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.

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What is an Accountancy Adjustment?

How Adjusting Entries are Made?

Types of Accountancy Adjustments

• 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.

Some Accountancy Adjustments Examples

• 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