Effects of Following Adjustments

Final accounts are a fundamental part of a business while preparing the books of accounts for a financial accounting year for every organization. In other words, it is the close books of the book-keeping method carried out the entire year. These are essential to be set by every commercial organization on or before the end of the financial year which is on the 31st of March every year.

Adjusting entries are mandatory at the close of each economic period to make even the revenues and expenses to the appropriate period following the matching principle in accounting. Adjusting entries are recorded before the final accounts of the year are finalized. There are mainly two categories of adjusting journal entries which are accruals and deferrals.

Meaning of Final Accounts

Final Accounts is the last step in the book-keeping process where the various ledger accounts preserved in the Trial Balance or Books of Accounts of the business transactions are offered in a detailed way to make available the productivity and economic status of the entity for a definite period to the investors and other concerned parties. The components of final accounts are the Trading Account, Statement of Profit & Loss, and the Balance Sheet.

Objectives of Final Accounts

The objectives of preparing the final accounts are as follows:

• identify the purpose of the entity and preparation of Trading and Profit and Loss Account

• find out the change between Gross Profit and Net Profit

• elucidate and know the expressions used in a balance sheet

• application of principles of accounting for the valuation of assets

• The Obligation of reduction in valuation and defining the actual profit of a firm

• identify adjustment entries.

• The consequence of adjustment entries is to determine the economic position of a business firm.

Meaning of Adjustments

A book-keeping adjustment is a transaction of the business entity which has not been counted in the accounts of the business as on a definite date. Most business dealings are usually recorded through the documents like a supplier invoice, customer billing, or the receipt of cash. 

However, if such dealings have not yet been documented after an accounting period, or if the entry wrongly states the effect of the transaction, the secretarial supervisor makes accounting adjustments in the form of adjusting entries. These adjustments are intended to bring the audited financial outcomes of the company into an agreement with the orders of the applicable accounting framework, like the Generally Accepted Accounting Principles or International Financial Reporting Standards. The adjustments are mainly referred to under the accrual basis of accounting.

List of Adjustments in Final Accounts

Accrued Revenues

Accrued revenues are transactions that are performed in one month but are to be paid in another month. We will require to make an adjusting entry to show the proceeds in the month when the transactions were completed. This is denoted as adjusting the entry of an accrued revenue.

Accrued Expenses

Accrued expenses are also called accrued liabilities. The accrued expenses are expenditures that the business has incurred without recording the same in the books. Wages paid to the employees after the accounting period are one of the most common examples of an accrued expense. We are required to make an adjusting entry for the accrued expense to debit the expense account and credit the matching payable account.

Unearned Revenues

Unearned revenues are expenditures for goods or services for which payments have been received but the goods or services are yet to be delivered. For instance, if an order is placed in a month, but the goods or services are not received by us, and neither the payment for the same is done, in this case, the company from whom the product is ordered will make an adjusting entry for unearned revenues. Then, in the month when the purchase is made, unearned revenue is debited and the revenue account is credited to adjust.

Prepaid Expenses

Prepaid expenses are assets that the company pays for and uses progressively throughout the accounting period. For example, the office supplies are worn-out all over the month, becoming an expense. Fundamentally, in the month that the expenditure is utilized, an adjusting entry is required to be passed to debit the expense account and credit the prepaid account.

Depreciation Adjusting Entry

Depreciation adjusting entries are a little different, as we are required to study the depreciation of assets accumulated over the existence of the company. This is stated as an adjustment of the contra asset account. Basically, from the time when the asset is acquired, it is reduced by an equal amount every month respectively or by reducing the value of the asset through various other methods of depreciating assets as per the Accounting Standards. For that month, an adjusting entry for depreciation is required to be passed, debiting the depreciation account and crediting the account of accumulated depreciation.

Importance of Adjustments

An important constituent of accounting is to make certain that all the accounts of the company are true and fair. It is the reason for using adjusting entries as an important part of financial statements. Adjusting accounts allows the entities to add notes to accounts or entries to the ledger to signify rectifications, such as writing the right amounts or dates of receiving payments. For example, if the entity records the incorrect date of payment for an outflow, it may be required to review the entry to express the truthful date of payment to evade inappropriate accounting for that period.

Effects of Adjustments

The financial statements are required to calculate the movement of incomes and expenses over some time. Adjusting entries are intended to match the recognition of incomes with the recognition of the expenses used to create them. The net income of the company will rise when incomes are accrued or when expenditures are deferred and it shows a reduction when incomes are deferred or when expenditures are accrued.

Conclusion

Final Accounts is the last step in the book-keeping process where the various ledger accounts preserved in the Trial Balance or Books of Accounts of the business transactions are offered in a detailed way. Adjusting entries are mandatory at the close of each economic period to make even the revenues and expenses to the appropriate period following the matching principle in accounting. Adjusting entries are recorded before the final accounts of the year are finalized. There are mainly two categories of adjusting journal entries which are accruals and deferrals. These adjustments are intended to bring the audited financial outcomes of the company into an agreement with the orders of the applicable accounting framework.