Accounting Adjustments

Types of Accounting Adjustments

Accruals: These are expenses that have been incurred but not yet recorded in the accounting system or paid.
Deferrals: These are payments that have been made or received, but are not recognised as expenses or revenue until a later accounting period.
Depreciations: This adjustment accounts for the wear and tear of assets over time. For instance, a company truck or machinery might gradually lose value.
Provisions: These are amounts set aside to cover expected future liabilities, such as repairs or debts.

Accounting adjustments are important to ensure accuracy in the financial statements. They help align the company’s books with the real-world transactions.
They ensure that the business records adhere to the matching principle, stating that all related revenues and expenses should be reported in the same accounting period.
Adjustment entries allow for better financial analysis and decision-making, giving an accurate picture of a company’s financial health.

Profit and Loss Account: Adjustments impact the business profit or loss for the period. For example, depreciation would decrease the net profit whereas accrued revenue would increase it.
Balance Sheet: Adjustments affect the value of the assets, liabilities and capital in the balance sheet. For instance, depreciation reduces the value of the assets, and an adjustment for unpaid expenses would increase liabilities.

Accruals are recorded by debiting an expense account and crediting a payable account. When the expense is paid, the payable account is debited and cash is credited.
Deferrals are initially recorded as assets or liabilities. When recognised, the asset or liability account is decreased and the expense or revenue account is increased.
Depreciation is usually calculated using either the straight line method (even yearly depreciation) or the reducing balance method (percentage of current book value). The depreciation expense is debited and the accumulated depreciation account is credited.
Provisions are created by crediting the provision account and debiting the expense account. When they are used, the provision account is debited and the corresponding payable or asset account is credited.