Ans
– MEANING
There are certain incomes and expenditures which are not
recorded even at the closing date of accounts. While there are certain Income
& Expenditures which are recorded but they relate to next accounting period.
So,
in order to prepare the final accounts for a particular period these
adjustments are to be adjusted since they affect Profit or Loss, Assets &
Liabilities of the business. Some important items which need due adjustments at
the time of preparing final accounts are (a) Closing Stock; (b) Outstanding
Expenses; (c) Prepaid Expenses; (d) Accrued Income; (e) Income received in
advance; (f) Depreciation; (g) Provision for bad debts; (h) Provision for
discount on debtors etc. In accounting terminology the effect of such
transactions in Final Accounts are known as Adjustments.
PURPOSE
OF MAKING ADJUSTMENTS IN FINAL ACCOUNTS
1.
Revenue Recognition Principle: Recognition
Principle of Accounting all the revenues should be recognised in the period in
which the sale is deemed to have occurred. Thus, any income which relates to a
particular year should be recognised in that year whether received or not
received. Whereas, any income which does not relates to the particular year
should be excluded if taken into consideration.
2.
Matching Principle: According
to matching principle, all the expenses should be recognised in the same period
as associated to revenues. It means that expenses recognition is tied to
Revenue Recognition. In other words we can say that expense follows the
Revenue.
3.
Accrual Concept: The
most important concept of accounting is the accrual concept which states that
in preparing final accounts Income & Expenses related to the accounting
year should be considered.
Thus,
in order to prepare the Trading and Profit & Loss A/c on accrual basis the
following are followed:
(a) Any expenditure which has been
paid but relates to the succeeding period is deduced.
(b) Any expenditure which relates to
current period whether paid or not added.
(c) Income or Receipts which relates
to succeeding period but received is deducted.
(d) Income or receipt which relates to current
accounting period whether received or not is added. 