Definition of Accruals
An accrual allows an entity to record expenses and revenues for which it expects to expend cash or receive cash respectively, in a future reporting period. It is nearly impossible to generate financial statements without using accruals, unless the cash basis of accounting is used.In double-entry bookkeeping, the offset to an accrued expense is an accrued liability account, which appears in the balance sheet.
Definition of pre-payment
prepayment represent amount in advance period for a subsequent period i.e expense can be paid in advance. Another word for it is payment in advance
It can be divided into expenses of prepaid income recovered in advance .examples of prepaid income are rent in advance,insurance premium.
End of the year adjustment
These are adjustment which are made in the profit and loss account and balance sheet, thus will ensure that the the final accounts of an organization show the true view of their transaction,they are closing adjustment or amendment made in the book at the end of the accounting period in order to match revenue with expenses.this will show an accurate picture of the accounts.they are shown as additional information after the trial balance.
Reasons for end of the year adjustment
- To provide for depreciation of fixed asset
- End of the year adjustment occurs because it will help in the application of the double entry principle
- This will ensure that all the income for the year recorded
- Also the expenses for the year are recorded
- To ensure that the financial statement are prepaid in accordance concept of accounting
- To avoid for valuation of stock at the year ended.
Types of adjustment
- Closing stock-stock at close should be adjusted and deducted from the cost of goods available for sales. it must be adjusted because it has not be recorded in the trail balance.
- Depreciation of asset-this is another end of the year adjustment the asset is depreciated to show the asset value. the value of depreciation is deducted from asset value and the value is posted to profit and loss account as expenses.
- Drawing by the owner- trader will after take item from their business for personal use without payment. therefore goods withdrawn by the owners should be deducted from purchase and added to drawing.
- Accrued and prepaid income-income can be accrued or prepaid,when it is so it has to be adjusted accordingly. Accrued income is added to income and it is treated as an asset and prepaid income is deducted and it is treated as a liability.
- Accrued and prepaid expenses –can also be paid in advance or owing,an accrued expenses is added to the expenses and it is a liability and on the other hand prepaid expenses are deducted and it is treated as an assets.
- Bad debt and provision for doubtful debt and provision for discount on debtors-all these are also adjusted from the relevant account for bad debt,provision for doubtful debt and discount,necessary entries should made to write them off from profit and deduct them from debtors in the balance sheet.
- Provision for discount on creditors-this is added to profit after the year end.it is known as provision for discount receivable.
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