Reasons for adjustments in revenue and expense accounts
The Accruals Concept of accounting states that in calculating net profit the expenses for the period should be subtracted from the revenues generated in the same period. The process by which the revenues and expenses for the period are ascertained is referred to as matching expenses with revenues.
At the end of each accounting period some adjustments may be needed for some expense and revenue accounts. This is due to some of these accounts having outstanding balances as well as having prepayments and advanced revenues advance.
Entries for prepaid expenses and accrued expenses at the beginning and end of a period
Entries for advance revenues at the beginning and end of a period
Below is an example:
On January 1, 2010 the following balances among other balances stood in the books of T. Tyler.
(a)Light owing $100
(b)Rates prepaid $700
(c)Commissions Received outstanding $1000
During the financial year ending December 31, 2010 the following transactions were recorded:
1. Paid light by cheque $900
2. Paid rates by cash $1000
3. Received Commission by cheque $2500
At the end of the financial period December 31, 2010 the following accounts showed balances:
1. Light expense owing $200
2. Rates prepaid $$100
3. Commission received outstanding $500
You are required to write up the accounts including the correct amount to transfer to The Profit and Loss Account ended December 31, 2010, and any balances to be carried forward to 2011.
