Adjustments in Final Accounts — Financial Accounting

Meaning of Adjustments

Adjustments refer to the essential changes made at the end of an accounting period to bring the accounts to their correct and true financial position. These adjustments ensure that revenues and expenses are recorded in the period to which they actually relate, following the accrual concept, matching concept, and conservatism principle.

Adjustments are incorporated into the Trading Account, Profit & Loss Account, and Balance Sheet to reflect an accurate picture of profit earned and the financial position of the business.

Need for Making Adjustments

To match expenses with related revenues.
To record outstanding or prepaid items correctly.
To bring forward incomes earned but not yet received.
To ensure full disclosure of assets and liabilities.
To calculate the actual profit or loss of the business.

Common Adjustments in Final Accounts

The following adjustments are usually required at the end of the financial year:

1. Closing Stock: Added to Trading Account on credit side and shown as an asset in the Balance Sheet.
2. Outstanding Expenses: Added to related expenses in Profit & Loss Account and shown as a liability.
3. Prepaid Expenses: Deducted from related expenses and shown as an asset.
4. Accrued Income: Added to income in Profit & Loss Account and shown as an asset.
5. Income Received in Advance: Deducted from income and shown as a liability.
6. Depreciation: Charged as an expense and shown as reduction in the asset value.
7. Bad Debts: Recorded as expense and deducted from Debtors.
8. Provision for Doubtful Debts: Shown as an expense; deducted from Debtors in Balance Sheet.
9. Provision for Discount on Debtors/Creditors: Created as per requirement.
10. Interest on Capital: Added to capital and shown as expense in Profit & Loss Appropriation Account.
11. Interest on Drawings: Deducted from capital; treated as income for the firm.
12. Goods Distributed as Free Samples: Deducted from purchases and shown as advertising expense.
13. Goods Withdrawn for Personal Use (Drawings): Deducted from purchases; reduced from capital.
14. Loss of Goods by Fire (Insurance Claim): Adjustment based on insured amount and stock destroyed.
15. Deferred Revenue Expenditure: Only a portion is charged; balance carried forward as an asset.
16. Provision for Taxation: Shown as expense and liability.

Table Representation of Major Adjustments

Adjustment	Effect on Profit & Loss / Trading A/c	Effect on Balance Sheet
Closing Stock	Shown on credit side of Trading A/c	Shown as Current Asset
Outstanding Expenses	Added to respective expense	Shown as Current Liability
Prepaid Expenses	Deducted from expense	Shown as Current Asset
Accrued Income	Added to income	Shown as Current Asset
Income Received in Advance	Deducted from income	Shown as Current Liability
Depreciation	Charged as expense	Deducted from Asset Value
Bad Debts	Recorded as expense	Deducted from Debtors
Provision for Doubtful Debts	Expense in P&L	Deducted from Debtors
Interest on Capital	Expense	Added to Capital
Interest on Drawings	Income	Deducted from Capital

Conclusion

Adjustments ensure the true and fair presentation of final accounts. Without adjustments, profits would be incorrect, assets overstated or understated, and liabilities incomplete. Therefore, adjustments form the backbone of accurate financial reporting.