End of Period accounting Adjustments


End of Period Adjustments

Financial statements are required to be prepared at regular intervals, usually once a year as a minimum. The preparation of such periodic statements requires the determination of expenses and revenues in the particular period. The difference between revenues and expenses is the profit or loss for that period. If only one profit and loss account were prepared during the whole life of the firm, the problem of periodic determination of expenses and revenues would not arise.

Periodic determination of profit or loss can only be achieved when revenues are matched against expenses.  As part of the matching procedure preparers of financial statements must make sure that accounts reflect every income earned and expense incurred during a particular period.  This involves making a number of adjustments.

There are generally six types of adjustments that are commonly made at the end of an accounting period.  These are:

a)         Those relating to expenses paid for in advance, alternatively known as prepaid expenses.

            b)         Those relating to revenues received in advance, alternatively known as deferred or unearned revenues.

            c)         Those related to expenses incurred during the accounting period, but unpaid for.  Alternatively known as accrued expenses.
            d)         Those related to revenues earned during the accounting period but payments for which have not been received.  These are alternatively known as accrued revenues.

            e)         Those related to the apportionment of cost of fixed assets over their expected useful lives. This is the depreciation ajdustment.

            f)          Those related to the actual and potential non-payment of receivables. These involve adjustments for bad and doubtful debts.

Comments

Post a Comment

Popular posts from this blog

What are the Misconceptions about employee motivation?

Image
Misconceptions about employee motivation In order for an employee to be motivated, depends on various factors such as level and status of the respective employee. There is no one principle to motivate all employees. There are some factors that are considered as motivating tolls for employees however in reality these may not be motivational. The followings are some misconceptions about employee motivation; 1.       Financial reward Money alone cannot generally act as a motivational tool for employees. Formal and informal recognition tends to add motivation for some employees rather than money. Money may tend only to motivate some employees in short term where an employee may be in high need for money. At some stage, i.e. senior level an employee may have enough money and therefore money may no longer motivate him/her. 2.       Natural motivation There is no such a natural motivation. No one can be motivated naturall...
Read more

Share capital, Invitation, Application, Allotment, calls and paid-up procedures

Capital of a limited company is divided into shares of a fixed amount . The amount stated in the Memorandum is known as the Authorized Share Capital . For example, this may be shs. 10 million divided into 100,000 shares of shs. 100 per share. This fixed amount per share is called its par or nominal value . A company may not issue share capital in excess of what has been authorized . The actual amount that has been issued to shareholders is termed Issued Share Capital . If in the above example only 80,000 shares have been issued, then the company's issued capital is shs. 8 million. The steps followed when a company issues shares are: Invitation The company invites the public to apply for its shares through a Prospectus which is an offer document that invites the public to subscribe and purchase shares of a company . A Prospectus gives objectives and information on attractiveness of the company. Application The public applies for shares in the company, usually...
Read more

CLASSIFICATION OF MANUFACTURING COSTS

CLASSIFICATION OF MANUFACTURING COSTS The three elements of production costs are materials, labour and expenses.   Each one may be categorized as either direct or indirect cost. Direct costs are those costs which may be identified with the product and therefore can be included directly in the cost of the product. These are costs that can conveniently and easily be traced to a particular product, department or any other object that costs are accumulated.   Examples are: (a) Direct materials - all materials that form an integral part of the finished product, like leather for shoes, wood for furniture, etc. (b) Direct labour - it is labour applied directly on the raw materials, in order to convert these into finished product. Like the wages paid to factory workers or machine operators engaged in the production process are classified under this category. (c) Direct expenses - are those specifically attributed to the product, like the royalty paid to an inve...
Read more