Introduction

In this part of tutorial, the learner will be able to prepare trading account, and profit and loss account and balance sheet with end of the year adjustments. In the previous tutorial, the assumption was that all incomes and expenses were for a one year’s financial period. In reality, the total incomes and expenses existing in the respective financial statement may not necessarily mean to be income or expense of that particular period. On the same breath, there are some provisions that need to be incorporated when preparing financial statements. Let us have a look at this perspective.

Final Accounts and End of Year Adjustments

In this lesson, we will review the relevant Accounting conventions, concepts and principles so as to appreciate the extent they apply in the Accountancy profession. For a start, let us contemplate the matching principle which require a business to consider incomes and expenses of a particular period of time whenever it computes its profits or losses. The Matching Principle advocates matching of expenses against incomes. This means that all incomes and expenses relating to the financial period to which the accounts relate to should be taken in to account. The following scenarios will portray the propositions of the matching principle pertaining trading income and expenses.

End of year Adjustments for Trading Account Components

The matching principle applies to trading account components and the preparation of this account has nothing to do with mere format presentation to the learner as purported by most accounting material. Therefore, the components of trading account such as opening and closing inventory, purchases and sales amongst others, are subjected to adjustment so as to comply the matching principle as we shall learn shortly. In addition, the learner need to remember that in level one of this accounting tutorial series, the general rules for accounting entry imply that both expense and income accounts have DR and CR totals at the end of financial period. As a matter of general rule of the thumb, the learner therefore need to note that preparation of trading account entails closing down the relevant accounts to trading account as one adheres to double entry rule and not just mere recording as it will be revealed in this section. To aid in understanding this concept, a general journal will be used for the sake showing how the accounts are closed to trading account. This aspect is as explained herein.

  1. Scenario one: Accounting treatment of Sales and Purchases

  2. Scenario two: Accounting treatment of Closing Inventory

  3. Scenario three: Accounting treatment of Opening and Closing Inventory

  4. Scenario four: Accounting treatment of Goods Returned

End of year Adjustments for Profit & Loss Account Components

To understand this concept better, interrogate the following scenarios.

  1. Scenario one: Accounting Treatment of Operating Income

  2. Scenario two: Accounting Treatment of Operating Expenses