Adjustments to Final Accounting accounts

All expenses incurred as well as losses must be taken into consideration in order to verify the trading results in the final accounts. Also, it is necessary to continue track of all incomes and profits during the trading and profit and loss accounts.

Before final accounts can be prepared in the mercantile way of accounting, they must first be adjusted. It is common to adjust expenses that were paid ahead, income earned in advance but not received income and bad debts. These adjustments can be made by adjusting entries.

Usual Adjustments

Outstanding Expenses

Some expenses that are due in a particular period may not get paid in the current accounting year. All unpaid, outstanding expenses which are due in a particular accounting period but have not been paid in that accounting years or postponed payments are eligible for payment. All expenses related to such matters should be documented, regardless of whether they have been paid. All expenses, paid and unpaid, must be recorded in the same account year. Also, salaries that have not been paid for the month will not be entered in the books of account. Salary profit and loss accounts will therefore be lower than actual expenditure. Thus, profit will be higher.

Prepaid Costs

Some of these expenses will result in a benefit for the next accounting year. These expenses are not included in the final accounts because they are for future periods. It is essential to adjust prepaid expenses in the books if you want to realize true profit. Some examples include insurance, taxes, or telephone subscriptions. Rent is another example. Rent is payable in advance. This may mean that adjustments might be required. Rent for one year is paid by x on 1.77.79, his accounting year will therefore be the calendar year. The rent for six months will not expire, and will be due in the following year.

Accrued Income

Although you might have earned incomes over the course of the year, they may not have been received until the last. You might have income such as rent, rent or commissions. Merchants typically earn income but do not receive it. These income items need to be adjusted before final accounting is prepared. All such incomes must be transferred to the relevant income account. As such, income earned but not yet received is considered an asset.