ADJUSTMENTS IN FINAL ACCOUNT

INTRODUCTIONIt was mentioned in the earlier Unit that the only way a business can ascertain its profit and loss during a given period is to prepare final accounts. These take into account the goods that were purchased and the goods sold, and the income that came in and the expenses that went out during the period. The relationship between income, expenses and time is very important. If income was due in a particular period but payment was not received, the accounts of that period would not reflect the true financial position unless the accrued income was taken into account. The same thing applies to expenses. In this unit, we are going to examine what are called 'adjustments'.

2.0 OBJECTIVES

At the end of this unit, you should be able to:
• explain the Meaning of Adjustments in Final Accounts
• give the full list of adjustment items
• compute relevant adjustment accounts.

3.0 MAIN CONTENT

3.1 Adjustments in Final Accounts

There are two guiding principles in the preparation of Final Accounts.

1. Every Trading Account and every Profit and Loss Account must be prepared accurately, so that the correct profit for the period is obtained. This can only be achieved if the accounts carry every kobo of the losses for the year, and include every kobo of the profits earned.
2. Every Balance Sheet must give a 'true and fair view' of the affair of the business, showing the assets and the liabilities at their 'true values.

In order to achieve these two aims, the accountant must take into account many matters, which require adjustment. For example the Wages Account may include some wages given in advance for next year to an employee who has requested an advance of salary to help him meet some domestic difficulty. This amount must be removed from the wages bill to be charged to the Trading Account; if it is not removed the Trading Account for this year will be carrying next year's losses. Similarly, a commission earned for selling a piece of property for a client may not have been paid yet although it is definitely due from the customer. If it is omitted from the Profit and Loss Account, this year's profits will be understated and next year's profit will be exaggerated.

A full list of adjustments includes:

1) Payments in advance by the firm
2) Payments in advance to the firm
3) Payments accrued due by the firm
4) Payments accrued due to the firm
5) Bad debts and provisions for bad debts
6) Provisions for discounts
7) Closing stock adjustments
8) Depreciation of assets
9) Appreciation of assets
10) Amortization of leases
11) Depreciation of goodwill

3.1.1 Payments in Advance by the Firm

Certain payments are always made in advance. This includes rents, licensing, trade subscriptions and insurance. Where the period covered by the payment does not coincide with the trading year the unexpired portion of such payments must be carried forward to the following year so that the debit to the Profit and Loss Account would represent the amount that relates to the accounting period.