Accounting For Managers - Accounting Process
Adjustment Entries
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:
Accrued interest a/c (Dr)
Interest
a/c (Cr)
(ii)
Revenues Received In Advance:
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:
2.
Provision of depreciation
3.
Provision for bad debts
4.
Provision for discount on receivables and payables
5.
Interest on capital and drawings
