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Chapter: 11th Accountancy : Final Accounts of Sole Proprietors-II

Final Accounts of Sole Proprietors-II

Rationale of making adjustments at the time of preparing final accounts

FINAL ACCOUNTS OF SOLE PROPRIETORS-II


Introduction

The principal function of final accounts is to exhibit a true and fair view of the profitability and the financial position of the business to which they relate. Final accounts are prepared based on the ledger account balances as shown by the trial balance for an accounting period as a whole. The expenses and incomes for the whole accounting period must be taken into account while preparing the final accounts.

Sometimes, it is possible that certain expenses have been incurred but not paid and certain incomes have been earned but not received during the accounting period. Similarly, there may be expense or income which have been paid or received in the accounting period but they may pertain to another accounting period. These items are to be adjusted to include correct amounts of them in the final accounts at the end of the accounting period. Certain items like value of stock at the end might have been ascertained after closing the ledger accounts for the accounting period. Such items might also be included in the financial statements so that they represent a true and fair view of profitability and financial status. It becomes necessary to make adjustments for such items after the preparation of trial balance by passing journal entries, called adjustment entries. Both debit as well as credit aspects of these adjustments are to be recorded at the time of preparation of final accounts.

 

Rationale of making adjustments at the time of preparing final accounts

The important considerations in the preparation of final accounts with adjustments are as under:

i. Revenue recognition principle

It requires that the revenue should be recognised in the period in which the sale is deemed to have occurred.

ii. Matching principle

Revenues earned during the period must be compared with the expenses incurred during that period.

 

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