if a fashion brand purchases a sewing machine for ₦10,000 that has a useful life of 10 years, it must record depreciation of ₦1,000 per year to reflect the decrease in the sewing machine’s value over time.

Adjusting the accounts is a crucial step in the accounting process because it ensures that financial statements accurately reflect the financial position of a business. Without adjusting entries, financial statements would not accurately reflect a business’s revenues and expenses, and investors and creditors would not have an accurate picture of the company’s financial position.

Adjusting entries also help a business to plan for future periods. For example, if the fashion business takes delivery of fabric supplies in December that will not be paid for until January and records such as an accrued expense in December, it can better plan for its cash flow needs in January. Similarly, if the business pays in advance for the fabrics in December and records such as a prepaid expense in December, it can better plan for its cash flow needs in the future.

Rather than connote fraud, adjusting the accounts ensures that financial statements accurately reflect the financial position of a business and helps a business plan for future periods. Because of its helpfulness to management, investors and creditors, businesses should pay close attention to adjusting entries and ensure that they are recorded in an accurate and timely manner.