Tag: need for adjustments

According to accrual concept of accounting, the profit or loss for an accounting year is not based on the revenues realised in cash and the expenses paid in cash during the year because there may be some receipts of income and payments of expenses during the current year which may partially relate to the previous year or the next year. There are certain items which are not recorded on day-to-day basis such as depreciation on fixed assets, interest on capital, etc. These are adjusted at the time of preparing financial statements. The purpose of making various adjustments is to ensure that the final accounts reveal the true profit or loss and the true financial position of the business. The items which usually need adjustments are: 

The closing stock represents the cost of unsold goods lying in the stores at the end of the accounting period. The adjustment with regard to the closing stock is done by crediting it to the trading and profit and loss account and by showing it on the asset side of the balance sheet. The closing stock of the year becomes the opening stock of the next year and is reflected on the trial balance of the next year. Sometimes, the opening and closing stock are adjusted through the purchases account. In this case, the entry recorded is as follows:

The entry to bring such expenses into account is:

The closing stock represents the cost of unsold goods lying in the stores at the end of the accounting period. 

The correct entry is:
Closing Stock A/c.....Dr.
   To Purchases A/c
This entry reduces the amount in the purchases account and is also known as adjusted purchases which is shown on the debit side of the trading and profit and loss account.

Closing stock of previous year is the opening stock of next year and is reflected in the trial balance of the next year.

Each adjusting entry usually affects one income statement account (a revenue or expense account) and one balance sheet account (an asset or liability account).

Sales = Opening stock + Purchase - Closing Stock

If there is no opening or closing stock, the total purchases and direct expenses is taken as Cost of goods sold.
Op.Stock + Purchases + Direct Expenses - Cl. Stock = Cost of Goods Sold
Rs. 0 + Purchases +Direct Expenses - Rs. 0 = Cost of Goods Sold
Purchases + Direct Expenses = Cost of Goods Sold.

Total Expenses means for any period for which such Total Expenses are being determined, the sum of the total gross cash expenditures of the Company or any subsidiary during such period, including all operating expenses, incentive fees, interest expense and taxes.