Often times when final financial statements are prepared, there is the need to make adjustment to the financial statement with respect to some of the items that have not been taken into consideration while preparing the ledgers with the financial year. This write-up is aimed at shedding more light into these types of adjustments and how they can be taken into consideration during the preparation of the final financial statement.
Accounting transactions are usually recorded in the ledgers and from these ledgers, the trail balance are usually prepared. Trial balance is a list of all ledger’s accounts. This list will contain the name of each of the ledger balances. It is expected that the balances on both the debit and credit side of the trial balance should be equal. By this, we can then say that the trial balance has “balanced”. Once we have the trial balance, the next duty of an accountant is to prepare the final accounts. The final accounts are usually the profit or loss account and the balance sheet. Though there are other accounts that are also prepared as part of the final account.
The adjustments to the account usually happened due to the fact that some transaction might not have been included in the transaction for the year and as a result, they might have not been included in the ledger. For a trading concerns, one of the most popular items that form part of the adjustment is the closing stock. The closing stock is the value of the stock on hand at the end of the accounting period. Usually, stock count is done at the end of the close of business for the period, as a result, we expect the value of the closing stock to come as an additional item. The treatment we will give to such item is to include it in the profit or loss account and also in the current asset in the balance sheet. Essentially what we will do is to ensure that the double entry is completed.
Other items of adjustments are prepayments. We have earlier defined this are payment made for services that we are yet to enjoy. The treatment of prepayment of prepayment also cut across both the profit or loss and the balance sheet. If the prepayment is an expense, then we reduce the amount incurred by the amount of prepayment in the profit or loss account to only take account of the amount relating to the period under consideration – this is in line with the accrual principle – and the amount prepaid will then be recognised in the balance sheet under current asset. If the amount prepaid is a revenue item, that means such an amount will also reduce the revenue and then be treated in the balance sheet as a current liability.
Finally, another major adjustment items are the accrued expenses and incomes. Accruals are services that we have enjoyed but payment has not been made for them. For accrued expenses, we will add accrued amount to the expense line and then recognise the accrued amount as a liability in the balance sheet. While for the accrued income, we will also add the amount to the income line and then recognise the accrued income amount as a current asset.
These adjustments are usually made to ensure the completeness of transactions relating to a particular year. Therefore, whenever we have a trial balance from which we are to prepare the final account, we should always look out for the adjusting items because they can sometimes be significant and can impact the accuracy of the financial statement.
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