Need for Adjustments in the Final Accounts of a Business
The purpose is to make a continuous assessment of the final affairs of the firm.
Items of Adjustment
At the time of making adjustments or bringing any transaction into the books, you have to remember that the general principle of double entry must be followed. It means that you will have to ensure that the amount is debited to one account and credited to another.
Expenses which have been incurred during the year and whose benefit has been derived during the year, but not paid for yet are called outstanding expenses.
Prepaid or Unexpired Expenses
In some cases, the benefit of the amount already spent will be available in the next accounting year also. Such a part of the expense is called a ' prepaid expense'.
Accrued or Outstanding Income
Accrued incomes are those incomes which have been earned during the accounting period but have not been received till the end of the accounting period.
Income Received in Advance or Unearned Income
The income which has been received during the current accounting year but relates to the next accounting year is called 'Unearned Income' or 'Income Received in Advance'.
Depreciation is the wear and tear of the assets that is used by the Organization.
The amount that is irrecoverable is a loss and known as 'Bad Debt'.
Commission is the amount entitles to the manager which is usually calculated at a fixed percentage of the profits.