UNIT – 2

Final accounts
Objectives of Financial Statements

 To Know the Financial Positions

 To Evaluate the Financial Performance
 To Predict Future Performance
 Final Accounts
• In Sole Proprietor
 Trading Account
 Profit and Loss Accounts
 Balance sheets

• In Companies
– Income Statements
– Balance sheets
– Cash Flow Statement
 Sole Proprietor

Final A/c

Accounts Statement

Trading A/c Profit & Loss A/c Balance Sheet

(Gross Profit) (Net Profit) (Financial Position)
 Trading Account

 It shows the overall results of purchasing and selling of goods.

 It includes all the direct expenses incurred in the business.
 It provides gross profit earned by the business, if total sales is
greater than total purchases.
 It provides gross loss suffered by the business, if total sales is
less than total purchases.
 Profit and Loss Account

 Profit and Loss account shows all incomes and indirect expenses
related to business.
 Indirect expenses include those expenses such as administrative,
Selling and Distribution expenses that are required for the
operation of business.
 Profit and Loss Account provides net profit earned or net loss
suffered by the business.
 Balance Sheet
 It is a financial statement that states the financial position of the
business.
 It lists the assets and liabilities of a business on a particular date.
 The assets and liabilities on a Balance Sheet are listed in either of
the following two orders:
 Liquidity order
 Permanency order
 Trading Account
Dr (For the period ended . . . . . . . . )
Cr.
Particulars Amount Particulars Amount

To Opening stock  By Sales =

To Purchases = 
Less: Sales returns __-_
Less: Purchases returns __-_ 
To Direct Expenses
By Closing stock


# By Gross loss
To Gross profit (transferred to profit and loss account)
(transferred to profit and loss account)
#

Total Total
8
 Profit and Loss Account
Dr. (For the period ended . . . . . . ) Cr.

Particulars Amount Particulars Amount

To Gross loss b/d  By Gross profit b/d 

To Indirect Expenses  By Indirect Income 

To Net profit By Net loss

(Transferred to Capital Account) (Transferred to Capital Account) #
#

Total Total

9
 Trading and Profit and Loss A/c
Dr. (For the period ended . . . . . . . ) Cr.

Particulars Amount Particulars Amount

To Opening stock  By Sales – Sales returns 

To Purchases – Purch. Ret.  By Closing stock 
To Direct Expenses  By Gross loss c/d #
To Gross profit #
(transferred to profit and loss
account)
#
To Gross loss b/d By Gross profit b/d #
To Indirect Expenses By Indirect Income 

To Net profit (Transferred to Capital To Net loss (Transferred to Capital
Account) * Account) *

Total Total
10
 Balance Sheet
(As on . . . . . . . . . . . )

Liabilities Amount Assets Amount

Current liabilities Current assets

Bank overdraft -- Cash in Hand/Bank --
Bills payable -- Sundry debtors / Bills Receivable --
Sundry creditors -- Closing stock --
Long-terms loans -- Investment --
Secured Loan -- Fixed Assets --
Unsecured Loan -- Plant and machinery Land & --
Reserve & Surplus -- Building --
General Reserve -- Furniture & Fixture --
Capital Misc. Expenditure --
+ Net Profit/-Net Loss Preliminary Exp. --
– Drawing -- --

Total === Total ===

11
 FINAL ACCOUNTS

ADJUSTMENTS

These are the entries that are made at the end of an accounting
period after closing the books of accounts and preparing Trail
Balance.
Some of the adjustment entries that are required for the
preparation of final accounts
 Adjustment Entries
Adjustment Effect - 1 Effect - 2

Closing stock Trading A/c Cr. B/Sheet Assets

Outstanding expenses Trading A/c Dr. + B/Sheet Liabilities

Or P&L A/c Dr. +

Prepaid expenses Trading A/c Dr. -- B/Sheet Assets

Or P&L A/c Dr. --

(Outstanding) Accrued income P&L A/c Cr. + B/Sheet Assets

Income received in advance (Unearned P&L A/c Cr. -- B/Sheet Liabilities

Income)

Depreciation P&L A/c Dr. + B/Sheet Assets --

Bad debts P&L A/c Dr. + B/Sheet Assets –

Interest on capital P&L A/c Dr. B/Sheet Liabilities

Capital +

13
1. CLOSING STOCK:

Adjusting Entry Closing Stock Dr.

To Trading A/c

Trading A/c Shown on the credit side

Balance Sheet Shown on the asset side as Current Asset

 The adjustments:
(Assumed accounting year: April to March)

Outstanding expenses: Add to the respective expense in the P & L A/c. and
show as a liability in the balance sheet .

Illustration:
Outstanding salary: Salary as per trial balance Rs.5,50,000. March salary payable
in April, yet to be accounted for Rs. 50,000.

P & L A/c. Balance Sheet

Expenses Income Liabilities Assets
To Salary 5,50,000
Add: Outstanding
Outstanding 50,000 Salary 50,000
6,00,000
OUTSTANDING EXPENSES:
Expenses incurred but not paid at the end of the year are called outstanding expenses

Adjusting Entry Respective Expense A/c Dr.

To Outstanding Expense A/c

Trading A/c Added to the respective expense on the debit side.

Profit & Loss A/c Added to the respective expense on the debit side.

Balance Sheet Shown on the Liability side as Current Liability

 The adjustments:
(Assumed accounting year: April to March)

Prepaid expenses: Deduct from the respective expense in the P & L

A/c. and show as an asset in the balance sheet.

Illustration:
Prepaid Insurance: Insurance premium paid for the year July to June-Rs.
12,000 debited to Insurance account
P & L A/c. Balance Sheet

Expenses Income Liabilities Assets

To Insurance 12,000
Less: Prepaid 3,000 Prepaid Insurance
3,000
9000
PREPAID EXPENSES:
Prepaid Expenses refer to amount paid in the current accounting year
for services to be received in the next accounting year

Adjusting Entry Prepaid Expense A/c Dr.

To Respective Expense A/c

Trading A/c Deducted from the respective expense

on the debit side.

Profit & Loss A/c Deducted from the respective expense

on the debit side.

Balance Sheet Shown on the Asset side as Current

Asset
The adjustments:
(Assumed accounting year: April to March)

Accrued Income: Credit the P & L A/c. with appropriate income a/c. and
show income accrued (but not received) as an asset in the balance sheet.

Illustration:
Deposit of Rs. 10,000 kept with bank on July 1, @ 12% p. a. for 5 years.

P & L A/c. Balance Sheet

Expenses Income Liabilities Assets

By Interest Accrued 900 Interest

Accrued
On Bank
Deposit 900
ACCRUED INCOME (Income earned but not received) :
If income for the current year is not received during the year, it is termed as accrued
income.

Adjusting Entry Accrued Income A/c Dr.

To Respective Income A/c

Profit & Loss A/c Added to the respective Income on the

credit side.

Balance Sheet Shown on the Asset side as Current

Asset
The adjustments:
(Assumed accounting year: April to March)

Pre-received income (Unearned Revenue): (If accounted for as

revenue): Deduct from the revenue in the P & L A/c. and show as liability in
the balance sheet
Illustration:
Advance from customers: Annual revenue Rs. 51,00,000, including Rs.
1,00,000 Advance received from customers accounted for as revenue.
Trading A/c. Balance Sheet
Expenses Income Liabilities Assets
Sales 51,00,000
Less: Adv.
Advance
From
Customers 1,00,000 From
50,00,000 Customers 1,00,000
 UNEARNED INCOME (Income received in advance):
It refers to income received for the current year against which services are to
be provided in the next accounting year

Adjusting Entry Respective Income A/c Dr.

To Unearned Income A/c

Profit & Loss A/c Deducted from the respective Income on

the credit side.

Balance Sheet Shown on the Liabilities side as Current

Liability.
The adjustments:
(Assumed accounting year: April to March)

Depreciation: It means diminution in the utility value of assets due

to wear and tear or passage of time.
Illustration:
Provide depreciation @ 15% on Plant and machinery of Rs. 10,00,000.

P & L A/c. Balance Sheet

Expenses Income Liabilities Assets

Plant & Machinery 10,00,000

To Depreciation 1,50,000 Less: Depreciation 1,50,000
8,50,000
DEPRECIATION on FIXED ASSET:
Depreciation is the depreciable cost of a fixed asset allocated to a
particular accounting year.

Adjusting Entry Depreciation A/c Dr.

To Asset A/c
Profit & Loss A/c Shown on the debit side as separate item.

Balance Sheet Shown on the Asset side by way of

deduction from the value of the concerned
fixed asset.
 The adjustments:
(Assumed accounting year: April to March)

Provision for Doubtful Debts: Debit the P & L A/c. with the
provision and show the provision as a deduction from Sundry Debtors in the
balance Sheet.
Illustration:
Sundry Debtors as per the trial balance Rs. 5,00,000. Create a provision of 5 % for doubtful
debts.
P & L A/c. Balance Sheet

Expenses Income Liabilities Assets

Sundry Debtors 5,00,000
Less: Provision
To Provision for Doubtful For Doubtful
Debts 25000 Debts 25,000
4,75,000
BAD DEBTS:
When a business enterprise becomes certain about non-recovery
of the amount from debtors, it is treated as Bad Debts and charged
to Profit & Loss A/c

Adjusting Entry Bad Debts A/c Dr.

To Assets A/c

Profit & Loss A/c Shown on the debit side by way of

addition to Bad Debts

Balance Sheet Shown on the Assets side as deduction

from the amount of Sundry Debtors.
PROVISION FOR BAD AND DOUBTFUL DEBTS:
As the exact amount of bad debts cannot be calculated at the time of sale, a
provision for bad and doubtful debts may be created in the year of sale and
charged to P&L A/c of this year.

Adjusting Entry Profit & Loss A/c Dr.

To Provision for Bad Debts A/c

Profit & Loss A/c Shown on the debit side as separate

item
Balance Sheet Shown on the Assets side by way of
deduction from the amount of Sundry
Debtors (net of additional bad debts)
The adjustments:
(Assumed accounting year: April to March)

Provision for Discount on Debtors : This provision is to be

made with reference to the debtors after deducting the provision for
doubtful debts.

This is because doubtful debtors cannot be expected to become entitled

to any cash discount for prompt payment.

Debit the P & L A/c. with the provision and show the provision as a
deduction from Sundry Debtors in the balance Sheet , after the
deduction of the provision for doubtful debts.
PROVISION FOR DISCOUNT ON DEBTORS:
Provision for discount on debtors is created to take care of discount to be allowed
to debtors for prompt payment. But before calculating provision for discount,
provision for doubtful debts is deducted from debtors.

Adjusting Entry Profit & Loss A/c Dr.

To Provision for Discount on Debtors
Profit & Loss A/c Shown on the debit side as separate item
Balance Sheet Shown on the Assets side by way of deduction
from the amount of Sundry Debtors (net of
additional bad debts & Provision for Bad and
Doubtful Debts)
Provision for Discount on Debtors (Contd.)

Illustration:
Sundry Debtors as per the trial balance Rs. 5,00,000. Provide 5% for doubtful
debts and 1 % for discount on debtors.
P & L A/c. Balance Sheet
Expenses Income Liabilities Assets
Sundry Debtors 5,00,000
To Provision for Less: Provision
Doubtful For Doubtful
Debts 25000 Debts 25,000
4,75,000
To Provision for Less: Provision
Discount For Discount
On Debtors 4,750 On Debtors 4750
4,70,250
The adjustments:
(Assumed accounting year: April to March)

Loss by Fire::Loss of stock by fire is credited to the

trading account.
If the stock is fully insured and the full claim is admitted by
insurance co. but not received till the date of the balance sheet, it is
shown as an asset in the balance sheet.

In case claim is for a part of the value of the stock destroyed, in

addition to the above disclosures, the irrecoverable portion is written off
as “loss by fire” by debiting the profit and loss account.
The adjustments:
(Assumed accounting year: April to March)

Goods Distributed as free samples: Sometimes goods are distributed as

free samples.
This will have to be accounted for in two places.

1.Since the goods are generally distributed as free samples for sales
promotion, the amount of such goods will be debited to the P & L A/c.
As “Advertisement Expenses A/c.”

2. The amount of such goods will also have to be deducted from

“Purchases” to complete the double entry in the trading account.
The adjustments:
(Assumed accounting year: April to March)

Goods Distributed as free samples: Contd.

Trading & P & L A/c.

Expenses Income
To Purchases
Less: Goods
distributed
as free
samples

To Advertisement
Exps.
(Goods distributed as
free samples)
 Adjustment Entries
 Closing stock
 Outstanding expenses
 Prepaid expenses
 Accrued income
 Unearned Income (Income received in advance)
 Depreciation
 Bad debts
 Interest on capital

34
Q.1 From the following particulars of M/s. Raman & Co., you are
required to prepare Trading, Profit and Loss Account and Balance
Sheet for the year ended 31 st Dec. 2017 :
Sales 65, 000 Discount Allowed 300
Sales Return 500 Discount Received 500
Stock at the beginning 8,000 Salaries 3,000
Purchases 29,000 Interest paid 400
Purchases Return 300 Furniture 3,000
Direct Wages 5,000 Buildings 20,000
Direct Expenses 5,000 Plant and Machinery 20,000
Carriage Inwards 4,000 Cash in Hand 1,000
Capital at the beginning 30,000 Bills Payable 6,200
Drawings 5,000 Reserve for Bad Debts 500
Sundry Debtors 10,000 Bad Debts 300
Sundry Creditors 12,000

 Additional Information :
(1) Closing stock at the end 8,000
(2) Outstanding Salaries Rs. 500
(3) Interest on Capital at 10% P.A.
(4) Depreciation on Plant and Machinery at 10% P.A. and Buildings at 5% P.A.
(5) Prepaid of Interest Rs. 100
(6) Provision for Bad and Doubtful Debts at 10% on Debtors
 Trading, Prpfit and Loss Account for the year ended 31st Dec. 2017

Particulars Amt Rs. Particulars Amt Rs.

To Opening Stock 8,000 By Sales 65,000

To Purchases 29,000 Less: S/Return 500 64,500
Less : Pur. Return 300 28,700 By Closing Stock 8,000
To Carriage Inward 4,000
To Direct Wages 5,000
To Direct Expenses 5,000
To Gross Profit cld 21,800
72,500 72,500
To Discount allowed 300
To Salaries 3,000 By Gross Profit bId 21,800
Add : Outstanding 500 3,500 By Discount Received 500
To Interest paid 400
Less: Prepaid Expenses 100 300
To Bad Debts 300
Add : B/D/R(New)10% 1,000
1,300
Less : Existing of B/D/R 500 800
To Interest on Capital @10% 3,000
To Depreciation :
10% on Plant & Mach. 2,000
5% on Buildings 1,000 3,000
To Net Profit cld 11,400
======= ====== 22,300
22,300
 Balance Sheet
as on 31 Dec. 2011

Liabilities Amt. Rs. Assets Amt Rs.

Capital 30,000 Cash in hand 1,000

Add: Net Profit 11,400 Furniture 3,000
41,400 Closing Stock 8,000
Add: Interest on Capital 3,000 Plant and Mach. 20,000
44,600 Less : Dep. 2,000 18,000
Less : Drawings 5,000 39,400 Buildings 20,000
Sundry Creditors 12,000 Less : Dep. 1,000 19,000
Outstanding Salary 500 Prepaid Interest 100
Bills Payable 6,200 Sundry Debtors 10,000
Less : B/D/Pro. 1,000 9,000
====== =======
58,100 58,100
======= =======
Illustration 2: Trial Balance of M/s Pandit Bros. as at 31 st March,2007 was as follows:

Rs. Rs.

Cash 1,000 Capital 22,000

Bank 5,000 Sales 1,25,000
Wages 8,000 Creditors 15,000
Salaries 25,000
Furniture 15,000
Rent of Building 13,000
Debtors 15,500
Bad Debts 4,500
Purchases 75,000

Adjustments: 1,62,000 1,62,000

1. Rent of building for one month was paid in advance
2. Closing Stock as on March 31, 2007 amounted to Rs.10,000/-
3. Wages Outstanding amounted to Rs.500/-
4. Salaries included Rs.5,000/- paid in advance to an employee
5. Furniture to be depreciated @ 10%.
6. Debtors included bad debts Rs.2,500/-
Prepare Trading and Profit and loss A/c and Balance Sheet
 Illustration 3: From the following Trial Balance of Mr. Ram, prepare a Trading and Profit and
Loss A/c for the year ending on 31st March, 2006 and a Balance Sheet as on that date:
Dr. Trial Balance Cr.
Rs. Rs.
Plant & Machinery 51,000 Capital 41,000
Office Furniture 2,600 Creditors 52,000
Stock (1.4.2005) 48,000 Sales 4,80,000
Motor Van 12,000 Bills Payable 5,600
Debtors 45,000 Purchase Return 5,500
Cash in Hand 400 Provision for Bad Debts 2,500
Cash at Bank 6,500 Discount Received 3,700
Wages (factory) 1,50,000
Wages (office) 14,000
Purchases 2,13,500
Bills Receivable 7,200
Sales Return 9,300
Drawings 6,000
Rent 6,000
 Illustration 3 contd………………………..
Lightning 800
Telephone 1,350
Insurance 300
Advertisement 6,350
General Expenses 1,000
Bad Debts 2,500
Discount Allowed 6,500

5,90,300 5,90,300
The following adjustments are to be made:
(a) Stock on 31st March,2006 was valued at Rs.52,000/-
(b) Rent due but not paid Rs.2,000/-
(c) Lightning due but not paid Rs.300/-
(d) Insurance Paid in advance Rs.100/-
(e) Depreciate Plant & Machinery @ 331/3%; Office Furniture @ 10%; Motor Van @ 331/3%
(f) The Provision for Bad Debts has to be increased to Rs.3,000/-
(g) The Provision for Discount on Debtors and Discount on Creditors is to be made @ 2.5%
(G.P. Rs.1,16,700/-; N.P. Rs.57,890/-; B/S Total Rs.1,51,490/-)
 Illustration 4: From the following information prepare Final Accounts:
Trial Balance as on 31st March,2006
Purchases (Adjusted) 1,49,600 Sales 1,60,000
Wages 10,450 Capital 37,550
Rent of Building 4,200 Commission 450
Insurance and rates (including 200 Creditors 15,000
premium of Rs.150 p.a. paid up
to 30-9-2006)
Stock (31-3-2006) 20,625
Cash 925
Loose Tools 2,000
Plant 17,000
Debtors 3,000
Sundry Expenses 5,000

2,13,000 2,13,000
Illustration 4 contd………………….
Adjustments:
1. Loose Tools were valued at Rs.1,600/- on 31-3-2006
2. Depreciate Plant by 10%
3. Manager is entitled to a commission of 10% of net profits after
charging such commission.
4. One-third of the building was occupied by the employees who
reside in the business building. Treat the value of the perquisite as
wages.
5. Wages include Rs.500/- for installation of a plant on 1-10-2005.
6. Loss of stock by fire on 20-3-2006 amounted to Rs.10,000/- and
100% claim was admitted by the Insurance Company.
(G.P. Rs.9,050/-; N.L. Rs.575/-; B/S Total Rs.51,975/-)
 Illustration 5: The following is the Trial Balance extracted from the books of Akhilesh as on
30th September, 2007:

Particulars Dr. (Rs.) Cr. (Rs.)

Capital A/c ---- 1,00,000

Plant and Machinery 78,000 ----
Furniture 2,000 ----
Purchases and Sales 60,000 1,27,000
Returns 1,000 750
Opening Stock 30,000 ----
Discount 425 800
Sundry Debtors / Creditors 45,000 25,000
Salaries 7,550 ----
Manufacturing Wages 10,000 ----
Carriage Outwards 1,200 ----
Provision for Doubtful Debts ---- 525
Rent, rates and Taxes 10,000 ----
Advertisements 2,000 ----
Cash 6,900 ----

2,54,075 2,54,075
Prepare Trading & Profit and Loss A/c for the year ended on 30 th September,2007 and a
Balance Sheet as on that date after taking into account the following adjustments:
1. Closing Stock was Valued at Rs.34,220/-
2. Provision for Doubtful Debts is to be kept at Rs.500/-
3. Depreciate Plant & Machinery @ 10%
4. The proprietor has taken goods worth Rs.5,000/- for personal use and additionally
distributed goods worth Rs.1,000/- as samples.
5. Purchase of furniture Rs.920/- has been passed through Purchases Book.
(G.P. Rs.67,890; N.P. Rs.38,740/-, B/S Total Rs.1,58,740/-)
 Other Adjustments

PROVISION FOR DISCOUNT ON CREDITORS:

Although Provision for discount on creditors is against the principle of conservatism but it is
an accepted accounting practice

Adjusting Entry Provision for Discount on Creditors A/c Dr.

To Profit & Loss A/c

Profit & Loss A/c Shown on the CREDIT side as separate item

Balance Sheet Shown on the Liabilities side by way of deduction from

the amount of Sundry Creditors
INTEREST ON CAPITAL:
To calculate true profit for the year, interest on capital invested by the owner of business is
provided in the books and treated as business expense.

Adjusting Entry Interest on Capital A/c Dr.

To Capital A/c

Profit & Loss A/c Shown on the DEBIT side as separate item

Balance Sheet Shown on the Liabilities side by way of addition to the

capital.
INTEREST ON DRAWINGS:
Cash, goods or any other asset withdrawn by the owner for his personal use is termed as
drawings. Sometimes interest on drawings is calculated by the business enterprise and treated
as business income.

Adjusting Entry Capital A/c Dr.

To Interest on Drawings A/c

Profit & Loss A/c Shown on the CREDIT side as separate item

Balance Sheet Shown on the Liabilities side by way of deduction from

the capital.
MANAGER’S COMMISSION ON PROFIT:
(i) Commission on Profits Before Charging Such Commission:
Profit before Commission X Rate of Commission
100
(ii) Commission on Profits After Charging Such Commission:
Profit before Commission X Rate of Commission
100 + Rate

Adjusting Entry Manager’s Commission Dr.

To Outstanding Commission A/c

Profit & Loss A/c Shown on the CREDIT side as separate item

Balance Sheet Shown on the Liabilities side as Current Liability.

ABNORMAL LOSS OF STOCK:
Sometimes loss of goods takes place due to fire, theft, earthquakes, etc.

Trading A/c Total value of abnormal loss of stock (whether or not

recovered) is shown on the credit side of the Trading
A/c

Profit & Loss A/c Total value of irrecovered loss of stock is shown on
the debit side as separate item.

Balance Sheet The amount due from the insurance company is

shown on the asset side as a Current Asset.
GOODS SENT ON SALE OR APPROVAL BASIS :
Generally, goods supplied on approval are recorded as sales. But this cannot be
treated as sales until the express or implied consent of the buyer is obtained.

Adjusting Entry Sales A/c Dr.

To Debtors A/c
(with sale price of goods sold on approval basis)
Stock A/c Dr.
To Trading A/c
(with cost of goods sold on approval basis)

Trading A/c Shown as a deduction from Sales (with sale price)

Added to the Closing Stock on credit side.

Balance Sheet Shown on the Assets side by way of deduction from the
Debtors. (with sale price)
CLASSIFICATION OF CAPITAL AND
REVENUE
CLASSIFICATION OF CAPITAL AND REVENUE

The Going Concern Assumption allows the accountant to classify the

expenditure and receipts as:
 Capital Expenditure
 Revenue Expenditure
 Deferred Revenue Expenditure
 Capital Receipts
 Revenue Receipts.
CAPITAL EXPENDITURE: is that expenditure which yields
benefits which extend beyond the current accounting period. They
are of non-recurring nature. For e.g. cost of land and building,
plant and machinery, furniture and fixtures etc.

REVENUE EXPENDITURE: is that expenditure which is incurred

for the running productivity or earning capacity of a business. Such
expenditure yields benefit in the current accounting period only.
For e.g. Office and Administration Expenses, Selling & Distribution
Expenses etc.
DEFERRED REVENUE EXPENDITURE: is that expenditure for which
payment has been made or a liability incurred but is carried forward on the presumption that
it will be benefit over a subsequent period or periods. Sometimes, revenue expenditure
incurred during the year is very large and it is expected to benefit not only the current year
operations but also subsequent period or periods. Such expenditure should be normally
written off over a period of 3 to 5 years.
For e.g. heavy Advertising Campaign, Research & Development Expenditure.
CAPITAL RECEIPTS AND REVENUE RECEIPTS
The recurring receipts are normally the outcome of normal trading activities and are regarded
as Revenue Receipts. Foe e.g. sale price received from sale of goods, interest on investments
made in past etc. The benefits of recurring receipts do not extend beyond the current
accounting period. The Revenue Receipts are shown in the Income Statement.
The non-recurring receipts are Capital Receipts and may take form of raising of long-term
loans, capital contribution by the owner, sale price of fixed asset etc. The benefits of non-
recurring receipts may or may not be confined to current accounting period. The capital
receipts create a liability of an equal amount to be paid in future.
RATIONALE OF MAKING ADJUSTMENTS
The important considerations are:
1. Revenue Recognition Principle which requires that revenue should be recognised in the
period in which the sale is deemed to have occurred.
2. Matching Principle which requires that the expenses should be recognised in the same
period as associated revenues. Expenses recognition is tied to revenue recognition. Let the
expenses follow the revenue.

An adjusting entry is recorded to bring an asset or liability account balance to its proper
amount.