NEED FOR ADJUSTMENTS

 8.2 NEED FOR ADJUSTMENTS

YOU know that the financial reporting requires tlie summarisation of business operations for a specific accounting period. It is quite possible that certain transactions recorded in current year's books may partly relate to the previous year or to the following year. It is also possible that-certain expenditure incurred during the current year has not yet been paid and so not recorded. Siinilarly, there may be certain incomes earned during the current year which have not been recorded because they have not yet been received. If such items are not adjusted or brought into current year's books of account, the summary presented in the forin of filial ACCOUNTS  will not reveal the true picture. Let us take the exainple of an amount of Rs. 600  paid on July 1,1987 towards insurance premium. You know ally general insurarice usually covers a period of twelve months. Suppose the accounting year is ending on December 31, 1987 it would mean that half the amount of imsur;rnce premium paid on  July 1,1987 pertains to the next accounting year i.e., 1988. Therefore:, while preparing the final accounts of 1989, the expenditure on insurance premium that should be debited to the Profit and Loss Account is Rs. 300 (Ks 600 paid - Bs. 300 pertaining to 1988). The remaining amount of Rs. 300 will he carried forward and charged to the Profit and Loss Account of 1988. Take another example. The wages Of workers foi the moiith of Dec, 1989 were paid on January 7,1988. This lilealis tlie Wages Account of 1987 does not include the wages for thc month of December 1'387. Such unpaid wages termed as 'Wages outstanding' have to be brought into the books and debited to the Trading Account along with the wages alseady paid. Similarly, adjustmelit may also become necessary in respect of certain irlcomes received in advar ce or those which are outstanding as at the end of tlie accountitig year. Apart from these, there are certain items which cannot be recorded on day-to-day basis such as depreciatiori, interest on capital, etc. They are generally adjusted at the time of preparing the final accounts. All items which need alteration or which are to be brought into books at the time of preparing final accounts are called 'adjustments'. The purpose of rnakirig various adjustments is to elnsure that the final auourits reveal the. true financial positior~ of the business. Therefore, when you are to prepare the final accounts of any business, you are provided with a Trial Balance and some additional information in respect of the adjustments to be made.