for the accounting period. Such items might also be included in the financial statements so that they represent a true and fair view of profitability and financial status. It becomes necessary to make adjustments for such items after the preparation of trial balance by passing journal entries, called adjustment entries. Both debit as well as credit aspects of these adjustments are to be recorded at the time of preparation of final accounts.
. . Rationale of making adjustments at the time of preparing final accounts The important consideration in the preparation of final accounts with adjustments are as under: Matching principle Revenues earned during the period must be compared with the expenses incurred during that period. .
Adjustment entries and accounting treatment of adjustments . . Meaning of adjustment entries Adjustment entries are the journal entries made at the end of the accounting period to account for items which are omitted in trial balance and to make adjustments for outstanding and prepaid expenses and revenues accrued and received in advance. .
. Purpose of adjustment entries The main purpose of adjustment entries are to match current year revenue with the expenses incurred to earn these revenues. Other purposes are: (i) To exhibit true and fair view of profitability (ii) To exhibit true and fair view of financial status. Accountancy .
. Need for adjustment entries The need arises to pass adjusting entries for the following reasons: (i) To record omissions in trial balance such as closing stock, interest on capital, interest on drawings, etc. (ii) To bring into account outstanding and prepaid expenses. (iii) To bring into account income accrued and received in advance.
(iv) To create reserves and provisions. . . Adjustments and adjustment entries The following are the common adjustments and adjustment entries which are made while preparing the final accounts.
(i) Closing stock (ii) Outstanding expenses (iii) Prepaid expenses (iv) Accrued income (v) Income received in advance (vi) Interest on capital (vii) Interest on drawings (viii) Interest on loan (ix) Interest on investment (x) Depreciation (xi) Bad debts (xii) Provision for bad and doubtful debts (xiii)