Physics Wallah

Accountancy Adjustments

Accountancy adjustments ensure that financial statements accurately reflect a company's financial position at the end of an accounting period. These Accountancy adjustments discrepancies and allocate revenues
authorImageShruti Dutta6 Jul, 2024
Share

Share

Accountancy Adjustments

Accountancy adjustments play a critical role in ensuring the accuracy and reliability of financial statements. These adjustments are necessary to align the reported financial results with the actual economic activities of a business during a specific accounting period. They help recognise revenues and expenses in the period they are earned or incurred, rather than when cash is received or paid.

By making these adjustments, accountants ensure that the financial statements provide a clear and transparent view of a company's financial position and performance, enabling stakeholders to make informed decisions. This article explores the importance of Accountancy adjustments, the types of adjustments commonly made, and their impact on financial reporting.

What is an Accountancy Adjustment?

An accountancy adjustments refers to a business transaction that has not been included in a company's accounting records as of a specific date. These transactions typically involve activities such as recording supplier invoices, billing customers, or receiving cash, which are eventually documented through modules in accounting software. Changes in accounting principles may also necessitate adjustments to previous periods' financial statements to ensure consistency in financial reporting across different accounting periods.

How Adjusting Entries are Made?

Adjusting entries are created using journal entries, which must include at least one debit and one credit entry, though they can include multiple entries (compound entries). The total debits and credits in a journal entry must balance; otherwise, the accounting software will reject the entry. It's beneficial to use templates for these journal entries, pre-defined forms with correct account numbers already filled in. Templates save time and reduce errors in journal entry input.

Types of Accountancy Adjustments

There are five main types of accountancy adjustments, each straightforward to understand and implement. Below, you'll find detailed explanations of each type, illustrative examples and instructions for completing them.
  • Accrued Revenues : Accrued revenue represents income earned in one accounting period but not received or recorded until a subsequent period.
  • Accrued Expenses : These are expenses incurred in one period but not paid until later, following a similar concept to accrued revenues.
  • Deferred Revenues : Deferred revenue occurs when a customer pays for goods or services in advance. It's crucial to recognize this income when the service is provided, even if payment was received earlier.
  • Prepaid Expenses : Similar to deferred revenues, prepaid expenses involve paying for expenses upfront that will benefit future periods. Instead of expensing the entire cost immediately, it's spread out over the periods it relates to.
  • Depreciation Expenses : Depreciation involves allocating the cost of a long-term asset over its useful life. This adjustment reflects the ongoing decrease in the value of assets like machinery, vehicles, or buildings. It is recorded periodically to reflect their reduced value over time on the balance sheet.
Also Read
Trade Credit Demand Curve and the Law of Demand
Difference between Balance of Trade and Balance of Payment Double Entry System

Some Accountancy Adjustments Examples

These adjustments are crucial for maintaining accurate financial reporting, ensuring that revenues and expenses are properly matched to the periods in which they occur, and reflecting the true financial position of the business.
  • Adjusting Allowance for Doubtful Accounts or Inventory Obsolescence Reserve : Increasing or decreasing the allowance for doubtful accounts or inventory obsolescence to reflect current estimates of bad debts or obsolete inventory.
  • Accruing Revenue from Unbilled Sources : Recognizing revenue from sources where services have been provided but invoices still need to be issued.
  • Deferring Revenue : Postponing recognition of revenue that has been invoiced but not yet earned, such as prepaid subscriptions where services will be provided over time.
  • Accruing Expenses Before Receiving Supplier Invoices : Recording expenses incurred but still needing to be invoiced by suppliers ensures accurate expense matching to the period they relate to.
  • Capitalizing Costs Until Asset Use: Delaying the recognition of costs until the corresponding asset is utilised or consumed in business operations.
  • Recognizing Prepaid Expenses : Including expenses that have already been paid for but relate to future periods, such as prepaid insurance or rent.

Journal Entries For Adjustments in Final Accounts

Journal entries for accountancy adjustments in final accounts are essential to ensure that financial statements accurately reflect a business's current financial position and performance. These entries capture various adjustments like accrued revenues, accrued expenses, deferred revenues, prepaid expenses, depreciation, and other necessary adjustments. Each adjustment entry involves debiting and crediting specific accounts to align revenues and expenses with the periods they relate to, adhering to accounting principles such as the matching concept and accrual basis. These entries are crucial for providing a true and fair view of the company's financial health and ensuring compliance with accounting standards
Date Particulars LF Amount (DR.) Amount (Cr.)
1. Adjustment of Closing Stock Closing Stock A/C XXX XXX
To Trading A/C XXX XXX
Recording ending inventory
2. Adjustment of Outstanding Expenses in Final Accounts Expense A/C XXX
Input CGST A/C XXX
Input SGST A/C XXX
To Outstanding Expense A/C XXX XXX
Recording unpaid expenses
3. Adjustment of Prepaid Expenses in Final Accounts Prepaid Expense A/C XXX
To Expense A/C XXX
Recording expenses paid in advance
4. Adjustment of Accrued Income in Final Accounts Accrued Income A/C XXX
To Income A/C XXX
To Output CGST A/C XXX
To Output SGST A/C XXX
To Output IGST A/C XXX
Recording income earned but not received
5. Adjustment of Income Received in Advance in Final Accounts Income A/C XXX
To Income Received in Advance A/C XXX
To Output CGST A/C XXX
To Output SGST A/C XXX
Recording income received but not earned
6. Adjustment of Bad Debts in Final Accounts Bad Debts A/C XXX
To Debtor's A/C XXX
Profit and Loss A/C XXX XXX
Bad debts transferred to Profit & Loss A/C
7. Adjustment of Further Bad Debts in Final Accounts Bad Debts A/C XXX
To Debtor's A/C XXX
Recording further bad debts
8. Adjustment of Provision for Doubtful Debts in Final Accounts Profit and Loss A/C XXX
To Provision for Doubtful Debts A/C XXX
Recording provision for doubtful debts
9. Adjustment of Provision for Discount on Debtors in Final Accounts Profit and Loss A/C XXX
To Provision for Discount on Debtors A/C XXX
Recording provision for discount on debtors
10. Adjustment of Interest on Capital in Final Accounts Interest in Capital A/C XXX
To Capital A/C XXX
Profit and Loss A/C XXX XXX
Interest charged on capital transferred to Profit & Loss A/C
11. Drawings of Goods for Personal Use in Final Accounts Drawings A/C XXX
To Purchase A/C XXX
To Input CGST A/C XXX
To Input SGST A/C XXX
Recording drawings in the form of goods for personal use
12. Abnormal or Accidental Loss in Final Accounts (Goods Not Insured) Profit and Loss A/C XXX
To Trading A/C XXX
To Input CGST A/C XXX
To Input SGST A/C XXX
Recording total value of abnormal loss
13. Abnormal or Accidental Loss in Final Accounts (Goods Insured) Accidental Loss A/C XXX
To Trading A/C XXX
To Input CGST A/C XXX
To Input SGST A/C XXX
Insurance Claim A/C XXX
Profit and Loss A/C XXX XXX
Adjusting the insurance claim received
Begin your journey towards academic excellence in Commerce with our comprehensive Class 11 Commerce courses . Master the CBSE syllabus with expert guidance and ace your exams. Enroll now!”
Related Links
Marginal Propensity to Consume Sources of Recruitment: Definition, Advantages
Measuring Central Tendency: Meaning and Objectives Role of Business in Environmental Protection
Normal Profit and Break-Even Point Incidental Trading Activity

Adjustments in Final Accounts FAQs

What are Accountancy adjustments?

Accountancy adjustments are necessary entries to financial records at the end of an accounting period to ensure that financial statements accurately reflect the business's financial position and performance. These adjustments include accruals, deferrals, provisions, and depreciation.

Why are Accountancy adjustments important?

Accountancy adjustments are crucial for matching revenues and expenses to the appropriate accounting periods, adhering to the accrual basis of accounting. They ensure that financial statements provide a true and fair view of the company's financial health and comply with accounting standards.

Can Accountancy adjustments be reversed?

Yes, some Accountancy adjustments, such as accruals and deferrals, can be reversed in the subsequent accounting period to ensure that transactions are properly reflected when cash is exchanged.
Popup Close ImagePopup Open Image
Talk to a counsellorHave doubts? Our support team will be happy to assist you!
Popup Image
CTA Image
008448982616
Join 15 Million students on the app today!
Point IconLive & recorded classes available at ease
Point IconDashboard for progress tracking
Point IconMillions of practice questions at your fingertips
Download ButtonDownload Button
Banner Image
Banner Image
Free Learning Resources
Know about Physics Wallah
Physics Wallah is an Indian edtech platform that provides accessible & comprehensive learning experiences to students from Class 6th to postgraduate level. We also provide extensive NCERT solutions, sample paper, NEET, JEE Mains, BITSAT previous year papers & more such resources to students. Physics Wallah also caters to over 3.5 million registered students and over 78 lakh+ Youtube subscribers with 4.8 rating on its app.
We Stand Out because
We provide students with intensive courses with India’s qualified & experienced faculties & mentors. PW strives to make the learning experience comprehensive and accessible for students of all sections of society. We believe in empowering every single student who couldn't dream of a good career in engineering and medical field earlier.
Our Key Focus Areas
Physics Wallah's main focus is to make the learning experience as economical as possible for all students. With our affordable courses like Lakshya, Udaan and Arjuna and many others, we have been able to provide a platform for lakhs of aspirants. From providing Chemistry, Maths, Physics formula to giving e-books of eminent authors like RD Sharma, RS Aggarwal and Lakhmir Singh, PW focuses on every single student's need for preparation.
What Makes Us Different
Physics Wallah strives to develop a comprehensive pedagogical structure for students, where they get a state-of-the-art learning experience with study material and resources. Apart from catering students preparing for JEE Mains and NEET, PW also provides study material for each state board like Uttar Pradesh, Bihar, and others
Privacy Policy
Terms of use
Copyright © 2025 Physicswallah Limited All rights reserved.