SS1 Second Term Financial Accounting Lesson Note – Adjustment in Profit and Loss Account; Prepayment and Accruals

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WEEK 6:

TOPIC: ADJUSTMENT IN PROFIT AND LOSS ACCOUNT, PREPAYMENT AND ACCRUALS

CONTENT:

• PREPAYMENTS OR DEFERRALS
• ACCRUALS

SUB-TOPIC: Adjustment in Profit and Loss Account-Prepayments

Adjustments are made in Final accounts to show the true view of their transactions. They are closing entries or amendments made in the books at the end of the of accounting period in order to match revenue with expenses. This will show an accurate picture of account.

REASONS FOR THE YEAR ADJUSTMENTS

1 To provide for depreciation of fixed assets

2 End of year adjustment occurs because it will ensure the application of double entry principle.

3 To ensure that the financial statement are prepared in accordance with the concepts of accounting.

4 To provide for valuation of stock at the end of the year.

5 To ensure that all the income for the year is recorded.

6    To also, make sure that the expenses for the year is also recorded.

CLASSIFICATION OF ADJUSTING ENTRIES IN FINAL ACCOUNTS

Deferrals or Prepayments; These are informed of 1 Prepaid income 11 Prepaid expenses; It is prepayment for services in advance of their use. When payment is made beyond the date of accounting period specified it is known as prepaid expenses. NOTE; This will be treated as an ASSET.

Prepaid income; This is the receipt of revenue in advance of the related earning activities.

NOTE: It will be treated as a LIABILITY in the Balance sheet.

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