THE FINAL ACCOUNTS OF A SOLE TRADER.

CLASS: S. S. 1

SUBJECT: FINANCIAL ACCOUNTING.

TOPIC: THE FINAL ACCOUNTS OF A SOLE TRADER.

ADJUSTMENTS IN THE FINAL ACCOUNTS.

Adjustments: These are closing entries or amendments made in the books at the end of the accounting period in order to match revenue with expenses. The adjustments carried out in the final accounts will show an accurate picture of the accounts.

Adjustments are required for the following:
(i) Accruals
(ii) Prepayments

(i) Accruals: These are income or expenditure which are due for earnings or to be paid in respect of the current trading period, but such income has not been received or the expenditure has not been paid as at the time of preparing the final accounts.
The accrual concept states that revenue and expenditure are recognized as they are earned or incurred and dealt with in the profit and loss (P&L) account for the period to which they relate and not the period they are paid or received.
It can be divided into:
(a) Accrued income
(b) Accrued expenses

(a) Accrued income: These are income which are due for earning in respect of the current trading period, but such income has not been received as at the time of preparing the final accounts, e.g rent receivable, commission receivable, etc. It must be treated as current asset in the balance sheet and credited to the profit and loss (P&L) account.

(b) Accrued expenses: These are expenses which are due for payment in respect of the current trading period, but such expenses has not been paid as at the time of preparing the final accounts, e.g, telephone, rent, salaries and wages, etc. It is treated as a liability in the balance sheet and placed under the current liability. Such expenses are debited in the profit and loss (P&L) account.

(ii) PREPAYMENTS: These are payments made, (paid) or received in a current period, but such payments or money received are not meant for the period they were paid or received but for subsequent period. It can also be called, prepaid, or paid in advance. It can be divided into:

(a) Prepaid expenses
(b) Prepaid income

(a) Prepaid expenses: These are expenses which are paid in advance for subsequent period, e. g, rent, insurance, etc. Only the expenses for the period must be charged to the profit and loss (P&L) account, while the prepaid expenses will be treated as an asset (current assets) in the balance sheet.

(b) Prepaid income: These are income received by the organization during the current period but such income relates to the next trading period. Only the income for the period must be credited to the profit and loss (P&L) account, while the amount prepaid will be written under the current liability in the balance sheet, e.g. of prepaid income is rent received from premises sublet which were received in advance.