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Accounting For Managers - Accounting Process

Adjustment Entries

   Posted On :  25.01.2018 10:52 pm

Because of the adopting of accrual accounting, after the preparation of trial balance, adjustments relating to the accounting period have to be made in order to make the financial statements complete. These adjustments are needed for transactions which have not been recorded but which affect the financial position and operating results of the business. They may be divided into four kinds: two in relation to revenues and the other two in relation to expenses. The two in relation to revenues are:

(i) Unrecorded Revenues:

 Income earned for the period but not received in cash. For e.g. Interest for the last quarter of the accounting period is yet to be received though fallen due. The adjustment entry to be passed is:

Accrued interest a/c     (Dr)

 

Interest a/c                  (Cr)

 

(ii) Revenues Received In Advance:

 i.e. Income relating to the next period received in the current accounting period: e.g. Rent received in advance. The adjustment entry is:

 

Rent a/c                               (dr)

 

Rent received in advance a/c       (cr)

 

 

The two relating to expenses are:

 

 

(i) Unrecorded Expenses:

 

 

i.e. Expenses were incurred during the period but no record of them as yet has been made: e.g. Rs.500 wages earned by an employee during the period remaining to be paid. The adjustment entry would be:

 

Wages a/c                                                                                                                                               (Dr)

 

Accrued wages a/c                                                                                                                             (Cr)

 

 

(ii) Prepaid Expenses:

 

 

i.e., expenses relating to the subsequent period paid in advance in the current accounting period. An example which is frequently cited for this is insurance paid in advance. The adjustment entry would be:

 

Prepaid insurance a/c                                                                                                                       (Dr)

 

Insurance a/c                                                                                                                                        (Cr)

 

 

In the above four cases unrecorded revenues and prepaid expenses are assets and hence debited (as debit may signify increase in assets) and revenues received in advance and unrecorded expenses are liabilities and hence credited (as credit may signify increase in liabilities).

Besides the above mentioned four adjustments, some more are to be done before preparing the financial statements. They are:

1.         Inventory at the end

 

2.         Provision of depreciation

 

3.         Provision for bad debts

 

4.         Provision for discount on receivables and payables

 

5.         Interest on capital and drawings

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