To determine net income of an accounting year revenue and other incomes are matched with cost of resources consumed (called expenses).For proper matching and to find out true income, these are matched on accrual basis. To determine net income on accrual basis, revenue and income earned during an accounting period (irrespective of inflow of cash) are compared with expenses incurred during the same period (irrespective of outflow of cash).
Under double entry system of book-keeping, cost of resources consumed is not directly recorded. To calculate cost of goods sold, goods purchased are adjusted for stock left at the end of the period (closing stock) by passing a journal entry. Besides, closing stock adjustment, expense accounts also require adjustment at the end of the year.
Expenses like wages, salaries, rent, interest, etc. are recorded on cash basis and require adjustment at the end of the year for amount due but not paid (called outstanding expenses) and amount paid but not due called prepaid expenses. The cost of fixed asset allocated to a particular accounting year (called depreciation) is adjusted at the end of the accounting year.
Sales are recorded in books when sale process is complete. It increases either cash or claim to cash in the form of debtors and bills receivable. However,other incomes, interest dividend, rent, etc. are recorded on receipt basis. To calculate true profit, amount received is adjusted for amount received but not earned (called unearned income) and amount earned but not received (called accrued income).Adjustments are made at the end of the accounting period by passing journal entries (called adjustment entries). Basic objective of passing these adjustment entries is to find out true profit on accrual basis and portray true and fair financial position of the business. Adjustment entries can be passed either before or after the preparation of trial balance, Generally, these adjustments are made after the preparation of trial balance.
Under double entry system of book-keeping, cost of resources consumed is not directly recorded. To calculate cost of goods sold, goods purchased are adjusted for stock left at the end of the period (closing stock) by passing a journal entry. Besides, closing stock adjustment, expense accounts also require adjustment at the end of the year.
Expenses like wages, salaries, rent, interest, etc. are recorded on cash basis and require adjustment at the end of the year for amount due but not paid (called outstanding expenses) and amount paid but not due called prepaid expenses. The cost of fixed asset allocated to a particular accounting year (called depreciation) is adjusted at the end of the accounting year.
Sales are recorded in books when sale process is complete. It increases either cash or claim to cash in the form of debtors and bills receivable. However,other incomes, interest dividend, rent, etc. are recorded on receipt basis. To calculate true profit, amount received is adjusted for amount received but not earned (called unearned income) and amount earned but not received (called accrued income).Adjustments are made at the end of the accounting period by passing journal entries (called adjustment entries). Basic objective of passing these adjustment entries is to find out true profit on accrual basis and portray true and fair financial position of the business. Adjustment entries can be passed either before or after the preparation of trial balance, Generally, these adjustments are made after the preparation of trial balance.
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