Understanding the End of the Year Adjustment in Profit and Loss Accounts

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.

The Profit and Loss Account starts with the credit from the Trading Account in respect of gross profit (or debit if there is gross loss). Thereafter, all those expenses or losses which have not been debited to the Trading Account are debited to the Profit and Loss Account. If there is any income besides the gross profit, it will also be transferred to the credit of the Profit and Loss Account.

A fundamental principle for preparing the Trading and Profit and Loss Account is that the expenses and incomes for the full trading period, but only for the trading period, are taken to the Trading Account and the Profit and Loss Account. This means that if an expense has been incurred but not yet paid for, a liability for the unpaid amount must be created before the accounts can be said to show a true picture.

Reasons for the End of the Year Adjustment

1. To provide for depreciation of fixed asset
2. End of the year adjustment occurs because it will help in the application of the double entry principle
3. This will ensure that all the income for the year recorded
4. Also the expenses for the year are recorded
5. To ensure that the financial statement are prepaid in accordance concept of accounting
6. To avoid for valuation of stock at the year ended.

Types of Adjustment

1. 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.
2. 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.
3. 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 therefore goods withdrawn by the owners should be deducted from purchase and added to drawing.
4. 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…

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SS1 Financial Accounting Third Term: End of Year Adjustments in Profit and Loss Account