ASSIGNMENT

Unit 3: Adjustments to Final Accounts

Write a short note on what is adjustment?

Adjustments, in the context of final accounts, refer to the necessary changes made to
financial statements to ensure accurate and reliable reporting of a company's
financial performance and position. These adjustments are typically made at the end
of an accounting period, such as the end of a fiscal year, to account for transactions
and events that occurred during the period but were not initially recorded or
properly accounted for.

The purpose of adjustments is to correct any errors, omissions, or discrepancies in

the financial statements, as well as to adhere to accounting principles and
regulations. These adjustments ensure that the financial statements provide a true
and fair view of the company's financial affairs and facilitate meaningful analysis and
decision-making.

Adjustments can be classified into two main categories: accruals and deferrals.

1. Accruals: Accruals are adjustments made to recognize revenues or expenses that

have been earned or incurred but have not yet been recorded in the financial
statements. For example, if a company provides services to a customer in one
accounting period but does not receive payment until the next period, an accrual
adjustment is made to recognize the revenue earned in the first period.
2. Deferrals: Deferrals involve adjustments made to postpone the recognition of
revenues or expenses that have been recorded but should be allocated to a different
accounting period. For instance, if a company receives payment from a customer in
advance for services to be provided in the future, a deferral adjustment is made to
defer the recognition of revenue until the services are actually delivered.

Other common adjustments include provisions for bad debts, depreciation of assets,
inventory valuation, and prepayments.
Adjustments are typically made using adjusting journal entries, which are recorded in
the general ledger and are designed to update the accounts and reflect the correct
financial position. These adjustments are then reflected in the final accounts, such as
the income statement, balance sheet, and cash flow statement.

Overall, adjustments play a crucial role in ensuring the accuracy and reliability of
financial statements by capturing and properly recognizing all relevant transactions
and events, thereby providing a more comprehensive and meaningful picture of a
company's financial performance and position.

1. Explain the 4 adjustments and explain in detail?

the four adjustments in a simpler manner:

1. Accruals: Accruals are adjustments made to account for revenues or expenses

that have been earned or incurred but haven't been recorded in the financial
statements yet. They help match revenues and expenses to the accounting period
in which they belong, regardless of when the cash transactions occur.
Accrued Revenues: These are revenues that have been earned but not yet
received in cash. For example, if a company provides services to a customer in
December but hasn't received payment until January, an adjustment is made to
recognize the revenue in December.
Accrued Expenses: These are expenses that have been incurred but not yet paid.
For instance, if a company receives a service in December but doesn't pay for it
until January, an adjustment is made to recognize the expense in December.
2. Deferrals: Deferrals are adjustments made to delay the recognition of revenues or
expenses that have already been recorded but should be allocated to a different
accounting period.
Deferred Revenues: These are payments received in advance for products or
services that will be provided in the future. For example, if a customer pays
upfront for a service that will be delivered in the next month, an adjustment is
made to defer recognizing the revenue until the service is provided.
Deferred Expenses: These are payments made in advance for expenses that will
be incurred in future accounting periods. For instance, if a company pays rent for
 the next three months in December, an adjustment is made to allocate the rent
expense over the three-month period.
3. Depreciation: Depreciation is an adjustment used to allocate the cost of tangible
assets (like buildings, equipment, or vehicles) over their estimated useful lives. It
recognizes that these assets gradually lose value over time due to wear and tear
or obsolescence.

By applying depreciation, a portion of the asset's cost is recognized as an

expense each accounting period. This adjustment helps spread the cost of the
asset over its useful life.

4. Bad Debt Provision: Bad debt provision is an adjustment made to account for
potential losses arising from customers who may not be able to pay their debts.

Companies estimate the portion of accounts receivable that may become

uncollectible and make an adjustment to account for those potential losses. This
adjustment helps reflect a more realistic value of accounts receivable on the
balance sheet.

2. From the following Trial Balance of M/s Ram and Sons; prepare a Trading and Profit and
Loss Account for the year ended 31st December….2012… and a Balance Sheet as on that
date.
Adjustments:
(a) Stock on 31st December Rs.6, 000
(b) Wages Outstanding Rs.500
(c) Salaries Outstanding Rs.425
(d) Prepaid Insurance Rs.50