What is the purpose of making adjustments in the final accounts?

          There are certain incomes and expenditures which are not recorded even at the closing date of accounts. While there are certain Income & Expenditures which are recorded but they relate to next accounting period.
          So, in order to prepare the final accounts for a particular period these adjustments are to be adjusted since they affect Profit or Loss, Assets & Liabilities of the business. Some important items which need due adjustments at the time of preparing final accounts are (a) Closing Stock; (b) Outstanding Expenses; (c) Prepaid Expenses; (d) Accrued Income; (e) Income received in advance; (f) Depreciation; (g) Provision for bad debts; (h) Provision for discount on debtors etc. In accounting terminology the effect of such transactions in Final Accounts are known as Adjustments.


1. Revenue Recognition Principle: Recognition Principle of Accounting all the revenues should be recognised in the period in which the sale is deemed to have occurred. Thus, any income which relates to a particular year should be recognised in that year whether received or not received. Whereas, any income which does not relates to the particular year should be excluded if taken into consideration.

2. Matching Principle: According to matching principle, all the expenses should be recognised in the same period as associated to revenues. It means that expenses recognition is tied to Revenue Recognition. In other words we can say that expense follows the Revenue.

3. Accrual Concept: The most important concept of accounting is the accrual concept which states that in preparing final accounts Income & Expenses related to the accounting year should be considered.
          Thus, in order to prepare the Trading and Profit & Loss A/c on accrual basis the following are followed:
(a) Any expenditure which has been paid but relates to the succeeding period is deduced.
(b) Any expenditure which relates to current period whether paid or not added.
(c) Income or Receipts which relates to succeeding period but received is deducted. 
(d) Income or receipt which relates to current accounting period whether received or not is added. 

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