Year-End Adjustments in Financial Accounting - Unit 6

Year-end adjustments

Adjustments made to balances in the books of an entity at the end of a financial period.

Financial period

A time frame, usually 12 months, used for reporting financial performance.

Allowance for settlement discount granted

A reduction in the amount receivable from customers for early payment.

Accumulated depreciation

The total depreciation expense that has been allocated to an asset since it was acquired.

Asset contra account

An account that offsets the value of an asset, such as accumulated depreciation.

Five steps of adjustments

1. Identify accounts to adjust; 2. Determine account effects; 3. Calculate adjustment amounts; 4. Record adjustments; 5. Ensure new balances are correct.

Financial statements

Reports that provide information about the financial position and performance of an entity.

Short-term Asset

A short-term asset is created for disclosure in the statement of financial position at the end of the financial year.

Adjustment Journal

One entry or 'leg' of the adjustment journal always affects a nominal account and the other affects a statement of financial position account.

Prepaid Expense Account

The prepaid amount is debited in the prepaid expense account and shown on the statement of financial position under current assets.

Statement of Financial Position Extract

Statement of Financial Position as at 28 February 20.1 shows Prepayments as a separate line-item under current assets.

Accrued Expense

An expense that relates to the current financial period but is still unpaid at the end of that period.

Current Liability

An obligation that is due to be paid within one year.

Trade and Other Payables

Liabilities that include accrued expenses, which will be disclosed as part of the balance.

New Financial Year

A period where a new set of journals and ledger accounts are created.

Water and Electricity Account

An account that reflects the expenses related to water and electricity, which will be credited for the previous financial year.

Nominal Accounts

Accounts that are closed off to the profit or loss account at the end of the financial year.

Liability

A financial obligation that a company owes to outside parties.

Accrued Expenses

Expenses that have been incurred but not yet paid.

Profit or Loss Account (Extract)

A summary of the profit or loss for a specific period, including water and electricity expenses.

Closing of Water and Electricity Account

The process of transferring the balance of the water and electricity account to the profit or loss account.

Journal Entries

Records of transactions in the accounting system, including adjustments and transfers.

Credit entry

An entry made to reduce an expense account.

Closing transfer

The process of transferring the balance of a temporary account to a permanent account at the end of the financial year.

Stationery

An asset that represents the value of supplies used for business operations.

Non-current assets

Assets that are expected to provide economic benefits for more than one year.

Current assets

Assets that are expected to be converted into cash or used up within one year.

Inventories

Goods and materials that a business holds for the purpose of resale or production.

Adjustment reversal

The process of undoing an adjustment made in the previous financial year.

T-accounts

A visual representation of accounts in accounting, showing debits on the left and credits on the right.

Physical inventory count

The process of counting the actual items on hand to determine the inventory balance.

Closing amount

The final value of an account at the end of a financial period.

Balance sheet accounts

Accounts that carry balances into the next financial year, such as assets and liabilities.

General ledger

A complete record of all financial transactions over the life of a company.

Stationery account

An account that tracks the purchases and usage of stationery supplies.

Consumable Inventory on Hand

The stock of stationery that is recorded as an asset in the accounting records.

Income Received in Advance

Income that has been received during the current financial period but relates to a future financial period.

Adjustment for Income Received in Advance

An adjustment necessary for the portion of income received in advance that must not be recorded as current income.

Rental Income Account

An account that shows the total rental income received, which includes amounts received in advance.

Current Liabilities

Liabilities that are due to be settled within one year, including income received in advance.

Income Received in Advance Line Item

A separate line item under current liabilities in the statement of financial position.

Adjustment Reversal

The process of reversing the income received in advance at the beginning of the next financial year.

New Income Account

An account opened for rental income for the new financial period after closing the previous accounts.

General Ledger

A complete set of accounts used to record all financial transactions of a business.

Statement of Financial Position

A financial statement that summarizes the assets, liabilities, and equity of a business at a specific point in time.

Statement of financial position

Shows accrued income as part of trade and other receivables.

Adjustment reversal on the first day of the next financial year

Involves creating new journals and ledger accounts, closing nominal accounts to profit or loss.

New income account for the new financial period

Commission income account that will be opened for the new financial year.

Temporary asset account

Accrued income account that is credited and the amount entered in the new commission income account.

Journal entries

Records of financial transactions that include debits and credits.

Reversal Transfer

A transaction that transfers accrued income back to the commission account.

Commission Income

Income earned from commissions, recorded in the general ledger.

Accrued Income

Income that has been earned but not yet received.

Credit Losses

Debts that are irrecoverable and are written off as a loss to the profit or loss account.

Irrecoverable Debt

A debt that is deemed uncollectible and is written off.

Trade Receivables Control Account

An account that summarizes the total amount owed by all debtors.

Profit or Loss Account

The financial statement that summarizes revenues and expenses to show net profit or loss.

Closing Transfer

The process of transferring balances from one account to another at the end of a financial period.

Allowance for Settlement Discount Granted

A reduction in the amount receivable from a debtor for early payment.

Tangible Assets

Physical assets that are used in the operation of a business and are not for resale.

Financial Position Statement

A statement that provides a snapshot of a company's assets, liabilities, and equity at a specific point in time.

Outstanding Amount

The total amount still owed by a debtor.

Expense

A cost incurred in the process of earning revenue, which reduces profit.

Balance b/d

The balance brought down from the previous accounting period.

Credit Entry

An entry that increases a liability or equity account or decreases an asset account.

Debit Entry

An entry that increases an asset or expense account or decreases a liability or equity account.

Insolvent

A state where a debtor cannot pay their debts as they come due.

Notification of Insolvency

A formal communication indicating that a debtor is unable to meet their financial obligations.

Expense/Loss Component

An element that represents a decrease in net income due to expenses or losses.

Trade Receivables Ledger

A detailed record of amounts owed by individual customers.

Statement of Profit or Loss

A financial statement that summarizes revenues, costs, and expenses to show net income.

Financial Year

A period of 12 months used for accounting purposes, which may or may not coincide with the calendar year.

Depreciation

An expense that represents the reduction in value of an asset over time.

Accumulated depreciation: machinery

A contra asset account that reflects the total depreciation expense charged against the machinery over its useful life.

Carrying amount

The value of an asset after deducting accumulated depreciation, shown under non-current assets.

Contra asset account

An account that offsets the value of a related asset account, such as accumulated depreciation.

Adjustment entry

An accounting entry made to update the financial records for accrued expenses or revenues.

Profit or loss account

An account that summarizes the revenues and expenses of a business to determine net income or loss.

Trial balance

A statement of all debits and credits in a double-entry account book, used to ensure that entries are balanced.

Pre-adjustment trial balance

A trial balance compiled to test the correctness of entries after posting from subsidiary journals to the general ledger.

Post-adjustment trial balance

A trial balance compiled after all adjustment journal entries have been posted to the general ledger.

Post-closing trial balance

A trial balance compiled after closing transfer journal entries have been posted, showing only assets, liabilities, and equity accounts.

Financial position

A statement that summarizes the assets, liabilities, and equity of a business at a specific point in time.

Property, plant and equipment

Tangible fixed assets used in the operations of a business, such as machinery and buildings.

Short-term adjustments

Adjustments related to current assets and liabilities, such as prepaid expenses and accrued expenses.

Long-term adjustments

Adjustments related to long-term assets and liabilities, such as depreciation.

Accrued expenses

Expenses that have been incurred but not yet paid or recorded.

Prepaid expenses

Payments made for expenses that will be recognized in future periods.

Consumable inventory on hand

Inventory that is expected to be used up or sold within a short period.

Income received in advance

Payments received for services or goods that have not yet been delivered.

Accrued income

Income that has been earned but not yet received or recorded.

Credit losses (bad debts)

Amounts that are not expected to be collected from customers.

Adjustment to make provision for depreciation

The accounting entry that recognizes the depreciation expense for the period.

Closing of depreciation account to profit or loss account

The process of transferring the balance of the depreciation account to the profit or loss account at the end of the accounting period.