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Some account balances in the trial balance do not reflect the correct values when considered in relation to the accounting period. Interest income is recorded only at an amount actually received or omitted when not received in cash. Since accounts are kept on accrual basis, it becomes necessary that the amount which was paid for certain expenses in the current accounting period although applicable to the next accounting period(s) must be taken out of that expense account and that those expense which benefit the current accounting period but the payment for them was made either in the previous year on not yet made at all in the current accounting period must be added to the expenses of the current accounting period. Likewise the amount received in the current period for certain revenues but applicable to other accounting period(s) must be eliminated from income and that portion of revenue which was earned currently but received either in a prior period or not yet received must be added to income. Such corrections in the existing balances of revenues and expenses are called adjustments which are made with the help of adjusting entries. Adjustments are made to record assets and liabilities at their correct value for a true and fair of the financial position of the business on a given date. Adjustments also ensure a proper matching of costs and revenues for obtaining correct profit or loss for the given accounting period. The types of adjustments generally required to be made at the end of the accounting period may be listed as follows:

1. Stock at the end:

The closing inventory after proper valuation is incorporated in the final accounts with the help of following journal entry:

Stock-at-the-end Account                    Dr.
    To Trading Account

Stock account is debited so that the asset on hand may appear in the balance sheet. The trading account is credited so that the goods available for sale (i.e., opening stock plus purchases made during the year) already recorded in that account, may be offset by the final stock, to give the cost of the goods sold. The stock-on-hand which appears in the Trial Balance is the stock which was on hand at the beginning of the period. But if the closing stock also appears in the trial balance, it means that the double entry was completed in the accounting period itself by reducing the purchases. Hence stock-at-the-end will not then be shown in the trading account. It will then be shown only in the assets side of the balance sheet.

2. Accrued expenses payable (Expenses Outstanding):

In many cases the expenses are recorded only when they are paid. For instance the payment for salaries or wages is made only at the end of the work period, say, a month, week, etc., though the expense occurs immediately when the service is rendered. The failure to record an accrued expense (though not paid) in the accounts results in an understatement of that expense and since payment for the expense has not been made, another result is the understatement of a liability. In order to avoid these understatements of expenses and liabilities, an adjustment entry is passed to increase the expense and liability:

Expense Account                  Dr.    (It will go to Trading or Profit
    To Accrued Expenses               Profit and Loss Account)
    Payable Account
To Expenses Outstanding Account    (It will appear in the balance Sheet as a liability)

But if outstanding expenses are given in the trial balance, the same will be shown only in the liabilities side of the balance sheet.

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